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Covid & globalisation: the surprising resilience of container shipping

17 September 2020 – Financial Times


Holding a small axe in a white-gloved hand, South Korea’s first lady Kim Jung-sook cut the ropes tethering the HMM Algeciras and officially launched the world’s biggest container ship at a ceremony in April.

The towering vessel, the first of a dozen ordered by shipping line HMM, is the size of four football pitches. If loaded on to a train, the 23,964 20-foot metal boxes it can carry would stretch for over 90 miles.

Yet for all the pomp on show at the Daewoo shipyard that day, the timing could hardly have been less auspicious. Global lockdowns had by then strangled economic activity in the US and Europe, the biggest markets for Asian exports of manufactured products. And as a result there was a steep drop in traffic of seaborne containers — millions of which criss-cross the oceans supporting global supply chains and transporting everything from electronics and clothing to scrap metal and fresh fruit. By May, nearly 12 per cent of the entire global fleet was idle, according to data from Clarksons Research. Tens of thousands of sailors were stranded at sea.

“The demand shock was even stronger than during the global financial crisis,” says Morten Bo Christiansen, head of strategy at Denmark’s AP Moller-Maersk, the world’s biggest container shipping company. “In every way it has been unprecedented.”

Given such a backdrop, the $180bn-a-year container shipping industry might have been expected to be in a perilous state — especially given its recent record of weak profits and overcapacity. Yet six months after the pandemic brought chaos to the global economy, many of the container lines have navigated the crisis surprisingly well.

By pulling services to prevent a glut, they have so far not only shielded themselves from a financial onslaught — many are making more money than before.

“Carriers have taught themselves a valuable lesson this year,” says Lars Jensen, chief executive of SeaIntelligence Consulting. “Unless something goes horribly wrong towards the last few months they will come out of 2020 with a much better financial result than last year, despite the disruption.”

Given its position at the heart of the global economy, the performance of the container shipping industry resonates well beyond the sector. Some economists have gone so far as to speculate Covid-19 could even spell an end to the golden era of globalisation — a period in which containers have been both the symbol and instrument. There are also plenty of short-term problems still to navigate — including the seafarers still unable to return home.

But so far the industry has demonstrated considerable resilience. The rise in ecommerce has given it a boost. It is also looking towards the likelihood of more shorter trips within regions on vessels that are smaller in size and more nimble than those like HMM Algeciras — an indication that the pattern of globalisation might be changing rather than retreating.

Roberto Giannetta, head of the Hong Kong Liner Shipping Association, says that while the shipping environment is “changing rapidly”, global trade “has adjusted and adapted itself very quickly in such a way that it can continue uninterrupted for a while longer”.

Crew members on a container ship in Wuhan are tested for Covid-19. Despite initial fears over the impact of the disease, the freight rates carriers charge largely held up © China Daily/Reuters

Reduced capacity, higher prices

The invention of modern container shipping in the 1950s revolutionised international commerce. Loose cargo transported in odd-sized wooden crates, barrels and sacks used to be handled by armies of dockworkers. By reducing the need for labour — and the risk of theft and damage — the humble metal box cut the cost and time for moving goods across the oceans.

It unleashed a huge expansion of trade during the latter half of the 20th century. Seaborne container volumes have increased nearly every year over the past four decades, from about 100m tonnes in 1980 to 1.8bn tonnes in 2017, according to the UN. Until now, the only contraction during that period was following the 2008-09 financial crisis.

“You’re hard-pressed to find any industry that’s collectively created as much value as container shipping because that’s where all the valuable products move,” says John McCown, a veteran of the transportation sector and founder of Blue Alpha Capital, an investment advisory firm. “And yet for a lot of reasons there is precious little left for the industry itself. It’s been chronically underperforming, despite incredible growth.”

Brutal competition has made sustained, decent profitability elusive. The sector comprises a fleet of about 5,000 ships. After the global financial crash, carriers continued to order ever-larger ships as they chased economies of scale, culminating in price wars that hammered earnings. A McKinsey report in 2018 estimated that the container shipping industry had destroyed $100bn in shareholder value over the previous 20 years.

The pendulum has now swung the other way. Despite initial fears over the impact of Covid-19, the freight rates that carriers charge — a key barometer of market health — have largely held up.

The composite index of the Shanghai Containerised Freight Index, a benchmark for spot market prices, recently hit an eight-year high and is up more than half since April — its lowest point this year. This was driven by a jump in rates between Shanghai and the US coasts, as well as on routes to Europe.

Industry consolidation has driven these higher rates. Following the 2017 bankruptcy of Korea’s Hanjin Shipping — the first big collapse in the industry for 30 years — the number of carriers shrank. The dominant liners today operate under three main “alliances”, whose members share space on board and pool vessels on services.

“Combined, these three alliances control around 85 per cent of capacity on the transpacific and almost all capacity on the Far East [to] Europe trade lanes, with much more rational behaviour [than before],” says David Kerstens, an investment analyst at Jefferies.

Since the pandemic began, liner companies have parked up ships, sent vessels on longer journeys and cancelled hundreds of sailings — all of which reduced available capacity.

It has paid off. Maersk’s ocean division reported a 26 per cent year-on-year jump in second-quarter earnings before interest, taxes, depreciation and amortisation to $1.36bn, despite a 16 per cent fall in volumes. It put this down to network capacity management, higher freight rates and lower fuel costs, following the collapse in oil prices.

German rival Hapag-Lloyd’s second-quarter ebitda was up by half year on year, while HMM — which has a recent history of state bailouts — swung to an operating profit in the quarter for the first time in about five years.

If the current market strength persists, SeaIntelligence Consulting forecasts a total industry profit of between $12bn and $15bn in 2020, a substantial improvement on last year's $5.9bn.

The flipside is that customers who want goods moved — “shippers” — are having to pay more. While some cancelled sailings have been reinstated, there are complaints about difficulties getting space on board ships and liners charging premiums to prevent cargo being “rolled” on to later vessels.

“It’s better than it was right in the middle of the pandemic but it’s still not great,” says Philip Edge, chief executive of the UK’s Edge Worldwide Logistics. “On spot rates for shipment of really urgent stuff [from Asia to Europe], it’s double what you normally pay. It’s a nightmare. At the moment you’re having to book four to six weeks in advance.”

While critics say the industry alliances distort competition, executives say that ignores the financial strains that companies face.

“This industry has not earned back its cost of capital for the last 10 to 12 years, in any year,” says Rolf Habben Jansen, Hapag-Lloyd’s chief executive, “[so] I would probably make the case that rates have traditionally been too low.”

Seaborne container volumes have increased nearly every year over the past four decades, from about 100m tonnes in 1980 to 1.8bn tonnes in 2017, according to the UN © Qilai Shen/Bloomberg

Labour unrest

Even if container lines can continue to maintain the supply discipline that supports higher rates, they could still be buffeted by human and political factors beyond their control.

When he boarded a container ship to work as its third officer in January, Martin Li only expected to be at sea for four months. But after the pandemic prevented crews from being able to disembark, the seaman, in his 30s, found himself stuck in a loop, repeatedly travelling between Canada and Europe with no idea when he was going home. “We were just going back and forth,” he says. “The operation never stopped.”

Mr Li eventually flew back to Hong Kong in August. But 250,000 people are believed still to be marooned in similar situations. Authorities in some countries have prevented seafarers disembarking on grounds of infection risk. Another obstacle is the grounding of international airlines many rely on to return home after voyages. Most of the world’s estimated 1.65m seafarers are from countries such as China, the Philippines, Indonesia, Russia, Ukraine and India. 

What was already a humanitarian crisis for those working on board container ships is now beginning to have implications for the goods they transit. According to the International Maritime Organization, about 90 per cent of all trade is carried by sea — more than half of it by value on container ships. Trade unions say that fatigue and emotional stress among staff elevates the risk of mistakes onboard. Warning about the potential risk to supply chains, Fidelity International, an asset manager, has called on companies and governments to address the problem.

“They seem to have become a forgotten army of people,” says Guy Platten, secretary-general of the International Chamber of Shipping. “This ultimately is going to affect the supply chains.”

Mr Platten points to the “first stirrings” of this in Australia, where crews have refused to work and ships were detained by the government for breaching labour laws. “What you see in Australia . . . that’s just the tip of the iceberg,” he says. “That’s what could happen around the world.”

Regionalised trade

The relentless advance of globalisation has spawned ever-larger vessels to accommodate seemingly inexhaustible consumer demand for goods.

But if HMM Algeciras symbolises the pinnacle of transoceanic logistics, some liner companies are now betting that future trade may be better suited to ships that are not so large and boast greater flexibility and speed.

In 2014, Zim, an Israeli shipping company, cancelled its route from China to the west coast of the US because it couldn’t compete with the big carriers. But in the wake of the pandemic it launched a new “expedited service” that transports goods more quickly, moving cargo from the warehouses of Shenzhen to the port of Los Angeles in two weeks: catering to a world that is largely staying at home.

“We identified a need,” says Nissim Yochai, Zim’s executive vice-president of transpacific trade. “This need grew due to the virus.”

The acceleration in ecommerce is influencing container shipping. Items ordered online by western consumers from Asian vendors are typically flown in the belly of planes, a far quicker method than by sea. But the grounding of most of the global airline fleet means more items have had to be shipped.

The container shipping sector comprises a fleet of about 5,000 ships and generates an estimated turnover of $180bn a year © Bloomberg

Another factor in the case against ever-larger vessels is that container traffic on intraregional routes is expected to grow faster than on the three major East-West routes — transpacific, transatlantic and Asia-Europe — which together account for about two-fifths of all container traffic.

It comes as many businesses reassess their supply chains after coronavirus exposed vulnerabilities in how goods are made and distributed. A study by the Global McKinsey Institute found that companies could shift a quarter of their global product sourcing to new countries in the next five years.

Countries such as Vietnam, Cambodia, Laos and Bangladesh were already building strong manufacturing sectors, a reflection of cheaper labour and companies seeking to avoid US tariffs on Chinese goods. Rising income levels should mean that these nations have a greater appetite for manufactured goods.

“The intra-Asian region appears to be the market attracting increasing attention from the shipping lines,” says Antonella Teodoro, an analyst at MDS Transmodal.

It will mean more vessels stopping at ports within the continent and travelling shorter distances, as opposed to loading up fully in China and setting sail for the west. Smaller regional ports often do not have adequate infrastructure for the bigger ships, while even on the main routes there may be diminishing returns on size.

“We have more or less reached the ceiling [on ship size],” says Mr Jensen of SeaIntelligence.

Lars Jensen of SeaIntelligence Consulting: 'Unless something goes horribly wrong towards the last few months [carriers] will come out of 2020 with a much better financial result than last year

Rolf Habben Jansen, Hapag-Lloyd’s chief executive: 'This [container shipping] industry has not earned back its cost of capital for the last 10 to 12 years, in any year' © Krisztian Bocsi/Bloomberg

While smaller consumer electronics mean that TVs and computers already occupy less space, the composition of goods inside containers may evolve further.

One area expected to prove fertile is perishable cargo, which is expected to have suffered less from the impact of Covid-19 than manufactured goods, according to maritime research consultancy Drewry. It forecasts an average annual expansion of 3.7 per cent to 2024 in refrigerated containers, or “reefers”, compared with 2.2 per cent for dry cargo.

“Fresh fruit, meats — anything that needs special care taking of on board the journey — that’s the golden egg of any liner company,” says Peter Sand, economist at the international shipping association Bimco. “[That is] where freight rates are high.”

In Hong Kong, Mr Giannetta says the pandemic means that “varied supply chains will need to be considered to avoid the complete disruptions that we saw during the early stages of Covid”.

He suggests these trends are already being seen through “regionalised production” and “online purchases”.

“When the pandemic first started, I wasn’t able to find my favourite Italian branded pasta products,” he says. “Then I started seeing pasta packages coming on [the market] that were in Chinese, that I couldn’t even read.”

Now, Mr Giannetta adds, he is able to buy pasta shipped from Italy again — but he has to order it online.

Copyright Financial Times.