Holding a small ax in a white-gloved hand, South Korea’s First Lady Kim Jung-sook cut the ropes that tied the HMM Algeciras and officially launched the world’s largest container ship in a ceremony in April.
The towering ship, the first of a dozen commissioned by shipping company HMM, is the size of four football fields. If loaded onto a train, the 23,964 20-foot metal boxes it can carry stretch over 90 miles.
Yet for all the pomp presented at the Daewoo shipyard that day, the timing couldn’t have been less auspicious. Global lockdowns were then strangled economic activity the United States and Europe, the largest markets for Asian exports of manufactured goods. And as a result, there has been a sharp drop in shipping container traffic – of which millions cross the oceans proof global supply chains and the transportation of everything from electronics and clothing to junk and fresh fruit. As of May, nearly 12 percent of the entire global fleet was unused, according to data from Clarksons Research. Tens of thousands of sailors are stranded at sea.
“The demand shock has been even stronger than during the global financial crisis,” says Morten Bo Christiansen, chief strategy officer at AP Moller-Maersk in Denmark, the world’s largest container shipping company. “In all respects this has been unprecedented.”
In such a context, one would have expected the $ 180 billion a year container shipping industry to find itself in a perilous state – especially given its recent record low profits and overcapacity. Yet six months after the pandemic wreaked havoc on the global economy, many container lines have weathered the crisis surprisingly well.
By withdrawing the services to avoid a glut, they have so far not only protected themselves against a financial attack – many are making more money than before.
“Carriers have learned a valuable lesson this year,” says Lars Jensen, Managing Director of SeaIntelligence Consulting. “Unless something goes terribly wrong over the past few months, they will come out of 2020 with a much better financial result than last year, despite the disruption.”
Given its position at the heart of the global economy, the performance of container transport industry resonates well beyond the industry. Some economists have gone so far as to speculate that Covid-19 could even mean the end of the golden age of globalization – a period when containers have been both the symbol and the instrument. There are also many short-term issues to be addressed – including the sailors still unable to return home.
But so far the industry has shown considerable resilience. The rise of e-commerce has given it a boost. He is also studying the likelihood of shorter trips to the regions on smaller, more agile vessels than those like the HMM Algeciras – an indication that the globalization model could change rather than back down.
According to Roberto Giannetta, director of the Hong Kong Liner Shipping Association, as the shipping environment “changes rapidly”, world trade “has adjusted and adapted very quickly so that it can continue uninterrupted for a long time. time”.
Reduced capacity, higher prices
The invention of modern container shipping in the 1950s revolutionized international trade. Before its advent, bulk cargoes carried in wooden crates, barrels and oddly sized bags were handled by armies of dockworkers. By reducing the need for labor – and the risk of theft and damage – the modest metal box reduced the cost and time of transporting goods across oceans.
It sparked a huge expansion of commerce in the second half of the 20th century. The volumes of shipping containers have grown almost every year over the past four decades, from around 100 million tonnes in 1980 to 1.8 billion tonnes in 2017, according to the UN. So far, the only contraction during this period has been following the 2008-09 financial crisis.
“You have a hard time finding an industry that collectively creates as much value as container shipping, because that’s where all the valuable products go,” says John McCown, transportation industry veteran and founder of Blue Alpha Capital, firming investment advice. “And yet, for many reasons, very little is left for the industry itself. He has been chronically underperforming, despite incredible growth. ”
Brutal competition has made sustainable and decent profitability elusive. The sector comprises a fleet of around 5,000 vessels. After the global financial crash, carriers continued to order larger and larger ships as they sought economies of scale, resulting in price wars that hammered profits. A McKinsey report in 2018 estimated that the container shipping industry had destroyed $ 100 billion in shareholder value over the past 20 years.
The pendulum has now swung in the other direction. Despite initial fears about the impact of Covid-19, a key barometer of the health of the market – the freight rates charged by carriers – has held up.
The composite index of the Shanghai Containerized Freight Index, a benchmark for spot market prices, recently hit an eight-year high and is up more than half since April – its lowest point this year. This is explained by an increase in fares between Shanghai and the American coasts, as well as on routes to Europe.
Consolidation of the industry has resulted in these higher rates. Korea’s 2017 bankruptcy Hanjin Expedition – the first major collapse of the industry in 30 years – the number of carriers has decreased. The dominant liners today operate under three main “alliances”, members of which share space on board and group ships together on services.
“Together, these three alliances control approximately 85% of the capacity on the trans-Pacific and almost all of the capacity in the Far East. [to] Europe’s trade route, with a much more rational behavior [than before]Says David Kerstens, investment analyst at Jefferies.
Since the start of the pandemic, liner companies have parked ships, sent ships on longer journeys and canceled hundreds of crossings, reducing available capacity.
It paid off. Maersk’s ocean division reported a 26% year-over-year increase in second-quarter earnings before interest, taxes, depreciation and amortization to $ 1.36 billion, despite a 16% decline in volumes. He attributes this to the management of network capacity, rising freight rates and falling fuel costs following the collapse in oil prices.
German rival Hapag-Lloyd’s second-quarter ebitda rose six months a year, while HMM – which has a recent history of state bailouts – achieved operating profit in the quarter for the first times in about five years.
If the current market strength persists, SeaIntelligence Consulting predicts a total industry profit of between $ 12 billion and $ 15 billion in 2020, a substantial improvement from $ 5.9 billion last year.
The flip side of the coin is that customers who want goods to move – the “shippers” – have to pay more. While some canceled sailings have been reinstated, there are complaints of difficulties in securing space on ships and liners charging premiums to prevent cargo from being “routed” on newer ships.
“It’s better than in the midst of the pandemic, but it’s still not great,” said Philip Edge, managing director of Edge Worldwide Logistics in the UK. “Cash rates for shipping really urgent items [from Asia to Europe], that’s double what you normally pay. It’s a nightmare. At the moment, you need to book four to six weeks in advance. “
While critics say industry alliances distort competition, executives say this ignores the financial strains companies face.
“This industry has not recovered its cost of capital in the past 10 to 12 years, regardless of the year,” says Rolf Habben Jansen, Managing Director of Hapag-Lloyd.[so] I would probably say that the rates are traditionally too low. “
Restlessness at work
Even though container lines may continue to maintain the supply discipline that supports higher rates, they could still be rocked by human and political factors beyond their control.
When he boarded a container ship to work as a third officer in January, Martin Li only expected to be at sea for four months. But after the pandemic prevented crews from disembarking, the sailor, in his 30s, got stuck in a loop, repeatedly traveling between Canada and Europe with no idea when he was returning home. “We were just going back and forth,” he says. “The operation never stopped.”
Mr. Li finally flew to Hong Kong in August. But 250,000 people would still be stranded in similar situations. Authorities in some countries have prevented seafarers from disembarking due to risk of infection. Another obstacle is the stranding of international airlines that many rely on to return home after travel. Most of the world’s seafarers, estimated at 1.65 million, come from countries like China, the Philippines, Indonesia, Russia, Ukraine and India.
What was already a humanitarian crisis for those working aboard container ships is now starting to have implications for the goods they pass through. According to the International Maritime Organization, about 90% of all trade is carried out by sea – more than half by value on container ships. The unions say that staff fatigue and emotional stress increase the risk of errors on board. Warning on potential risk to supply chains, Fidelity International, the asset manager, has called business and governments to resolve the problem.
“They seem to have become a forgotten army of people,” says Guy Platten, managing director of the UK Chamber of Shipping. “This will eventually affect supply chains.”
M. Platten underlines the “first eddies” of this in Australia, where crews refused to work and ships were arrested by the government for violating labor laws. “What you see in Australia. . . this is just the tip of the iceberg, ”he says. “This is what could happen in the world.”
The relentless advancements of globalization have spawned ever larger ships to meet a seemingly inexhaustible consumer demand for goods.
But if HMM Algeciras symbolizes the pinnacle of transoceanic logistics, some liner companies are now betting that future trade could be better suited to smaller, more flexible and faster vessels.
In 2014, Zim, an Israeli shipping company, canceled its route from China to the west coast of the United States because it could not compete with the major carriers. But in the wake of the pandemic, it launched a new “expedited service” that moves goods faster, getting goods from Shenzhen warehouses to the port of Los Angeles in two weeks: for a world that largely stays at home. him.
“We have identified a need,” says Nissim Yochai, Zim’s executive vice president for trans-Pacific trade. “This need has increased because of the virus.”
The acceleration of e-commerce is influencing container transport. Items ordered online by Western consumers from Asian sellers are usually carried on airplanes, a much faster method than by sea. But the grounding of most of the world’s airline fleet means the e-commerce industry has had to ship more items.
Another factor in the case against increasingly larger ships is that container traffic on intraregional routes is expected to grow faster than on the three main East-West routes – trans-Pacific, transatlantic and Asia-Europe – which together represent about two-fifths of the whole. container traffic.
It comes as many companies reassess their supply chains after the coronavirus exposed vulnerabilities in the way goods are manufactured and distributed. A study According to the Global McKinsey Institute, companies could shift a quarter of their global supply of products to new countries over the next five years.
Countries like Vietnam, Cambodia, Laos, and Bangladesh were already building strong manufacturing sectors, a reflection of cheaper labor and companies seeking to avoid U.S. tariffs on Chinese products. Rising incomes should mean that these countries have a greater appetite for manufactured goods.
“The intra-Asian region seems to be the market that is gaining more and more attention from shipping companies,” says Antonella Teodoro, analyst at MDS Transmodal.
This will mean more ships will call at mainland ports and travel shorter distances, instead of fully loading in China and setting sail west. Small regional ports often do not have adequate infrastructure for giant ships, while even on major routes, size yields may decline.
“We have more or less reached the ceiling [on ship size]Says Mr. Jensen of SeaIntelligence.
While smaller consumer electronics already mean televisions and computers now take up much less space, the makeup of cargo inside containers can still change.
One area that should prove fertile is perishable cargo, which should have suffered less from the impact of Covid-19 than manufactured goods, according to maritime research consultancy Drewry. It forecasts an average annual expansion of 3.7% until 2024 in refrigerated containers, or “reefers”, against 2.2% for dry cargo.
“Fresh fruit, meat – whatever needs special attention on board the voyage – it’s the golden egg of any liner business,” says Peter Sand, economist at the international shipping association Bimco. “[That is] where freight rates are high. “
In Hong Kong, Mr Giannetta said the pandemic means “varied supply chains will need to be considered to avoid the complete disruptions we saw in the early stages of Covid.”
He suggests that these trends are already visible through “regionalised production” and “online shopping”.
“When the pandemic started, I couldn’t find my favorite Italian pasta,” he says. “Then I started to see packages of pasta arriving [the market] which were in Chinese, which I couldn’t even read. “
Now, Mr Giannetta adds, he can buy pasta shipped from Italy again – but he has to order it online.
Additional reporting by Song Jung-a in Seoul