Volatile weather poses a risk on the high seas. Volatile markets pose a similar threat to the container shipping industry, which carries 80% of the world’s traded goods. The coronavirus pandemic, which has kept people at home for months doing little more than shopping, has sent container prices skyrocketing.
In 2022, the return on capital of shipping lines exceeded 40%, the largest profit achieved, as it was three times the total profits during the past two decades combined. Prices and returns fell as demand declined and shipping companies began to take delivery of new ships required during the boom period.
Then attacks by Yemen’s Houthi rebels on ships in the Red Sea led to a decline in activity in Egypt’s Suez Canal. The disruption sent shipping volumes back to record levels lasted only during the pandemic. How long will the good times last this time?
This may not last long, one broker believes, with shipping companies’ average return on capital of 4.7% between 2002 and 2019 having fallen in the wake of the cost of capital, which averaged 10% or so.
New ships take years to build, according to BIMCO, an industry association. In 2023, the global fleet added capacity of about 2.3 million 20-foot equivalent units (TEUs), the standard measure of container size, beating the previous annual record by 37%. Another million arrived in the first four months of 2024.
In February, concerns about a surplus of cargo ships prompted A.P. Moller-Maersk, the world’s second-largest shipping line, to warn that it could lose up to $5 billion this year. Now Maersk reckons it will instead make a pre-tax profit of perhaps $3 billion. So what changed?
High demand
Stephen Gordon, of Clarksons Ship Brokers, points to the Red Sea disruption as the main reason for the surge in demand. The Houthis show no sign of letting up on their attacks. In recent days, a sailor has been killed, one ship has sunk and another has been left ablaze.
This waterway used to account for 30% of global container traffic, but 90% of ships that would have crossed the Red Sea now reroute to the Cape of Good Hope at the southern tip of Africa, adding at least a week or two to journeys from Asia to Europe and America.
Longer voyages mean that more ships are needed to transport the same volume of cargo in a given period.
Houthi attacks have also affected the Suez Canal at a time when other powers are increasing shipping lanes.
The global economy has avoided recession, and the peak season for container traffic has arrived early, as importers stock up for Christmas to avoid disruption, potential tariffs and further increases in freight rates, HSBC explains.
The cost of sending a container from Shanghai, China, to the West Coast of America has now doubled since late April, becoming more than four times what it was in early December and only 12% less than the peak of the coronavirus pandemic in February 2022.
If the Red Sea remains rough until later this year, the extra demand could more or less absorb the growing fleet, which is expected to grow by 8% this year. If the Houthis retreat sooner, that will leave many new ships idle.
What about the coming years?
Maersk CEO Vincent Clerc admits that a shipping surplus is again a possible outcome.
Indeed, many of Maersk’s competitors are using the windfall to order new ships. But Clerc remains optimistic that oversupply can be avoided if shipping companies delay taking delivery of ships from charterers and get rid of older vessels sooner, which is not a bad idea because it helps them renew their fleets. Although things are likely to remain “volatile and unpredictable,” this could mean “a decade of strong market conditions” for the industry.
