Date: Tuesday, February 14, 2023
No one does cyclical quite like the shipping industry.
After enjoying years of record profits in the aftermath of the global pandemic, the shipping industry now looks set to experience a sharp reversal.
So say Barclays Plc analysts led by Alexia Dogani, who warn that their proprietary index of freight rates suggests shipping costs “will likely go below pre-pandemic levels or, at best, back to where they were pre-pandemic given current trends.”
They’re cutting their estimates for earnings at companies like A.P. Moller-Maersk A/S and Zim Integrated Shipping Services Ltd., citing the twin pressures of lower rates and oversupply. Shipping companies that made nearly $60 billion in profits in the third quarter of last year alone, according to estimates from John McCown, have been using the money to ramp up capacity and buy new vessels.
That leaves major shippers with a potential glut of capacity just as the export boom that propelled rates to all-time highs peters out, with Maersk warning just last week that container volumes could fall by as much as 2.5% this year. That could leave shipping companies forced to idle vessels at the same time that they’re already cutting back on speeds in order to reduce carbon emissions.
“Capacity has already increased, while speed and idle management can only partially offset this influx of capacity without damaging network and schedule quality,” the analysts say. “Indeed, when we assess the recent data on both idling and slow steaming, the data has inflected the most in recent months, with limited success to date in halting the freight rate decline.”
While a drop in shipping rates would be good news for US inflation, which remains firmly above the Federal Reserve’s 2% target, it could also heap pressure on an industry that’s notorious for swinging from boom to bust. Barclays says it now expects “a significant correction in profitability over the next two years,” adding to similar warnings from industry participants of a “ great recession” coming to shipping.
“Container shipping line earnings can be very volatile given the significant operating leverage to unit freight rate,” the Barclays analysts conclude. “Clearly, as seen during the pandemic, it is difficult to predict rates, and operating leverage is very high, but our analysis and current rate projections suggest there could be significant challenges ahead.”