The Maersk Sentosa container ship heads south to exit the Suez Canal in Suez, Egypt, on Thursday, December 21, 2023.
Stringers | Bloomberg | Getty Images
The US merchant ship Gibraltar Eagle was attacked by Houthi fighters on MondayUS Central Command said.
Some market watchers say the disruption could lead to a turnaround in the fortunes of an industry that was mired in recession last year.
“As for higher interest rates in 2024, this could add several billion to the VOCC’s bottom line, even if this only lasts for another two or three weeks,” said Alan Baer, CEO of logistics company OL USA, in an email told CNBC.
If this continues for three to six months [profits] will slowly approach the 2022 level again.
Alan Bear
CEO of OL USA
Vessel-Operating Common Carriers (VOCC) are shipping companies that own and operate vessels responsible for managing and transporting cargo. Maersk, Evergreen and COSCO are some well-known VOCCs.
“If this goes on for three to six months, then [profits] “We will slowly move back towards 2022 levels as operating costs are expected to be lower than what airlines experienced during the chaos of 2021 and 2022,” Baer said.
The global shipping industry is in crisis, hit by high inventory levels and declining consumer spending, leading to several bankruptcies in the past year. Before the Red Sea attacks, global shipping container rates had more than halved as of 2022, a significant reversal from the post-pandemic boom.
According to a recent research note from Jefferies, interest rates between Asia and Europe averaged around $1,550/FEU in 2023, but have now more than doubled to over $3,500/FEU. FEU is a standard unit for measuring the capacity of a 40-foot shipping container, which is usually the largest standard size for container ships.
“When we were in November, we were pretty much seeing the bottom … rates were just about bottom,” said Paul Brashier, vice president of drayage and intermodal at ITS Logistics. He noted that the disastrous tariffs extended not only to shipping but also to trucking. This was not always the case.
According to the John McCown Container Report, an industry compendium, container shipping companies collectively earned $364 billion in profits in 2021 and 2022, which compares to the industry's cumulative losses of $8.5 billion 2016 to 2019 is staggering.
But the industry's net profit fell 95.6% year-on-year to $2.6 billion in the third quarter of 2023.
Containers pile up in Lisbon, Portugal, on January 13, 2024.
Luis Boza/ | Photo only | Getty Images
While recent increases in freight rates may not help shippers relive their post-pandemic glory days, they would significantly boost profitability.
Container line profitability is expected to recover in the first quarter of 2023 due to current price increases, Nico Luman, senior economist at ING, said in a report last week.
Additionally, brokerage firm Jefferies said it had “significantly upgraded” 2024 profit forecasts for some shipping giants due to “higher utilization, higher capacity and a tighter supply-demand balance as a result of the diversion of ships from the Red Sea.” “
The brokerage raised Maersk's 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd's by over 80% to $4.3 billion and ZIM's by 50% to 0. $9 billion.
“We expect the freight recession to end this year, most likely by the end of the third quarter,” said Brashier of ITS Logistics.
As tensions on the Red Sea continue to escalate as the US and UK launch attacks on Houthi targets and the rebel group announces a response, interest rates are unlikely to fall any time soon.
Brashier noted that both contractual rates for shipping companies and spot market rates could continue to rise.
The contracted rates currently being negotiated are typically set between January and March of each year and are fixed for the remainder of the calendar year.
The upcoming Chinese New Year could also drive up prices ahead of holiday closures, Brashier said. The holiday traditionally sees a surge in exports from Asia as companies try to move more cargo before operations in Asia go offline for at least two weeks.
Overall, container freight will continue to increase [find it] It is difficult to deal with the problem of oversupply.
Daejin Lee
Global Head of Research at Fertistream
Other industry observers believe it is too early to make definitive predictions.
Amrit Singh, senior shipping analyst at LSEG, told CNBC that while the higher tariffs are expected to help companies make profits to some extent, this will largely depend on how long the disruption lasts.
“The participation of various multinational navies, including the US Navy, could deter further attacks on ships and lead to a correction in freight rates,” he said. The U.S. launched a multinational maritime force, Operation Prosperity Guardian, in December to protect trade in the crucial waterway.
There is also the problem of an oversupply of containers.
Container shipping companies enjoyed a ship-buying boom after making record profits as a result of the pandemic, many of which came in 2023 and led to excess capacity in the container market.
“Overall, container freight will continue to increase [find it] “It is difficult to get to grips with the oversupply problem,” said Daejin Lee, global head of research at Fertistream.
Demand for shipping assets is still weak and recent developments in the Red Sea are helping shipping lines absorb some of that excess capacity, said Rahul Kapoor, global head of shipping analytics and research at S&P Global.
“This is worse than Evergiven… but it’s not as bad as Covid,” he said. “What we saw [during] Covid was a global disruption.”