Container Market: Feeling hot, hot, hot

The container shipping market has never been so hot. Investors are piling in as carrier profits take off to new heights. How long can it last?

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 13.0%.

How long can this business upcycle last?

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.

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.

In such heady times, it is important to keep sight of how we got here. The huge freight rate inflation from 2H20 onwards was the consequence of temporary factors;

• A demand surge caused by a pandemic-driven shift in consumption habits towards goods;
• 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.

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.

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 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.

Things might not be so easy for carriers post-2022.

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 (see Figure 2). Moreover, there are other heavily-speculated deals that have yet to make it on to the ‘confirmed’ ledger.

Following this flurry, the orderbook is now pushing 15% of the current fleet. 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.

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.

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.

Our view

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.
Source: Drewry (https://www.drewry.co.uk/container-insight-weekly-newsletter/container-insight-weekly-newsletter/feeling-hot-hot-hot?utm_source=newsletter&utm_medium=email&utm_campaign=CIW%20Latest%20Article%20-%20Press)