Shipping industry faces hardship after bumper profits in pandemic

Consumers preparing to purchase the latest imported appliances, clothing or electronic gadgets this holiday season may want to think about companies that will struggle to make money over the next few years by moving products across the ocean.

Indeed, the container shipping industry, touted as the Grinch who ruined Christmas over the past two years with record freight rates and slow deliveries, is returning to its pre-pandemic place in the world of shipping. company: the eternal underachiever Charlie Brown.

The largest carriers reported net profit totaling $364 billion in 2021 and 2022, according to figures compiled by industry veteran John McCown, after a decade of meager profits. They will likely return to the red this quarter as the rates they charge fall below costs and look to stay there for the foreseeable future.

Booms and busts have been steeper and more sensational, but rarely has an established industry so tied to the global economy gone from historic profits to sub-breakeven levels more directly than have the Shipping companies that transport 80% of global merchandise trade. This year. After the massive demand shock caused by Covid, the culprit is now excess supply.

“I am certainly concerned about the next 24 to 36 months,” said Rolf Habben Jansen, CEO of the Hamburg company. Hapag-Lloyd AG, said in an interview last week. “We’re going to see a slowdown.”

Consider the tougher times we face AP Moller-Maersk A/S, the largest publicly traded container line. The Copenhagen-based company’s free cash flow, which hit $27 billion last year, could fall by about 80% this year and turn negative in 2024, according to Stéphane Kovatchev, a credit analyst at Bloomberg Intelligence. could weigh on the company’s obligations, he wrote in a research note Friday.

Read more: Maersk collapses after forecasting weak global trade until 2026

Over the last 10 days, Maersk, Hapag Lloyd and tightly held CMA-CGM SA of France – the five main players which together control around a third of the world’s container capacity – said they were cutting costs, with some fearing the crisis could last at least until 2024.

Some executives oppose the price war, which has contributed to a wave of consolidation and, at least, a major bankruptcy in the years leading up to the pandemic.

“Each player will have to be responsible to ensure that the market remains reasonable in a context of relatively low rates. » CMA-CGM Chief Financial Officer Ramon Fernandez told reporters Friday. “After a while, price wars hurt not only those who start them, but everyone. »

Read more: Shipping giant CMA CGM warns of price war as profits fall

This concern stems from a combination of economic forces: demand for goods is returning to pre-pandemic levels, even as supply increases in the form of new, larger ships. It can take two to three years to build a container ship, which typically operates for around 25 years. It is therefore inherently difficult to synchronize their launch and withdrawal with the ebb and flow of the economic cycle.

To manage capacity in the short term, the main tools available to carriers are the cancellation of individual trips or the complete suspension of services on trade routes where demand is low. In a prolonged crisis, they can also let charter contracts expire, idle some ships or sell old ships on the scrap market.

Kovatchev said what was emerging was a confrontation between the strong and the weak. “Larger companies such as Maersk and Hapag-Lloyd have the liquidity to wait and focus on cost reduction, rather than aggressive capacity reductions – for now,” he said. “It all comes down to supply, demand and who blinks first. »

Of course, the flip side of shipping’s woes is lower costs for the manufacturers and retailers who own the goods being transported, which ultimately helps central bankers charged with bringing down still-high inflation in many countries. many developed economies.

“A few years ago, prices for goods saw double-digit inflation and maybe a 4 or 5 percent increase for services,” said Phil Levy, chief economist at Flexport Inc., a trading company. digital freight forwarding based in San Francisco. “To the extent that goods were under inflationary pressure, or in a very tight goods market, that disappeared.”

Companies including clothing brand Under Armor Inc. and furniture maker Cie Lovesac. cited relief from lower shipping spending in the latest quarter.

As inflation eats away at their wages, consumers are cautious with their spending and looking for cheaper ways to get their packages delivered.

“Our own data tells us that the broader economic situation may be impacting the services our customers choose, with many seeking more cost-effective shipping options,” said Karen Reddington, president of FedEx Express Europe. “We expect external business conditions to be challenging in the near term, and uncertainties remain over the timing of demand recovery.”

Read more: Powell says Fed must be cautious and won’t hesitate to hike if necessary

For container carriers, the cost of transporting goods cannot stay this low indefinitely, as their expenses go in the opposite direction.

For example, Suez Canal transit from Asia next year will cost 15% more, according to the river authority. said in mid-October without explanation. On the other main trade route, ships transiting the drought-stricken Panama Canal are dealing with long waitssurcharges and time-consuming, fuel-intensive detours around South America to avoid delays.

These costs are minimal compared to the $1 trillion investment the industry will face in the coming decades to decarbonize – a shift that will require engines running on cleaner fuels and new infrastructure to produce, store and transport alternative fuels.

The major European carriers have published estimates for the supplements that will come into force with the upcoming entry of maritime transport into the European Union’s emissions trading system in January.

At CMA CGM, one of the strategies to cushion the ups and downs of maritime transport is to diversify. Second-generation descendant Rodolphe Saadé, who runs the company started by his father, took advantage of the pandemic windfall to invest in an airline, ports and logistics operations and even the media.

The Saade family is worth around $19 billion, according to the Bloomberg Billionaires Index. That compares to $33 billion in April.

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