When big profits look bad
Container shipping lines are one of the few sectors that can be said to be having a good pandemic. Perversely, despite a sudden fall off in demand for their services, lines look set this year to make more money than they have in a long time as their crisis-management tactics (essentially blanking voyages) has paid off handsomely.
In our latest Container Forecaster report, published at the end of June, Drewry estimates that the industry secured an operating profit (EBIT) of around $1.4 billion and margin of 3.2% in 1Q20, pretty much on par with the same quarter of last year.
While the first quarter was not a full test of the industry’s COVID-19 coping mechanism as most countries did not enter lockdown until quite late in the period, all signs point to operating carriers having not only survived the market shock, but even benefitting from it, with spot market rates soaring and a number of previously guarded companies now upgrading quarterly and full-year guidance.
The same cannot be said of other stakeholders. Non-operating charter owners have seen charter demand and daily hire rates collapse, while cargo owners have had to contend with greatly inflated transportation costs, but lower service quality. Many shippers have experiencing cargo roll-overs, including some contract BCOs that have told Drewry carriers are prioritising much higher-paying spot cargoes.
Despite significantly reduced bunker costs in 2Q20, few shippers saw anything near the full benefit of these reductions as carriers used their market leverage to hold onto bunker surcharges with the threat of rolled cargo. Drewry is involved in an industry initiative to develop a fair, neutral bunker adjustment factor indexing mechanism, alongside the European Shippers’ Council (ESC) and new partner CLECAT, a European forwarders’ association.
From a public relations perspective the optics of making big profits during a global crisis are not great. The price will be more animosity and accusations of profiteering.
Drewry is inclined to give carriers the benefit of the doubt for now. Given the highly unpredictable outlook for demand, instances of capacity over-suppression in some trades was always likely. Lines are now starting to return capacity to the worst-affected trades such as the eastbound Transpacific to accommodate higher than expected demand with some previously blanked sailings being put back on to schedules.
That makes previous capacity over-reductions look more like understandable misjudgements rather than anything more malicious. However, we might change our view if capacity continues to be kept significantly below market needs.
The situation raises interesting questions about the purpose of carriers and the expectations of their customers.
Carriers may be one of the biggest facilitators of world trade, but they are also for-profit commercial entities with shareholders to answer to. So long as they can fulfil their primary role of keeping the global supply-chain in motion, why shouldn’t carriers do everything in their power to maximise profits?
It is not as if they have a great track-record for making money (shippers have mostly had the upper hand in recent years) and if no profits are being made investment in the future capacity needed to propel trade around the world will be curtailed.
Cargo owners too have to look out for their own interests, so it is unrealistic to expect both parties to sit down with the peace pipe together. However, the battles of the past have only resulted in a sub-optimal supply-chain, pockmarked by volatile swings in freight rates and draconian capacity management.
One can but hope that a better shipper/carrier dialogue evolves out of this crisis that might produce more of a happy medium.
It will take some effort from both sides. Shipping lines could do a better job in terms of giving notice and rationale when making capacity changes, while closer consultation with customers about the likely timing and scale of any future rebound can help to avoid potential bottlenecks. Cargo owners should be aware that carriers need to maintain a minimum level of revenues in all conditions, or else they will be forced to withdraw services.
Drewry expects freight rates to soften in 2H20 as carriers will cautiously reintroduce capacity to meet any demand recovery, but not at the expense of a large collapse in rates to uneconomic levels.