As container shipping lines enjoy what’s left of their most profitable stretch on record, the wheel of fortune may be turning again for an industry all-too familiar with sweeping boom and bust cycles.

Over the past two years, disruptions to the global economy and pent-up demand from home-bound consumers provided a record windfall for the world’s container carriers. But these heady days look to be coming to an end.

This week, the World Trade Organization said merchandise trade flows slowed last quarter and will likely stay weak in the second half. That’s still consistent with the WTO’s forecast for 3% growth in global merchandise trade in 2022.

But the Geneva-based organization sounded less confident about that prediction given that the war in Ukraine is dragging on, inflationary pressures abound and interest rates are rising.

The good news is some supply strains are easing and fuel prices are falling — removing some of the sting that logistics costs have contributed to corporate balance sheets. But it also means the surprise star of pandemic-driven profitability is fading.

Rating Downgrades

This week, Citi cut its outlook for Maersk, Hapag-Lloyd and Zim on expectations of a deeper slowdown in global demand, citing a few reasons: a reduction in consumption, flagging US home sales and rising inflation. They’re all negative omens for an industry that moves about 80% of global trade.

Now the carriers that just a few months ago had zero available capacity have ample room on the ships they deploy across key trade lanes — a reversal that has sent short-term container rates sinking for six straight months.

 Drewry said the spot rate for the benchmark route from Asia to the US fell to $4,949 per 40-foot container, marking the first time the index has slipped below $5,000 since December 2020.

Asia-US Container Rates Drop Below $5,000

Shipping rates on key route falll below $5,000 for first time since late 2020

Note: Rate is for a 40-foot box

Clarksons Research expects container trade capacity will outpace demand by 300 basis points in 2022, which may further reduce container rates, Bloomberg Intelligence’s Lee Klaskow wrote in a research note.

He expects container spot rates will keep moderating but stay “well above” their pre-pandemic levels through the rest of 2022 because of the ongoing fragility of the world’s supply chains.

That brings up another potential problem — bureaucrats looking for someone to blame for inflation. In its research note, Citi said that regulatory pressure in Europe may unravel the “2M” vessel-sharing alliance between the top two players — Copenhagen-based Maersk and the Geneva-based MSC.

“EU regulation allows liners to cooperate and offer joint services provided the combined market share is less than 30%,” Citi said. “We expect 2M alliances market share increasing from 27% in 2021 to 33% by 2025.”

Source: Indian Shipping News