Global shipping outlook: Getting soft
Source: Associated Press
Scott McKnight, PhD
The top-line:
The global shipping industry is emerging from a period of crisis that was also its most profitable period in over a decade
Supply chain bottlenecks, lack of ships and trade volumes (first collapsing, then fast-recovering) were the main causes of the crisis
All three of these factors that led to the crisis and near-record profits for global shippers have changed drastically since 2020-21
Global shipping is back in the headlines because of two big changes in recent weeks:
Russia is building up a ‘shadow fleet’ of 100 ageing tankers in an attempt to get its oil and refined products around the G7 constraints to reach buyers in India, China and Turkey.
The UN’s International Maritime Organization (IMO)’s Energy Efficiency eXisting ship index (EEXI) and Carbon Intensity Indictor (CCI) regulations—two efforts to reduce greenhouse gas emissions in shipping—came into effect this January. (I’ll leave it to others to shoot holes in these well-meaning but very flawed initiatives).
These changes come at a time when the global shipping industry is emerging from crisis as well as its most profitable period in over a decade. Let’s take a look at the factors that led to these super profits (and why they won’t last).
The Ever Given wedged in the Suez Canal, winter-spring 2021 - Source: EPA/Maxar Technologies
Why the big profits?
1) Supply chain bottlenecks. Authorities in different countries and locales responded differently and at different times to the spread of the Covid-19 virus. That meant different restrictions on workers in ports and in the factories that produced the goods. And then there was the container vessel Ever Given getting stuck in the Suez Canal in March 2021. Since about 90% of the goods in our homes, offices and factories are shipped by sea, these disruptions to seaborne trade only added delays, costs and headaches.
2) Lack of ships. Part of these inefficiencies were due to unprecedented backups at ports as ships queued up to unload or reload. Adding to this fact was that the global fleet really hadn’t grown much in preceding years, leaving little buffer of surplus capacity when the pandemic disruptions hit.
3) Recovery in trade volumes. By 2021, global seaborne trade volumes were back to the pre-pandemic levels of 2019. But not every sector or commodity roared back. Seaborne shipping for cars, crude and refined oil products as well as coal (who had its booming profit year) stayed below 2019 levels.
Container ships queue outside the congested ports around Los Angeles. Source: Reuters
“The 2022-23 outlook is gloomy for container shipping, pulled down by high interest rates and too many ships on the market. But even shipping segments that have been strong in recent years such as dry bulk and LNG likely will see a softening as well.”
Why is the market softening?
The three major factors that led to the global shipping crisis (and big profits for shippers) have shifted or now been addressed – and maybe overzealously so.
1) Supply chains return to normal (mostly). Port congestion has cleared and retail inventories across a range of consumer industries have been restocked (though much of inflation has stuck, with energy being a big reason for that).
2) The shipbuilding boom. 2021-22 saw the highest newbuild volumes of ships since 2014 — to the point that some classes of vessels like containers may soon be oversupplied. An eye-popping US$110bn was spent to build new vessels in 2021. And this building boom occurred despite newbuilding prices being some 20% higher in 2021. The secondary market was bumping too. Transaction volumes (in sale and purchases) surpassed the previous peak from 2007, with an estimated US$50bn in assets changing hands. This stunning level of transactions indicate that industry players were hitting gaps in the market—and those inefficiencies may now largely be sorted out.
SonicShares Global Shipping ETF (BOAT) (Source: Yahoo! Finance)
3) Is the recession here yet? The global shipping industry is hyper-sensitive to changes in economic activity, with everyone watching the US Fed’s rate hikes (are we done yet?). The shipping industry responded well to the recovery of trade volumes—so much so that by spring 2022 box rates were falling. By summer 2022, maritime ETF’s were falling hard too (see image). This softening has come despite all the disruptions caused by Russia’s invasion of Ukraine, hinting one of several things—that the war wouldn’t be that disruptive to world trade; that energy markets are flexible than we thought (one of our ‘lessons in energy markets’ from 2022); or that the global economy wouldn’t be able to swallow the arrival of a massive number of new vessels in 2023.
The outlook: Going soft
The same factors that led to the global shipping crisis of 2020-21 (and near record profits for shippers) have changed. Freight rates and secondhand prices have fallen sharply, back to something close to normal levels by late 2022. The outlook is gloomy for container shipping, pulled down by high interest rates and too many ships on the market. But even shipping segments that have been strong in recent years such as dry bulk and LNG may see a softening as well.
