Ocean freight rates look set to stay elevated for another two years, as disruption continues to restrict capacity and with new vessel orders remaining relatively low until at least 2023, according to container shipping analyst Drewry. But it believes things may not be so easy for carriers after 2022, as a flurry of new orders in the last few months is set to change container shipping’s supply-demand dynamic.
Drewry’s latest Container Forecaster report argues that carriers “are set up nicely for at least another two very profitable years”, with investors “piling in as carrier profits take off to new heights”.
Examining how long this high freight rate environment can last, and with it high carrier profitability, Drewry noted that the progression of quarterly carrier operating profits in 2020 “was exponential, with a near doubling in each proceeding three-month window”. Subsequently, the end-year result was the best industry performance that Drewry has records for at an estimated $26.6 billion, with an operating margin of 13%.
“These are uncharted waters as the container industry has historically been accustomed to low margins, punctuated by only very occasional forays into significantly higher or lower performance,” Drewry noted. “Using history as the only guide, the smart bet would be to think that the market will cool down fairly quickly, but these are not normal times and in Drewry’s latest Container Forecaster report we argue that carriers are set up nicely for at least another two very profitable years.”
Reflecting on “how we got here”, it noted that the huge freight rate inflation from the second half of 2020 onwards was the consequence of temporary factors: a demand surge caused by a pandemic-driven shift in consumption habits towards goods; and supply chain disruption that reduced port productivity and restricted capacity from the market.
“These things will pass and the risk is that when they do the market will be in for a sobering reality check,” Drewry noted. “However, these factors are stubbornly refusing to go away and the timeline for a ‘return to normal’ keeps getting pushed back.”
Drewry’s working position is that port congestion and container equipment shortages “will remain an unwanted feature throughout most of 2021, albeit lessening in degree as the months pass. This will further restrict the availability of capacity and lead to substantially higher average spot and contract freight rates.”
It continued: “With higher contracts rates locked in, another highly profitable year is virtually guaranteed,” and Drewry thinks the industry will re-set profitability records once again in 2021, despite several operating expenditure (OPEX) headwinds in the form of higher fuel cost and charter rates.
“For 2022, while we foresee some erosion in freight rates as carriers will lose the inflationary impact caused by the current supply chain disruption – assuming normality is restored by then – we think that lines will manage to stay highly profitable thanks to favourable supply and demand growth trends, alongside skilful capacity management.”
Less easy for carriers post-2022
But Drewry said “things might not be so easy for carriers post-2022”, adding: “One sure indicator of the heat in the sector currently is the rapid escalation in newbuild contracting. In 4Q20 alone, the volume of new orders was more than three times that of the previous nine months; and contracts signed this year already are far in excess of the 2020 full-year tally – with a staggering 1.45 million teu booked in just three months.
“Moreover, there are other heavily-speculated deals that have yet to make it on to the ‘confirmed’ ledger.”
Following this flurry of orders, Drewry said the orderbook “is now pushing 15% of the current fleet”, but added: “This is still way below the 60% ratio of 2008, but the active fleet is now more than twice the size it was back then, so owners need to recalibrate what an appropriate orderbook size looks like.”
It continued: “Owners – both operating and non-operating – are understandably scrambling for as many containerships as they can find, but these new orders won’t arrive in time to cash in on the boom time.
“These ships are being ordered as if they are for today, not what the market will look like when they are ready for delivery in 2-3 years. Owners are risking paying top dollar for assets that will potentially end the container upcycle.”
Drewry concluded: “Given the huge profits that carriers are currently making, and are expected to continue making for another couple of years at least, it is tempting to just say: ‘carry on doing what you’re doing’. However, lines need to be mindful that they have lucked into this situation, and the conditions that created it will not last forever.
“Ocean carriers look set for a prolonged and unprecedented upcycle, which will enable them to improve their financial health, reward investors and spend more. However, if accelerated ship orders continue, there is a risk of a return to over-capacity that will shorten the cycle.”
Further analysis can be found in Drewry’s quarterly Container Forecaster analysis and outlook for the container shipping market.
Source: Lloyds Loading List