In most sectors, having a key earnings index fall by half in less than three quarters would be a disaster. But this is container shipping, where rates have been at stratospheric levels over the course of the pandemic. Even with the recent sharp declines, current rates are still three times higher than the average level between 2015-2019.
But there is a growing sense that the party is coming to an end.
That may not be immediately apparent as container carriers post ever higher earnings, and will undoubtedly have their most profitable year on record in 2022. Long-term rates tied in when demand was high and capacity scarce mean that box line results are a lagging indicator of what is happening in the market now.
Container shipping, however, does not live outside the economies it serves. While Covid-related stimulus packages and changing consumer behaviour boosted demand during the pandemic, this year has seen a new dynamic emerge.
As economies opened up after lockdowns, energy demand began to rise. Russia’s invasion of Ukraine in February led to a geopolitical earthquake that then sent energy prices through the roof.
This has been a major contributor to inflation that is now running at around 10% in many major consuming economies. Classical economics suggests that when inflation runs high, interest rates rise, spending retrenches, economies cool and demand dwindles.
Here, again, we only have lagging indicators to work with. But figures this week from both Container Trades Statistics and the US National Retail Federation show that demand is easing off, although maybe not quite as quickly as freight rates. But those figures are for July and today’s data may well be more in line with the reality of spot rates.
After two years of almost constant peak season, this year has shown little sign of any build-up of volumes ahead of the key US and European shopping seasons. But some analysts still suggest caution before “jumping the gun”, and say demand may be higher than the trailing figures indicate and the power of the American consumer should never be underestimated.
There seems no doubt, however, that the normalisation of the container market, long since predicted, is finally coming about.
While port congestion remains rife, particularly in Europe and the US east coast, there are signs that it is easing. This is important to the outlook for box lines, as it was congestion that took so much capacity out of the market at a time of high demand, and drove freight rates to their extraordinary levels.
Fewer ships waiting for berths means more ships on the water and more available slots for shippers. And those shippers now have a choice of where to put their cargo, and there are already some indications that carriers with space available are bidding down the market.
This will become more problematic as a swathe of new tonnage hits the water over the next two years. With capacity tight and money no problem, carriers have been on a spending spree at the yards, with the orderbook touching 30% of the existing fleet. Another 7m teu will enter service over the next few years.
Some of that will be absorbed by scrapping, dry docking and regulatory driven slow steaming. But it is still an awful lot of new capacity when volume growth is forecast at less than 3%.
Box shipping has form on this, investing heavily in the boom times leading up to the global financial crisis, then spending the next decade losing money as it fought to fill slots on half empty ships.
There have been suggestions that this time it will be different, and that a smaller number of competitors, tied in to a tight coterie of alliance partnerships, will avoid the follies of the past.
When the pandemic struck and volumes fell by 20% in a quarter, carriers did successfully blank sailings and maintain freight rates at their pre-pandemic level. The potential carnage of not doing so was so obvious that there was little choice but to individually come to a collective decision to reduce capacity.
But “this time is different” is the epitaph written on the tomb of many investment decisions.
As demand edges away, and sales teams are told to fill ships in order to maintain earnings, can that discipline still stand?
Will carriers tied in to long-term charters, signed when getting any capacity at any price was the sole objective, want to idle those ships? Or will they want them earning their keep, even by sailing with less profitable cargo?
History suggests that a trade lane manager being asked to explain his or her load factors will be more inclined to take a price than consider the collective welfare of the sector.
This will all take time to wash through. Carrier investors can expect a few more quarters of good dividends yet.
But the signs are there that the extraordinary set of circumstances that has defined box shipping since early 2020 are finally starting to unwind.