Since the second quarter, ocean rates and volumes have been falling, but shipping lines have raised their expectations on profits in the second half of 2022. Reasons are the guarantee of high price in BCO contracts and the utilize the trump card of capaci

11 Aug 2022

By Arthur Chen.         Photo : Johan Taljaard 

Maersk released its first-half 2022 financial report, with a net profit of $15.4 billion and a return on invested capital (ROIC) of 62.5% over the past 12 months. However, in terms of maritime business volume, Maersk second-quarter cargo volume decreased by 7.4% year-on-year in 2021, but it achieved revenue of US$17.4 billion, and EBIT increased to US$8.5 billion, an increase of 138% over the same period last year. And Maersk raised its full-year performance forecast again, predicting that the actual earnings before interest, tax, depreciation and amortization (EBITDA) for the full year of 2022 will be raised from $30 billion to $37 billion. Coincidentally, Hapag-Lloyd, the world's fifth largest shipping company, also raised its full-year EBITDA forecast from $14.5-16.5 billion to $19.5-21.5 billion. Hapag-Lloyd and Maersk, the world's top two shipping companies by market value, raised their forecasts by $5 billion and $7 billion respectively. Why is it that today, when the spot freight rate may fall below the long-term contract price, the shipping giants not only make new highs in profits, but also keep raising their performance expectations?


Various signs and analyses indicate that the shipping market will gradually normalize in the second half of the year, and the freight rates and freight volumes that shipping companies rely on to make profits are declining. Drewry announced that the container shipping market has reached the end of the bull market, the spot freight rate has fallen more and more, and the freight volume of some routes has declined, and the global port container throughput in 2022 will be lowered from 4.1% to 2.3%. Xeneta, which tracks long-term contract rates for a long time, said long-term contract rates have peaked and spot rates have been falling, enticing more shippers to turn to the spot market or to renegotiate contracts. Walmart said higher levels of food and fuel inflation had affected consumer confidence and consumption patterns, and cut its full-year forecast, indicating that retailers are overstocking and reducing demand for purchases. In short, the weakening of commodity demand and the reduction of freight rates have become a consensus. Maersk also pointed out that global container volume fell by 2.3% in the second quarter of 2022 compared to 2021, and expects global container demand in 2022 to be at the lower end of the -1% to +1% range.


However, in the second half of the year and even in recent years, liners’ confidence are still very strong. The trend of market normalization is obviously slow. When Maersk released its first quarter earnings report, it is expected that the shipping market will gradually return to normal in the second half of the year. However, on the ports side, as long as the cargo volume does not drop sharply, the existing port infrastructure is insufficient to solve the problem of port congestion, and the logistics supply chain still in blocking. Major ports in Europe and the United States, terminal congestion will bring good income to the terminal, and will also contribute to freight rates and inflation. Dock workers, railway workers, truck drivers, etc. are trapped in the rising cost of living, and their wages rise at a low rate. Due to the growth rate of terminal revenue and the level of inflation, the assembly of strikes to demand negotiations will lead to increased terminal congestion. Coupled with various uncertainties such as geopolitical conflicts, Maersk has pushed back the timetable for the normalization of the maritime market to the fourth quarter of 2022. Therefore, at the end of the first half of 2022, the total capacity of the global container fleet reached 25.4 million TEU, a year-on-year increase of 3.9%, but the idle capacity remained at a low level of 1.1%. This data is reflected in the high freight rate. In the second quarter of 2022, Maersk average freight rate is US$4,983/40-foot container, a year-on-year increase of 64%. Similar huge increases for other shipping companies are the norm in the industry.


The focus of shipping lines are no longer the market share, but the proportion of long-term contracts and their future performance. In the financial reports of major carriers this year, the cargo volume is either flat or declining. Maersk's cargo volume decline is higher than the decline in global container volume, but its long-term contract ratio has increased to 72%, while Maersk's current multi-year contract has exceeded. 1.9 million FEU. In the case of a slow decline in the spot market, the long-term contract price has ensured the profitability of the shipping company. On June 28, 2022, the Baltic Container Freight Index from Asia to the United States and West (FBX01) was US$7,599/40-foot container, down 14% year-on-year, but in the second quarter of 2022, the average freight rate of Maersk's east-west routes soared by 77.8% year-on-year, and it is difficult not to be confident in the market scenario. The most important killer is that the alliance shipping companies always have a trump card, which is capacity control, and respond to the decline in freight demand through blank sailings.


However, governments of various countries have put pressure on shipping companies to reduce prices. Urged by stakeholders such as cargo owners, regulators are also tightening supervision. The United States has recently passed the Maritime Reform Act to give the Federal Maritime Commission greater regulatory powers, and the European Union has also launched In order to investigate the competition exemption for shipping companies, under the current regulations, shipping companies can exchange information and coordinate to adjust the capacity. If the EU finally rules that the shipping alliance abuses market power, the shipping alliance will lose the means to control the capacity. As the profits of shipping companies continue to set record high, it is not difficult to imagine that the downward pressure on freight rates is not only a factor of space supply and demand, but also the strengthening of government supervision is another stronger force. Customers are also putting increasing pressure on shipping companies to offer spot freight instead of long contract prices. However, the vast majority of shipping companies are still reluctant to relax long-term contract positions, and prefer to run the flexible method of spot freight through freight forwarders. The profit margin of freight forwarders in the second half of the year will not increase due to the incremental transfers from shipping companies. The freight forwarding industry can only earn "reasonable" service fees.

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