The Journal of Commerce, in an article published today by their Senior European Editor, Greg Knowler, points out another incredible anomaly here in 2020, this time pertaining to the ocean freight industry. Here is Greh Knowler’s article in its entirety.
The robust profits container lines reported in the third quarter, (the best in a decade), stand in stark contrast to dismal service levels and worsening container imbalances out of Asia that comes with the sting of rates that have hit record levels in the Trans-Pacific and six-year highs on Asia–Europe trades.
With rates up significantly compared with last year, and bunker prices down year over year, the carriers managed to shrug off growing supply chain disruption in the third quarter to report a slew of highly positive results.
· Maersk Line, the largest container carrier by fleet capacity and a financial bellwether for the industry, reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.3 billion in the third quarter, an increase of 39 percent compared with the same three-month period in 2019.
· CMA CGM grew its EBITDA 68 percent year over year to $1.7 billion for the quarter,
· Hapag-Lloyd increased its EBITDA 17 percent to $768 million,
· Zim Integrated Shipping Services reported an incredible 145 percent growth in earnings to $262 million, and
· Ocean Network Express saw its EBITDA surge 78 percent to $872 million.
· While Yang Ming did not provide an EBITDA figure, the Taiwan-based carrier posted an operating profit of $230 million in the third quarter compared with a $38 million loss in the same quarter last year.
Following the carriers’ solid Q3 results, Sea-Intelligence Maritime Analysis is expecting the industry to achieve an operating profit of $14 billion for the full year, while Drewry last month upgraded its operating profit expectation for container shipping in 2020 by16 percent to $11 billion, a level not seen since 2010.
But even as carriers head for their most profitable year in a decade, frustration is building among their customers that are finding space in short supply, a lack of equipment, and global schedule reliability that in the third quarter tumbled to 65 percent, down almost 15 percentage points year over year.
To cover the sustained high volume on both the trans-Pacific and Asia–Europe trades, carriers have thrown all available capacity into the water, but the demand has quickly filled all vessels and is overwhelming terminals in the United States, Europe, and the UK. Shippers are facing lengthening port delays, cargo rollovers, soaring rate levels, and an array of equipment and congestion surcharges.
Prepare accordingly
Containers were already left out of position during the extensive blank sailings program implemented during COVID-19 lockdowns in the second quarter, and the extreme rebound in demand since economies in Europe and North America reopened in June blindsided the capacity-cutting carriers.
“Everyone has been surprised by the cargo rebound and that is why a lot of the supply chains are under pressure,” Rolf Habben Jansen, CEO of Hapag-Lloyd, told JOC.com in an interview. “It is difficult for the terminals, for the truckers, there are not enough chassis, we can’t find enough ships, boxes are tight. Everyone is affected by this problem at the moment.”
Søren Skou, CEO of A.P. Møller-Maersk, said a stronger-than-expected recovery in demand following the slowdown in April and May led to the reactivation of all available tonnage, with Maersk reporting a 96 percent utilization of its fleet for the third quarter.
CMA CGM said the volume momentum that built through the third quarter had continued into the last quarter, and the carrier’s fleet was operating at full capacity. Carriers blame their poor on-time performance on severe weather delays, congestion in ports and inland transport, and the container imbalance, all of which they say has been exacerbated by the surprisingly rapid rebound in demand.
Some forwarders and shippers tell JOC.com they should not have to pay record rates for terrible service, but others say the factors leading to poor service levels are indeed out of the control of carriers.
As carriers struggle to reposition containers and transport boxes on time, there is not yet any sign of a decline in either demand or rate levels, a situation that could persist into the new year, according to Otto Schacht, executive vice president of sea logistics at Kuehne + Nagel.
“The situation will definitely not improve before Chinese New Year. Importers should prepare accordingly,” Schacht wrote in a LinkedIn post, highlighting congestion issues at the ports of Los Angeles and Long Beach, which are delaying the return of urgently needed containers to Asia.
With the trans-Pacific generating the highest rates, forwarders say carriers have prioritized the repositioning of boxes to these higher-yielding routes, leaving shippers on other trades battling to find boxes and secure guaranteed bookings.
Equipment shortages on Asia-Europe are also mounting as strong demand continues through November.
The spot market on both the east-west trades out of Asia rose steeply July through September and have accelerated that rate strength into the last quarter.
The average rate from Asia to the US West Coast reached $3,913 per FEU as of Nov. 20, up 218 percent year over year, according to the latest reading of the Shanghai Containerized Freight Index (SCFI).
The rate from Asia to the US East Coast hit $4,682 per FEU, more than double the rate at the same time last year.
On the Asia-North Europe trade lane, the rate in the week of Nov. 20 rose 160 percent year over year to $1,644 per TEU, while Asia-Mediterranean rates jumped 134 percent to $1,797 per TEU compared with the same week last year. The weekly rate movements can be tracked at the JOC Shipping & Logistics Pricing Hub.
Unusual out-of-season demand
Carriers are reporting market strength continuing into the fourth quarter, and this out-of-season development virtually guarantees a good year in 2020.
“We now expect to deliver a Q4 which is stronger than Q3,” Skou told analysts in Maersk’s third-quarter earnings call. “This is unusual and not our normal seasonality, but it has enabled us to upgrade our EBITDA expectations for the full year to between $8 billion and $8.5 billion.”
Looking further ahead, the carriers have all expressed concern that increasing COVID-19 infections across Europe and the US could put the brakes on consumer spending, which through the third quarter was directed away from services and into the purchase of goods.
But with news that multiple COVID-19 vaccines are delivering positive test results, and may start being rolled out as early as the first quarter, the carriers are increasingly confident about 2021.
“If people become more optimistic, there is a chance of reasonable demand in 2021,” Habben Jansen said. “There was a catch-up effect in the rebound of August, September, and October. It will be a little less than that next year, which is good because otherwise everyone would struggle to find space for a long time.”
The Maersk CEO believes volume in 2021 will be approximately the same as that transported by the carrier in 2019, but added that ultimately, the pandemic would have the deciding role.
“The development in container trade will be determined by actions to contain the virus spreading, combined with continued fiscal support to households and businesses,” he noted during Maersk’s third-quarter earnings call.
HMM took a similar view, warning that the resurgence of the pandemic in the winter season pose “a serious threat to the global economy,” while ONE said future cargo demand remained “very uncertain.”
Contact Greg Knowler at greg.knowler@ihsmarkit.com
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