Container Shipping is Set for Record Profits Despite Spot Rate Decline
In the past few months, container freight rates have been normalizing to pre-pandemic levels. Several spot rate indices have been showing consistent declines for 39 weeks in a row, but the declines are not necessarily translating into losses for carriers.
While the major carriers repeatedly predicted a normalization in the markets in the second half of 2022, the declines came on quickly for the industry. According to Drewry’s World Container Index (WCI), however, spot rate reductions further intensified last week, specifically on the Asia-North Europe route. The rate from Shanghai to Rotterdam for example recorded a weekly decline of 18 percent, so far the largest seen in the last two months. The annual decline on this route stood at 84 percent compared to a similar period last year.
Commenting about last week’s WCI report, Vespucci Maritime CEO Lars Jensen said that container shipping could now be passed a rate normalization and into a phase of rates under-shooting as we experience the market take a hard landing.
On the contrary, shipping lines however are still on track to post record profits this year. John McCown, a shipping specialist and the CEO of Blue Alpha Capital, in a recent report of the carriers’ third quarter performance, forecast the 2022 full-year net profits for liner shipping are set to reach $223 billion. This would be 50.6 percent above the $148 billion posted in 2021.
Although the worldwide container volume was down 3.9 percent in the third quarter compared to the same quarter last year, container shipping still posted a record $58.9 billion net profit in Q3. This represents an increase of $10.8 billion from the $48.1 billion profit recorded in the year-ago quarter.
However, when compared sequentially to Q2 earnings, the net income was $4.1 billion or 6.6 percent lower. This is the first downturn in the past seven quarters of record profits. McCown predicts that 2Q2022 effectively becomes the peak of quarterly earnings.
But what could explain the mismatch in the hype surrounding spot rates decline in the past few weeks and a rather strong financial baseline for most carriers?
“The larger point is that earnings in the container shipping industry are on a different curve than what has occurred with spot rates as the majority of loads move under contract rates. Average overall contract rates remained near peak levels in Q3, with actual data showing that average contract rates on loads moving into the US were at their highest level ever in Q3,” explains McCown.
Despite the cushions built into the industry and rapid efforts to adjust capacity, it is predicted that there will be further declines from Q3 in quarters to come. While recognizing that the record times are over, the carriers are still hoping to achieve a soft landing for their businesses even as freight rates continue their decline.