Continuing disruption in the Red Sea has forced the shipping companies operating on Asia-Europe routes to revise upwards their break-even levels.
The Cape of Good Hope shipping route between Asia and Europe has finally become a long-term fixture. The regular line shipping companies have now been using this route to avoid the disruption caused by the Houthi rebels in the Red Sea for more than 10 months. This situation is starting to have a serious impact on the operational efficiency and fuel bills of the shipping companies.
The use of longer sea routes has led to increased fuel consumption and reduced transport capacity, since less round trips can be made than would be possible using the Suez Canal. "The market is too slow and is burning far too much fuel," a senior shipping company executive told us recently. When it presented its second quarter financial results, Maersk indicated that its fuel consumption had increased 18% compared to the same period last year because of having had to re-route ships round the Cape of Good Hope.
Add to that the fact that insurance costs have also shot up and it is clear that the shipping companies are currently experiencing a marked increase in their operating costs.
1/ Break-even rates have virtually doubled
Following the end of the Covid-19 pandemic, we estimated that the average freight rate required to ensure that a shipping company was able to operate profitably on Asia-Europe routes was $1,800/40' dry container, not including terminal handling charges. This was for a direct sailing from a Chinese base port to a north European base port via the Suez Canal.
This rate was, of course, purely indicative, since the composition of operating costs varies greatly from one company to another according to ship speed, fuel consumption, the size, age and load factor of the ship concerned, daily ship cost, crew and flag quality and so on). MSC, which, proportionately, operates the greatest number of ships equipped with scrubbers, continues to benefit from a USD200/tonne price differential thanks to its use of IFO 380 fuel, which is the heavy fuel with the highest sulphur content. This advantage, combined with the strike power afforded by its position as the world's number one operator in terms of capacity available, make MSC the trendsetter on the freight rate market.
The new situation created by the use of the Cape of Good Hope route has resulted in a direct increase in operating costs which we estimated last February at USD 1,000 per 40' dry container. For the reasons mentioned above, this additional cost has grown quickly to USD 1,200-1,500 per 40' container, and even to USD1,700-1,800 for the smallest companies, which are the ones which find it most difficult to achieve economies of scale.
Currently, the break-even point which shippers need to take into account in their purchasing strategies is situated at around USD3,400/40' container. Quite a lot of big shippers, both direct buyers and non-vessel operating common carriers (NVOCCs), have been able to buy at around or slightly below this level in the first half but this is no longer tenable.
2/ Spot rates down, contract rates up
The new geopolitical situation has had an impact on transport prices. Although ocean freight rates had been falling since the second half of 2022, even to below break-even levels, the virtual closure of the Suez Canal has stopped this downward spiral.
Source : Upply Freight Index
The increase in FAK spot rates seems to have peaked, however, in August. We are currently seeing a fall in rates on this market, while, at the same time, quarterly and annual contract rates have increased as announced. Spot rates are always higher than contract rates, although, abnormally, this was not the case during most of 2023. The gap between them is now closing, however.
Fundamentally, the increase in contract rates is not the result of a marked increase in demand. The shipping companies are trying to apply increases to avoid contract rates getting dangerously close to the minimum levels required to cover operating costs. There is no guarantee, however, that the shipping companies will succeed in passing on these increases to their clients, given that shippers these days prefer to negotiate everything at all times.
3/ Shipping company profitability currently in decline
In the analysis of shipping company profitability we made at the start of the year, we suggested that there would probably be an improvement in shipping company profitability in 2024 by comparison with 2023, given the new geopolitical situation. We indicated, however, that the increase would be moderate and in no way comparable to the exceptional earnings made in the post-Covid period.
For the time being, the first half results of the main shipping companies are down on those for the first half of 2023, even though the gap narrowed from in the second quarter.
In the second half, on the supposition that ships continue to be routed round the Cape of Good Hope, it is virtually certain that their financial results will be markedly higher than they were in the second half of 2023, which showed a significant deterioration. Maersk and Hapag Lloyd, for example, have both revised upward their EBITDA and EBIT estimates for the current year.
Data source : the companies' financial publications
The shipping companies have undoubtedly obtained a financial advantage from the situation in the Red Sea, despite a significant increase in their operating costs. We are not at the stage at which we can talk about "super profits", however. Signs of nervousness on the market show that they remain at the mercy of a reversal of the trend if the geopolitical context changes. If the shipping companies improve their net income by 10% or so in 2024, that will be a remarkable performance.
