Regular line shipping companies will see their financial performances decline markedly in 2023 following the about-turn in the container shipping market. Some are better protected than others, however.
The factors which enabled regular line shipping companies to rake in colossal profits in 2021 and 2022 have disappeared. In this early part of 2023, demand is weak and freight rates, particularly for goods leaving China, have slumped as a result. Does this mean that the shipping companies are bound to fall back into the financial difficulties they experienced in the past?
In the first place, there is a fundamental difference between the current situation and that of the difficult years which saw many spectacular shipping company failures. The companies now have a war chest and have been able to reduce their debts massively during the last two years.
The shipping companies' return to financial solidity is good news, since it is not in the interest of any operator in the logistics chain to work with partners in a fragile state. At the same time, not all shipping companies have the same capacity to resist the reversal of market trends.
How are the market leaders doing?
The top 5 shipping companies should register a modest profit in 2023. For the others, however, the battle will be tough. All will be forced to reconfigure their services, cut costs and carry out major restructuring operations.
1/ The best armed shipping companies
A first lesson needs to be drawn. Companies relying purely on shipping will probably be at a disadvantage, compared to those which have opted for vertical integration. Maersk, COSCO and CMA CGM should, therefore, benefit from the investment they have made in logistics activities during the last two years.
These activities will not be totally spared by the economic slowdown, but the impact will be less violent than in the container shipping sector proper, where freight rates for goods leaving China have slumped in just a few months. The diversification practised by the big shipping groups should serve as a shock absorber against the fall in operating results.
At the same time, these big groups, to which we can add ONE, have a greater capacity to redeploy their activities over the year into markets offering better rewards than the east-west corridor from China. This redeployment, even if its impact is only marginal, can reduce the effect of the reversal of market trends on their financial performance.
ONE has not opted for diversification but can count on another significant factor, namely Japan's economic patriotism.
2/ The shipping companies most at risk
- Evergeen, Yang Ming and Wan Hai
The three Taiwanese companies seem to us to be the ones most likely to suffer from the market turnaround. They could be tempted, moreover, to form a defensive alliance, a sort of Taiwanese ONE. This would not be easy to realise, however, given that Evergreen is tied into the Ocean Alliance with COSCO and CMA CGM until 2028.
- HMM
Korea's Hyundai Merchant Marine (HMM) seems to us to be very exposed to the market's change of direction. Its fleet has grown significantly over the last three years, increasing from 53 ships with a combined capacity of 439,999 TEU on 31 December 2019 to 72 ships and a capacity of 809,000 TEU on 31 December 2022. The company's leading shareholders have just indicated that they want to sell their stakes rapidly. Perhaps this decision has come a little late, however, given that HMM risks finding itself having to sell slots at below-cost.
- ZIM
Zim, which has been run by financial experts rather than container shipping professionals following its restructuring in 2014, also placed major orders for new ships during the bonanza provoked by the pandemic. A strategic repositioning is going to be more difficult for it in 2023, since it is short of options in a market where demand growth has become a rarity.
3/ Hapag Lloyd's position atypical
For now, Hapag Lloyd has not gone for vertical integration. The German group has preferred to invest in port terminals, making acquisitions, notably, in India and Latin America. It has also opted for geographical diversification, which, in its regular line business, has resulted in it taking over Nile Dutch and DAL.
Are things going to change as a result of Deutsche Bahn's decision to sell DB Schenker? Klaus-Michael Kühne, who is a shareholder in Kuehne + Nagel, as well as Hapag-Lloyd, could be tempted to come forward out of a certain kind of German patriotism. If this were to happen, it would seem that Hapag Lloyd would be his preferred takeover vehicle. Could the company find itself reluctantly having to change strategy? What is certain is that, in a period marked by China's avowed appetite for acquisitions in Europe and the particular links between China and Germany, the future of these three big groups is open to question.
4/ MSC in solo breakaway
With the 2M alliance expected to be broken up, MSC has chosen to go it alone as market leader. Over the years, the Italian-Swiss group has shown that it knows how to navigate its way through a declining market with tight cost control.
In 2023, it has stayed true to this strategy, using the extreme flexibility, opportunism and pro-forwarder policy which have already served it well as it continues to forge ahead of the field. Certainly, it has yielded to the temptation of diversification after recently setting up MSC Air Cargo, but it has not intruded on the territory of the forwarders.
With a new storm awaited on the trans-oceanic container transport market, the company can rely on other activities:
- MSC diversified several years ago into ro-ro transport and ferries, which have a following wind now that nearshoring is in fashion.
- At the same time, after a sharp reduction in activity during the pandemic, the group's cruise business recovered strongly in late 2022 and should return to its excellent pre-pandemic level in 2023. This, too, will contribute to the financial health of the wider group.
There is one dark area in the outlook for the group, however. Despite its public relations messaging on the greening of its fleet, thanks to the acquisition of new ships, MSC will be the regular container line operator which will buy the greatest quantity of heavy fuel oil (IFO 380) this year. The company opted to "scrubberise" its fleet to comply with the requirements of IMO 2020. In the long term, this choice may turn out not to have been the wisest one but, for the time being, it should enable the group to contain its operating costs better than its direct competitors.
In the port cargo-handling sector, MSC controls terminals in a large number of ports. This, too, could enable it to make gains in competitiveness. It is not the only shipping company in this position, but it has shown in the past that it is able to make clever use of synergies within the group.
Can the decline in major trade routes be made up for elsewhere?
For the time being, the sharp turnaround in market trends concerns the two main container transport corridors - Asia-Europe, particularly ex-China, and the transpacific. Can the shipping companies rely on other better performing corridors to limit the damage to their operating results?
1/ Storm on the way in the Atlantic
For the time being, the transatlantic trade is one of those in which freight rates have held up fairly well. In the longer term, however, the supply-demand balance remains fragile. The market should see the arrival of a large number of MSC ships in this trade and the divorce by mutual agreement expected between MSC and Maersk makes this even more likely.
It would be dangerous, therefore, for the shipping companies to believe that the transatlantic trade can provide them with the kind of steady income which would partly make up for the collapse in rates for goods coming out of China.
2/ Promising areas
Other trade routes offer more favourable prospects for the shipping companies in 2023, however.
- The Mediterranean area in the widest sense (West Med, East Med, Black Sea and Middle East) offers quick round trips, good demand and profitable freight rates.
- North-South traffic (North America-South America, Europe-Africa, Europe-South America)) began the year in stable fashion, with freight rates boosted by the pandemic.
- The IPBS area (India, Pakistan, Bangladesh, Sri Lanka) is a market which is independent of the Chinese market in terms of shipping services and also offers good demand prospects this year.
- At a more global level and further from us, the Indian-Pacific trade is also promising and relatively tension-free despite tensions over Taiwan. The thaw in diplomatic relations between China and Australia is a good example.
Future prospects rely on Chinese revival
1/ Return to growth expected in 2H 2023
The leading Western shippers are in the process of signing long-term contracts for goods coming from China at rate levels which were inconceivable a few months ago and for smaller quantities of goods than last year. The shipping companies are expecting fresh market growth in the second half, however, on the strength of the following factors:
- Stocks are starting to run out in Europe and the United States
- There has been a general, sharp fall in inflation in the West
- Spot market rates have re-established themselves for the long term at levels above contract rates.
A return to growth could enable the shipping companies to restore their operating margins a little in the Asia-Europe and transpacific trades. This recovery remains hypothetical for the time being, however. China has just announced that it is expecting its GDP to grow by about 5% in 2023, which would be its lowest growth rate for decades. Inflation is looking likely to be more resistant than expected, if we are to believe the testimony given by the chairperson of the American Federal Reserve before a US Senate commission in early March. Away from pure macro-economic considerations, moreover, geopolitics are currently playing a major role in world trade, and in this area, instability is becoming increasingly prevalent.
2/ Fair rates for Chinese exports
At the very start of the pandemic, we tried to estimate what might be a fair average rate for a container from China to Europe. Since then, the shipping companies' operating costs have increased and cargo volumes have fallen, but the idea remains relevant. The right rate would correspond to the desirable break-even point which would enable the shipper to be offered an acceptable service in return for a rate offering adequate remuneration to the shipping company. Such a rate would need to give it an acceptable profit margin and cover the cost of the technical investment necessary to guarantee the sustainability of its business, particularly in the field of digital processes and energy transition.
In current circumstances, we consider that a combined spot and contract rate of around $2,500 would be reasonable for the transportation of a 40' HC DRY container, filled with non-dangerous goods, from main port to main port, with a spot rate of $2,500-3,000 and a long-term beneficial cargo owner contract rate of $2,000-2,500.
It would be difficult for a shipping company to provide a quality, long-term service for rates below these levels, bearing in mind that we are currently close to the market's lowest point of resistance. Shippers are expecting a slight improvement in terms of access to capacity this year, compared to last year, since the capacity of the world fleet in service will exceed demand, even if there is little hope of a general return to service regularity and no hope of an improvement in transit times, given the very low commercial speeds at which ships are operated.
To get through the storm, the shipping companies are going to need to find the right balance between size and flexibility. They will also need to return to the economic survival formulae which correspond ultimately to their normal operating mode. The managerial dimension, which has been a little neglected during the pandemic, is already starting to return to the fore in day-to-day shipping company management. The market will not have a totally painless landing, but the two exceptional years just enjoyed by the shipping companies will at least have made it possible to recompense staff who have never let them down, even during the difficult years.
