Although liner companies will probably set a new earnings record this year, several factors threaten to put a damper on demand. Analysts warn against drawing too many conclusions based on the first quarter.
Although container shipping companies – with Maersk as the most recent today – report heavy advancement in earnings due to soaring freight rates, demand could be on the way down, says analyst firm Drewry.
The consultancy today presented an updated outlook for the container market, where it would otherwise expect carriers to beat last year’s record earnings and book an ”incredible” operating profit in excess of USD 300bn for 2022.
More several major risks loom on the horizon and could radically alter market conditions, and fast, says Drewry, which expects demand for container transport to slow down this year and the next.
The container market is extremely volatile, and conditions can change very quickly
Simon Heaney, senior manager for container research, Drewry
Earlier this year, Drewry estimated that demand in 2022 would grow by 4.6 percent, but now the company has downgraded to 4.1-percent growth.
The consultancy has also dialed down on demand for 2023, now estimating it to grow only 2.8 percent – against a previous prediction of 3.5 percent.
”The container market is extremely volatile, and conditions can change very quickly. How freight rates are going to further develop is quite dependent on the duration of the situation [Covid lockdowns, -ed.] in China and the economic impact of the ongoing Russian-Ukrainian war,” says Simon Heaney, senior manager for container research at Drewry, during today’s webinar.
Several big risks
According to Drewry, a number of major risks such as China and the Russia-Ukraine war could block demand on the container market and have rates declining ”pretty quickly” and thereby make earnings growth for carriers slow down.
”We haven’t yet presented solid evidence that demand is about to fall, but growth has declined. Data gathered since we wrote our report indicate that the rate development and profitability of carriers could become more dampened than first predicted,” says Heaney.
Maersk raised its result guidance earlier today but at the same time said that the carrier expects lower growth in demand for container transport than previously assumed.
Demand might even end up dropping in the current year, the company said.
Based on volume developments in the first quarter, APMM has revised downwards its outlook for the growth of global container demand from 2-4% to -1/+1%
Maersk
”Based on volume developments in the first quarter, APMM has revised downwards its outlook for the growth of global container demand from 2-4% to -1/+1%,” read an update from Maersk.
Maersk has also seen a drop in box volumes since the year’s beginning, though this was counterbalanced by a surge in freight rates.
”The strong result is driven by the continuation of the exceptional market situation within Ocean, which has led to a 7% decline in volumes and an average 71% increase in freight rates compared to Q1 2021,” Maersk wrote in its update.
Expects new record result
Drewry expects growth in rates – a mixture of spot and long contracts – of 39 percent this year compared to an almost vertical increase last year of 110 percent.
”Even after having included large operational costs from, for example, higher fuel prices and ships in our calculations, we expect that these can be easily absorbed by the large increases in revenue per unit. We expect the container industry to deliver an unbelievable operating profit of USD 300bn in 2022,” says Heaney.
In comparison, the carriers earned USD 214bn last year, according to Drewry, which was already a historic figure.
It is extremely difficult to predict with any degree of certainty how the freight volumes will develop throughout the year
Lars Jensen, shipping analyst
According to container analyst and Vespucci Maritime CEO Lars Jensen, the development in freight demand is highly uncertain for the rest of the year.
”It is extremely difficult to predict with any degree of certainty how the freight volumes will develop throughout the year,” states Jensen.
While the ongoing Covid outbreaks in China may limit economic activity, the private consumption of US consumers pulls in the opposite direction. Among these, demand for goods remains very high.
”For 18 months, we have said that it couldn’t go on, but the wheel has kept spinning,” says Jensen on the US consumption.
”When and if US consumers reduce their consumption of goods, it will have a very large effect,” he says, adding:
”When the consumers start changing their patterns of consumption, it usually has an immediate effect.”
More normal start to 2022
Helping to complicate the image of the current freight volume development is that the Chinese New Year traditionally carries with it a volume decline in January and February, according to Jensen.
”The decline we saw in January-February 2021 was less than what we normally see at that time of year. This year, the situation is more normal with a larger dive,” he says.
When freight rates are still so high that container carriers such as Maersk upgrade their full-year guidance despite falling volumes in the first quarter, it is primarily due to bottlenecks still affecting the market.
”The freight rates are primarily determined by the lack of capacity at the moment, not by the freight volumes,” states Jensen.
Maersk and other carriers such as Hapag-Lloyd have to a significant degree tried to move their customers over onto long contracts at high rates, and that may keep their earnings high in the course of the year. However, Jensen doubts whether the carriers will be able to maintain the long contracts when the market turns.
”That we will see when the market turns. I’m a bit skeptical as to how big a part of these contracts that can actually be enforced.”
