Container shipping: Record carrier profits could be here to stay

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After ocean carriers’ cumulative profits topped some $9 billion in the final quarter of 2020, profits in the liner sector could double that figure in the first quarter of this year.

Cosco Shipping told analysts last week that it expected its first-quarter net profit to hit a whopping $2.3 billion, up from just $44 million in the same period last year, after its average freight rate soared 54% quarter-over-quarter.

“It will be another strong year for the container shipping sector,” said Shanghai-based Bank of Communications shipping analyst Maggie Wang.

Maritime consultancy Drewry agreed, saying the container shipping market has “never been hotter,” as the sector is now in “uncharted waters” on the crest of an unprecedented upward business cycle.

“Using history as the only guide, the smart bet would be to think the market will cool off fairly quickly, but these are not normal times,” the consultancy said.

In its view, carriers are “well prepared for at least another two very profitable years.”

While the huge freight rate inflation in the second half of last year was caused by a pandemic commodity consumption-driven shift, coupled with supply chain disruption and constrained capacity, the “return to normalcy continues to lag,” Drewry noted.

“Drewry’s working position is that port congestion and container equipment shortages will remain an undesirable feature for most of 2021, albeit decreasing in degree as the months pass. This will further restrict capacity availability and lead to substantially higher average spot and contract rates.”

In fact, carriers have managed to lock in substantial annual contract increases with shippers on major trade lanes, with several reports to The Loadstar of “very one-sided negotiations” and take-it-or-leave-it offers made by shippers.

In addition, shippers are also reducing the MQC (minimum quantity commitment) in contracts in order to allocate more space for spot and premium business, which pay more.

And carriers’ increased confidence is reflected in their interest in locking in chartered tonnage for periods of three years or more at sky-high daily rental rates.

“With higher contract rates locked in, another highly profitable year is virtually guaranteed,” Drewry said, suggesting that despite the operating cost headwinds of higher fuel or charter hire, the industry was on track to “set profitability records once again in 2021.”

By 2022, while Drewry expects some erosion in freight rates, it still believes carriers will manage to remain “very profitable” due to “favorable supply and demand growth trends coupled with skillful capacity management.”

Thereafter, the outlook looks less certain, given the recent rush to order new vessels that will begin sailing in the next two to three years.

“Shipowners risk paying a lot of money for assets that could kill the container up-cycle,” Drewry says.

He added that while shippers can expect “a prolonged and unprecedented bull cycle,” he warned that if the acceleration in vessel orders continued, there was a “risk of returning to overcapacity that would shorten the cycle.”

Source gCaptain

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