Container Shipping Has Cratered, as Ship Owners Try to Avoid Unprofitable Trips

Date: Tuesday, May 23, 2023
Source: Wall Street Journal

Boxship owners are losing money on once-lucrative trans-Pacific routes from Asia as weaker demand for apparel, furniture and electronics cuts into ocean carriers’ earnings.

It is an ominous sign as the shipping industry approaches its peak season. Demand normally rises during the summer and early autumn as retailers bring in higher levels of merchandise for crucial selling periods, such as the year-end holidays.

Ship operators including A.P. Moller-Maersk and Hapag-Lloyd say they need freight rates to increase to cover their operating costs. For now, there are too many ships in the water bidding for cargo, resulting in heavy competition on prices.

Average daily freight rates from Asia to the U.S. West Coast across the Pacific are at roughly $1,500 per 40-foot container, compared with more than $14,000 a year ago, according to the Freightos Baltic Index. The cost to send a box from Asia to Europe is at roughly $1,400, compared with nearly $11,000.

The rates for both trade lanes are hovering around 2019 levels, but fuel and labor expenses are higher now than before the pandemic.

“Spot rates are at a level that in the long run are not sustainable, with costs up by 25% to 30% since 2019,” Rolf Habben Jansen, chief executive of Hapag-Lloyd, said on the German box-ship company’s earnings call earlier this month. In some cases, certain voyages don’t make sense “because you simply lose too much money,” he said.

Box-ship operators were among the biggest pandemic winners. Orders for imported goods began to climb in 2020 as consumer spending surged on demand for products as diverse as electronics and chairs. Supply-chain delays made slots on ships harder to get, helping push freight rates up to about $20,000 a box on some routes.

Several companies posted record profits, largely because of higher prices and elevated demand. Demand began to taper last year as orders to move cargo dried up, prompting carriers to cancel sailings along some of the world’s busiest trade routes.

Pricing power for ship operators has diminished, but some publicly listed operators still produced hefty early-year profits. A recovery in prices during the peak season is doubtful, said Peter Sand, chief analyst at shipping-data provider Xeneta. “The shippers are in the driving seat to set freight rates,” he said.

Shipping companies now face the same uncertainty that surrounds some of their biggest customers, such as, Walmart and Home Depot. A number of retailers have said in recent weeks that they remain cautious about the financial health of consumers, but also pointed to progress in reducing bloated inventories. Target, the Minneapolis-based retail chain, said Wednesday that shoppers are pulling back on discretionary purchases and shifting spending to essentials such as food and household goods.

Cargo volumes into the U.S. slumped this year amid the broad decline in orders from retailers and manufacturers. The nation’s busiest container-port complex, at Los Angeles and Long Beach, Calif., handled the equivalent of about 1.74 million import containers in the first quarter of 2023, a 32% decline from last year’s record volumes.

Box-ship operators are looking for a rise in spending by U.S. consumers on items such as appliances and electronics, which could draw down swollen inventories and increase demand for container ships.

“What I don’t know is when it will happen, and the data is not convincing at this point,” Maersk CEO Vincent Clerc said in an interview.

For now, the market remains subdued. Several ocean-freight carriers pushed for a general rate increase in April of $600 per container on average, but it was “a dead-cat bounce that’s fading fast,” Sand said, referring to a term used to describe a brief rally.

The International Monetary Fund forecast in April that global economic growth will fall to 2.8% this year from 3.4% in 2022. It said the slowdown is expected to be more pronounced in advanced economies such as the U.S.

Importers, such as Hobby Lobby Stores and Costco Wholesale, expect to benefit from less expensive ocean-freight rates this year. Some smaller importers delayed signing annual contracts with ocean-shipping companies, gambling that they would get a better deal by playing the spot market for the rest of 2023.

To deal with lower demand, shipowners are expected to continue canceling sailings in addition to scrapping vessels or idling them for extended maintenance.

“They should have canceled at least twice as many sailings as they did,” said Lars Jensen, CEO of Denmark-based consulting firm Vespucci Maritime. “The collapse in demand is leading to price wars, which will hurt them all.”

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