Extensive supply chain issues to pump carrier profits

SThe supply chain turmoil will last longer than expected, forcing major upgrades to container freight rates and carrier earnings forecasts in Drewry’s latest Container Forecaster report.

A longer-than-expected period of supply chain disruption forced Drewry to once again raise his forecast for container freight rates and industry profitability in the latest edition of the Container Forecaster.

While the maritime container network is clearly under intense pressure, a lot of goods are still in transit (eventually). Drewry expects global port handling to increase 8.2% this year, or 7.2% from pre-pandemic 2019. This is a downward revision from our Previous forecast of 10.1% given three months ago, since when the disruption of the supply chain crisis has worsened as cases have arisen. of Covid-19 has temporarily closed some Chinese terminals, while extreme weather events have compounded the problem. Drewry does not expect operations to normalize until the end of 2022.

For 2022, we have kept our previous forecast of 5.2% for global port handling, although growing inflationary pressures, in part a direct result of supply chain inefficiencies that have overshadowed transport costs, are emerging. as a downside risk.

Drewry predicts that fleet growth will lag behind demand growth this year and next, but that the story will shift from 2023 as the recent frenzy of orders begins to be delivered . The projected mismatch between supply and demand in 2023 poses a risk for carriers of overcapacity to return to the market.

The real question is, will they care? Three years of previously unthinkable and wacky profits could very well desensitize them to such trivial concerns.

A stronger than expected spot rate movement in 3Q21 and a longer supply chain recovery timeline is driving our rationale for improving the outlook for global average freight rates (spot and contract). ) for 2021 at 126%, which is an upward adjustment of 47% in our month of June. forecast.

For 2022, spot rates are expected to fall, but there will be a significant increase in contract prices, leading to an increase in average world prices of around 6%.

One consequence of all of the above was record carrier industry EBIT, which Drewry said topped $ 39.2 billion in 2Q21, an improvement of nearly eleven times over the previous year. profit of $ 3.6 billion from the same quarter a year ago.

Increases in input costs, such as charter rates and bunker prices, have had little impact. Each carrier we monitor has increased its margins compared to 1Q21, some over 50%.

Carriers are now expected to achieve staggering EBIT of $ 150 billion in 2021, and slightly more in 2022

For seasoned observers of the container market, typing those numbers on a page is downright surreal, but while we think about it, we still need to keep track of how carriers are using their windfall earnings.

The carriers did not sit on their profits, using them in a variety of ways, including debt repayment, shareholder dividends, and large-scale investments in new construction and equipment. This is important because, the more the carriers make, the more they will have to justify their role.

While they are unlikely to convince many shippers of their intentions, carriers must at least demonstrate to regulators that they are doing everything in their power to improve the flow of goods, now and in the future, or face the imposition of undesirable operational measures.

As regulators look into evidence of unethical activity, the lines are on the defensive and recent steps by some to stop further spot rate hikes must be viewed through the lens of a public relations war.

While this may seem like a cynical opinion, in our opinion the shipping companies are not to blame for this crisis. They are just the very lucky winners of this cruel lottery.

It is not the carriers’ fault that ports keep them waiting, navigation schedules are disrupted and access to container equipment is limited. Nor is it the fault of ports and terminals that they have become parking lots for ships and crates, as Covid has made them less able to return crates efficiently and then have them quickly evacuated from the site by due to fewer truck drivers and less storage space.

There are many risks to our forecast, primarily related to the speed of supply chain recovery, which will dictate future upward or downward revisions. There are no easy answers to this extremely complex problem. Our rationale for the longer payback period can be summarized as follows:

We expected more progress at this point. The deterioration of the situation suggests that the problem is much deeper than feared, the pandemic causing latent crises to appear in certain sectors;
The consensus view of conversations with industry professionals is that the end of 2022 is a more likely timeline, overriding previous expectations of a fix after the Chinese New Year;
The increase in Delta cases has increased the risk of further restricting logistics capacity, either through additional lockdowns or more stringent work protocols;
The expiration of the contract for the dockers on the west coast of the United States next summer looms as a disruptive risk.
Source: Drewry