Shipping companies have steamed out of 2020 in ship shape as freight rates hit highs. The rollout of vaccines around the world will eventually tame high shipping costs, but even then the industry may fare better than in previous down cycles, reports The Wall Street Journal.
Surge in shipping rates
Shipping rates have skyrocketed since the middle of last year on strong demand from the developed world for personal protective equipment and stay-at-home goods, after the initial shock from Covid-19. As manufacturing powerhouse China has gotten the pandemic under control at home, its surging exports of electronic gadgets and masks have pushed up the cost of shipping them.
Freight rates from North Asia to the west coast of North America have tripled from a year earlier, as assessed by S&P Global Platts. In contrast, rates for the other direction only rose 63%. The imbalance in trade led to a shortage of container boxes: Carriers were trying to return them, sometimes empty, to Asia.
The rush to move container boxes to the trans-Pacific route seems to have pushed up rates on some other routes, too. Freight rates from North Asia to North Europe have tripled since November. Port congestion caused by lockdowns and other pandemic-related restrictions have aggravated the problem.
A momentary increase?
Shipping company stocks are having a bumper year. Shares of A.P. Moeller-Maersk, the world’s largest carrier, have gained 40% since the beginning of last year, while those of China’s Cosco Shipping have nearly tripled.
Shipping rates won’t stay elevated forever but may remain high for several months to come. As people are free to travel and eat out, the heightened demand for consumer goods will likely ease. But shipping companies will probably still emerge more resilient than in previous downturns.
“‘How far will rates fall?’ is, of course, the million-dollar question, and the carriers showed throughout 2020 that they could support rates even when there was a significant decline in demand. And so it stands to reason that they will employ similar methods going forward to maintain rates,” said George Griffiths, editor of container-freight markets at S&P Global Platts.
Initial demand collapse
Shipping companies initially cut supply to maintain stable rates when demand for goods collapsed at the beginning of the pandemic. Idle capacity peaked at 12% in May, according to Clarksons Research. Through years of consolidation, the three biggest alliances have around 80% of the market. They also haven’t rushed to order more ships like in previous booms. Their order book, as a percentage of existing fleet, is now at its lowest level of below 10%, compared with 57% in 2007, according to Fitch.
Shipping rates won’t stay high forever, but the shipping companies are riding on a structural tailwind, too—in large part thanks to previous measures to restrain overcapacity and consolidate the market
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Source: The Wall Street Journal
