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Despite rising risks, shipping lines on track for another record year

Kuehne+Nagel reports 15% drop in Chinese exports but expects quick recovery

The year is almost a third over, and with each passing month, shipping lines look increasingly likely to pocket even more cash in 2022 than in record-trouncing 2021.  

New data and commentary released Tuesday by ocean carrier Maersk, freight forwarder Kuehne+Nagel and consultancy Drewry highlight just how profitable this year is looking for ocean carriers — and how expensive it’s looking for importers.

Drewry’s baseline forecast now calls for ocean carriers as a group to earn $300 billion in 2022 (measured in earnings before interest and taxes, EBIT). That’s up 40% from $214 billion last year. It expects full-year average freight rates, including both spot and contract rates, to rise 39-40% year on year.

“Recent events have not fundamentally changed our outlook,” said Simon Heaney, Drewry’s senior manager of container research, referring to China’s COVID lockdowns and the Russia-Ukraine war.

“Risks are much more heavily weighted to the downside from a carrier perspective, but we still think this year is going to be characterized by extreme freight rates and carrier profitability.”

Carrier hikes guidance … again

Maersk, the world’s second largest ocean carrier, preannounced Q1 2022 results on Tuesday. It reported earnings before interest, taxes, depreciation and amortization of $9.2 billion, handily topping the prior record in Q4 2021 of $7.99 billion.

Despite all the market talk on moderating rates, Maersk earned $4,552 per forty-foot equivalent unit in the first quarter, its highest ever quarterly average. That’s up 71% year on year and up 13.5% from the fourth quarter.

Volume declined to 2,996,460 FEUs, down 7% year on year and down 8% versus the fourth quarter.

Maersk already has visibility on Q2 2022. It said market strength will continue through the current quarter and noted that it has higher long-term contract coverage in the second half. As a result, it hiked its full-year 2022 guidance to $30 billion in EBITDA, well above its previous guidance for $24 billion.

If it hits that target, it will earn 25% more this year than last year. And Maersk has a long track record of setting guidance too low and having to repeatedly upgrade. For Maersk to make only $30 billion this year, spot rates would have to fall sharply starting this summer. “The current guidance is still based on an assumption of normalization in ocean [shipping] early in the second half,” it said.

Maersk’s latest guidance also assumes global container demand will only be in the range of -1% to +1% year on year, down from its previous estimate of +2 to +4%.

K+N: ‘Consumption is still robust’

Maersk’s views on demand, rates and profits are on the bearish end of the range.

“Consumption is still robust,” affirmed Detlef Trefzger, CEO of Kuehne+Nagel, the world’s second largest freight forwarder, during his company’s conference call on Tuesday.

“Consumer behavior has changed,” he added. Cargo flows are shifting from home, garden and personal fitness items (“we’ve seen so many sport shoes shipped to the U.S. that you all must have bought 10 new pairs each over the last two years”) to goods used by service businesses like restaurants and hair salons. “There is a different structure of goods in our network, which we believe is healthy and sustainable.”

On freight rates, Trefzger commented, “Yes, they are slightly down. But we have to remind ourselves that they are still five times higher than pre-COVID. You will most likely not see freight rates at the levels seen in 2018 or 2019 [for the rest of] this decade.”

Weekly global rate index in $ per FEU. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

K+N reported Q1 2022 results showing a very similar pattern to Maersk: Rates rose and volumes dipped.

Its Q1 2022 EBITDA was 1.306 billion Swiss francs ($1.36 billion), flat versus Q4 2021 and up 114% year on year. Ocean volumes totaled 1,148,000 twenty-foot equivalent units, down 3% from the fourth quarter and down 8.5% year on year.

But its gross profit per ocean container rose to $966 per TEU, up 32% from the fourth quarter and 111% year on year.

China exports down 15%

The “twin threats” to ocean carriers, said Heaney, are the China COVID lockdowns and the Russia-Ukraine war. “Both have the potential to create something of a firebreak in container demand and speed the supply chain recovery,” he said.

Trefzger reported that Chinese exports have fallen 15% over the past two weeks due to the Shanghai lockdown.

“We have congestion at the largest port in the world, which is Shanghai, but we don’t have China congestion. We have trade ongoing” from the country, he said, noting that cargo is being rerouted through other Chinese ports.

When export flows resume out of affected areas “we shouldn’t underestimate the power of China and the reincarnation of trades,” said Trefzger. He expects Chinese export volumes to go back to pre-lockdown levels “within weeks” of lockdowns easing, causing “volume to spike.”  

According to Heaney, “With regards to profitability, what carriers are going to be most concerned about is the COVID disruption in China and whether it will be felt most at the ports and terminals, or at the factories.

“COVID has been exceptionally good for carrier profitability. Because the primary side effect has been to create shortages in virtually every link in the freight transportation network at a time of very high demand.

“But any factory shutdowns or slowdowns in China really spell bad news for carriers. It would forcibly choke off demand for their services and potentially correct some of the capacity shortage problems we’ve been experiencing for the last couple of years,” he said.

“The sweet spot for carriers is for logistics congestion to be bad but not so bad that it interrupts the flow of goods out of the factories.”

‘Party should keep going’ for shipping lines

If congestion doesn’t unwind in the next few months and spot rates don’t fall fast enough, Maersk would have to revisit its guidance. Yet again.

Congestion doesn’t look like it’s unwinding. Trefzger said that K+N’s “disruption indicator” shows congestion on the rise again globally. Heaney said that Drewry’s congestion indicator is showing increasing delays.

“The dominant drivers of freight rates and therefore carrier profits have been container system inefficiencies, disruptions and port congestion,” explained Heaney.

“These factors are now embedded in the market. They’ve relegated the other more traditional supply-and-demand and cost factors to the margins. Ultimately, carriers’ ability to charge customers extremely high freight rates is going to be dictated by the longevity of supply chain bottlenecks.”

While container demand growth may be slowing — Drewry estimates this year’s growth at 4.1%, above Maersk’s estimate — that won’t cure congestion, said Heaney.

“It’s entirely possible for freight rates to stay extremely high at the same time headline demand growth is slowing. So long as there is any form of growth and a sharp contraction can be avoided, the party should keep going for carriers.

“If the ports and terminals and wider supply chain infrastructure are not able to cope with current volumes, heaping on even more, even if it’s a small amount, isn’t going to help reduce congestion. We need a contraction in demand for that to happen.”

Drewry previously forecast a market normalization by the end of this year. No longer. It now believes normalization “will not occur before 2023,” said Heaney. “That’s going to mean another 12 months of lengthy delays and high freight rates.”

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Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.