Container shipping company profits are likely to have another very strong year in 2022 as freight rates remain high despite moderate reduction in the last three months, reports Fitch Ratings.
Freight rates
High freight rates along with buoyant demand have led to an increase in the new vessel order book, which is about 26% of the existing global fleet compared to less than 10% at the beginning of the pandemic. The industry could encounter a turning point in 2023, when growth in vessel capacity is likely to exceed container demand.
The capacity deployment discipline during the peak periods of pandemic-related lockdowns in 2020 was partly the result of industry-wide consolidation in the previous decade, as it reduced the need to gain market share. However, whether this discipline holds with the arrival of new fleet remains to be seen. Some of the excess cash from the ongoing bumper profits has gone to debt reduction, but increased capex, shareholder returns and bolt-on acquisitions have been the other uses across the industry.
Port congestion
Acquisitions have been mostly to increase door-to-door logistics capability, which will be good for the longer-term growth and stability of the industry. Port Congestion Key for Normalisation Most of the freight rate increases over the last two years were driven by increase in port congestion as a result of pandemic-related operational bottlenecks and higher demand due to consumer spending shifts to non-perishable goods and away from services.
Port congestion remains an issue in both the US and European ports. Chinese lockdowns, although leading to lower container volumes for February-April 2022, have not been sufficient to ease the congestion. Union issues at ports and the arrival of peak season for container volumes means congestion issues are unlikely to be resolved in the near term. If port congestion continues into 2023, it could partly absorb the new vessel capacity due to be delivered in 2023.
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Source: Fitch Ratings
