Shipping: The Golden Days are returning to the Container industry

Unsettled weather conditions are a hazard of the high seas. Volatile markets are equally treacherous for the container shipping industry, which carries 80% of the volume of goods traded internationally. A global pandemic, which kept people at home with nothing to do but buy, buy, buy, buy, sent container prices skyrocketing.

In 2022 the return on capital of shipping companies exceeded 40% – the largest gains were three times the total gains of the previous two decades combined. Prices and yields fell as demand waned and shipping companies began taking delivery of new ships ordered during the boom.

Then Houthi rebel attacks on ships in the Red Sea nearly closed the Suez Canal. The disruption sent fares back to record levels only surpassed during the pandemic. How long will the good times last this time?

The destruction of value

On the surface, the answer should be: not much at all. Historically, value destruction has been the industry norm. Trast Economics estimates that between 2002 and 2019 shipping companies’ average return on capital, 4.7%, lagged behind the cost of capital, which averaged around 10%.

The new ships take two years to build. In 2023 the global fleet added capacity of about 2.3 million 20-foot equivalent units (the standard measure of container size), surpassing the previous annual record by 37%.

Another 1 million arrived in the first four months of 2024. In February concerns about overcapacity led A.P. Moller-Maersk, the world’s second-largest shipping company, to warn it could lose as much as $5 billion this year.

The Red Sea and the Houthis

Maersk now estimates that it will have a pre-tax profit of perhaps $3 billion. What changed; But of course the disturbance in the Red Sea is shown to be the main cause of the increasing demand.

The Houthis show no sign of calming down. In the past few days a sailor has been killed, a ship sunk and another abandoned in flames by its crew.

The waterway once accounted for 30% of global container traffic, but 90% of ships that would pass through the canal now reroute around Africa, adding at least a week or two to journeys from Asia to Europe and the Americas .

And longer voyages mean more ships are needed to carry the same volume of goods in a given period.

The Suez attack comes just as other powers are creating wind in the sails of shipping companies. The global economy has avoided recession and the peak season for container traffic has arrived early as importers stock up for Christmas to avoid disruptions, potential tariffs and further freight increases.

The cost of shipping a container from Shanghai to America’s west coast has doubled since late April. It is now more than four times higher than it was in early December and only 12% below the peak of February 2022, when the war in Ukraine began.

Excess demand

If the Red Sea remains rough until later this year, the extra demand could more or less absorb the growing fleet, whose capacity is poised to grow by 8% this year. If the Houthis retreat earlier, that would leave many of the new ships idle.

The oversupply can be avoided if shipping companies delay taking ships from lessors and scrap older ships earlier – not a bad idea as they green their fleets to meet emissions targets. While things are likely to remain “volatile and unpredictable”, this could mean another “decade of strong market conditions” for the industry.

About the author

The Liberal Globe is an independent online magazine that provides carefully selected varieties of stories. Our authoritative insight opinions, analyses, researches are reflected in the sections which are both thematic and geographical. We do not attach ourselves to any political party. Our political agenda is liberal in the classical sense. We continue to advocate bold policies in favour of individual freedoms, even if that means we must oppose the will and the majority view, even if these positions that we express may be unpleasant and unbearable for the majority.

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