Maritime shipping: implications of a structural demand shift and capacity supply crunch.

Low-cost shipping is essential to world trade, but currently jeopardized by steel prices rising, a consumer demand surging and bottlenecks adding further pressure on fragile supply chains. Is there a maritime shipping trading idea here?

The shipping industry is experiencing both supply and demand shocks. We explore rising shipping rates, congestion levels in ports, soaring steel prices, new vessel order books filling up, and how the industry is tackling decarbonization.

Industrial organization of maritime shipping

Maritime shipping is an integral part of the industrial supply chain—it is the backbone upon which large quantities of goods are moved from one place to the next. As you can imagine, the container shipping business is large thanks to globalization. The 5,371 container ships in the global merchant fleet move goods like crude oil and refined oil products, dry-bulk items like iron ore and food, and consumable finished products like clothing, toys, furniture, and cars. Industry CAGR is 4% annually, akin to the cosmetic industry, with 2021 seeing an outlier performance in growth of +23%, driven by the factors we explore next.

The three main maritime actors we see below are currently embroiled in many economic shocks, and we want to know how one might capitalize on all of this. Our actors include shipping operators, ship-builders, and seaports. The display below is a simple ecosystem overview with shipping companies at the heart of global trading operations. While ship builders are not represented, they should, but more on this later…

Broad maritime transport ecosystem

 

Demand side fuels the fire

It all begins with the start of the pandemic. Workers are sent home, with a job or not, and governments of major economies decide to safekeep their economies by printing money and sending stimulus checks to the unemployed. For a year, folks are stuck at home thinking about how they can improve their apartments, or whatever else is online they can spend their stimulus checks on. Retail trading sees a surge as stay at home and the unemployed look for new ways to entertain their prison-like existences, and e-commerce enables compliance with stay at home orders and there goes the ship send off.

 

Skip to today. E-commerce has seen a growth Wall Street only expected five years from now, but pent up demand is not yet unleashed. Savings accounts on average have risen as restaurant closures and retail store closures have cornered consumers to wait for a reopening.

Now, the countdown begins as we reopen businesses and let pent up demand roam free. This summer could continue to see consumers ordering more goods, and services which will put further strain on the maritime shipping industry.

As large retailers restock their shelves in anticipation and response to summer demand, the shipping industry continues to find itself in what seems to be a never ending crunch. The pandemic has led to consumer demand seeing a structural shift, not just a cyclical one. This means container traffic will not revert back to pre-pandemic 2019 levels.

Inventory replenishment, just-in-case inventories, and efforts in direct-to-consumer retail will continue to be the underlying forces in the port bottlenecks we see next.

 

Result 1: port bottlenecks

At the end of March, the Suez Canal, a major chokepoint for international trade connecting the Red Sea with the Mediterranean Sea via Egypt, saw one of Evergreen’s massive container ships, the Ever Given, stall more than 400 ships.

Allianz estimated that this blockage could diminish the yearly global growth by 0.2%-0.4%. The Wall Street Journal then confirmed this, attributing the rising cost of freight transportation ships of 47% to the attempts by shipping operators to re-route vessels during the stall. So what about the consequences of all this on ports today?

Figure showing the Suez Canal


In the US, the East Coast port network remains fluid, but the West Coast continues to see some roadblocks. US container imports remain robust at +30% from 2019 levels, which is a strenuous figure for ports. West Coast ports have been more significantly impacted by port congestion and supply chain bottlenecks than the East Coast where in New York, workers have begun working longer hours on Saturdays to make up for deficits. In the US, there is another lingering problem beyond the shipping industry, notably in the shortage of trucks, which slows down offloading.

In European ports, congestion has worsened as lingering impacts of the Suez Canal disruptions continue to weigh down on offloading cargo. In Europe’s three major ports, Container xChange indicated that more boats are entering the port than exiting, mainly due to the difficulty shipping agents have in booking export containers –it seems as though shipping lines are now prioritizing sending back empty containers to China as fast as possible to lessen port traffic.

In China, the Yantian port situation is getting worse. Earlier this week Maersk wrote an open letter to clients saying it anticipated an average wait time of 14 days instead of 12 at important Asian ports like Yantian. The Chinese port has struggled to make up for lost ground in May, when a virus outbreak lowered port staff count.

But in the end, one thing is sure. A capacity crunch at ports and on ships results in higher rates. Next, we look at how rates have evolved.

 

Result 2 : rates soar

Freight rates, charter rates and monthly revenues have all climbed as a result of demand pressures on cargo and container ships. Freight rates continue to rise as we speak and BIMCO, the largest international shipping association representing shipowners, believes that freight rates will continue to grow for the next three months because demand remains high and supply chain logjams are not yet cleared.

Vessels see charter rates surging too with little signs of abating considering port congestion continues to see worsening state in China and Europe. The next graphic shows an image that is recurrent in shipping rates i.e. a hockey-stock rise.

 

Figures showing container rate prices soaring



Liners are targeting more spot rate hikes in June with a peak season around the corner. Ocean freight rates will remain supported by demand, ongoing logistic bottlenecks, and growing confidence around more rate hikes planned for June 15th. Spot rates for Asia to Europe surged 569% YoY, Asia to USA have soared 126% for West Coast and 210% for East Coast.

 

Result 3: ship-building orders climb

Shippers are strained by a lower fleet to orders ratio, meaning that shipper capacity, or the availability of space on ships is falling as a percentage of the amount of goods being moved. The next graphic signals a 2021 shipper capacity line nearing a historical minimum threshold. This contributes to the surging demand for ship builders. More ships please!

Figure showing still low shipping capacity in 2021


Orders for new container ships nearly doubled from 2019-2020 according to VesselsValue. It’s the biggest gain in ship orders going to shipyards in South Korea and China. In fact, order tallies have been so strong that builders want to renegotiate contracts. Actually, this is mainly because steel plates have doubled in price since the end of 2020 (see next part on commodities).

In the first five months of this year, 208 container ships worth $16.3B were added to the global order book versus half that figure last year says. Most ship orders are for massive 14,500 to 20,000 boxes ships used on an Asia-European trade lane.

Shipping broker Braemar ACM Shipbroking showed that YTD ship orders are on track to surpass total container capacity of 2.8 million containers, a volume not seen since a 2007 high point. Strong profits have enabled liners to order new vessels to make up for a capacity shortage--more orders are highly likely to come in H2 of 2021, and sustain well in 2022. 

New orders for container vessels have surged this year.

 

Variable cost: commodities surge

Steel is used to build ships. In fact, it accounts for 30% of the cost of a vessel. Tankers (ships that move crude oil and refined oil products) and dry-bulks (those who move large volumes of bulky products like iron ore) need even more than container ships.

If yards deliver ships at current contracts, they will be building at a loss. Big cargo ships need between 25,000 and 30,000 tonnes of steel, and that’s an additional $15 million on average from last year in added costs. 22 ships on order are being renegotiated at big Asian yards right now with a large crude carrier now costing around $100M, up 17% since last October.

Steel graphic showing resurging in Steel price

 

ESG consideration: decarbonizing maritime transport.

According to S&P Global analysts, maritime shipping only contributes 3% of global C02 emissions—this is threatening the long term pitch for shipping stocks. The EV industry actually plays a role in this since it contribute to a surge in seaborne imports of lithium-ion batteries as displayed in the next graphic.

 

EV demand for lithium-ion batteries effect on US seaborne imports 


This month of June, the International Maritime Organization (IMO) is planning to establish some new ground rules around emission output. There are many challenges ahead to make the shipping industry ESG friendly; new fuels need to be invented, novel propulsion systems, upgraded vessels and a new global refueling network need to be made.

In March, Maersk pledged to lower emissions by 60% by 2030 and go net-zero by 2050—for many firms it is becoming a question of corporate survival to lower greenhouse gas emissions, and shipping stocks are not immune to this. Early last year, 20 lenders who represent $150B in loans to the shipping industry signed agreements to increase transparency around their ESG practices; banks now have skin in the game and shipping stocks need to abide by new rules.

Shipping groups have however started using liquified natural gas as a way to lower emissions, but LNG is much like other commodities i.e. sensitive to prices volatility. While 140 companies in the maritime sector are participating in the Getting to Zero Coalition, the coalition calculated that the industry will need to see a 5% adoption rate of new fuels by 2030 for any objectives to be achieved.

 

Conclusions on how to play it

In summary, the maritime industry is seeing both a demand pressure from pent up demand, and a capacity constraint on the supply side with both steel prices rising and bottlenecks at ports increasing freight and charter rates.

Shipping companies are reacting to increased consumer demand by ordering more ships from ship builders who now see order backlogs well into 2023. Because rates have increased due to a fall in capacity, shipping operators can command more profits from importers.

Downside risk of these different forces include the possibility that ship builders incur losses from steel price increases, a rise in competition if logistics software groups find ways to lower prices for some operators and a slowdown in mobility if supply chains continue to falter from increased demand pressure.

Ship builders will benefit from new container ship orders as long as they are able to renegotiate contracts considering the rising prices of steel plates. Examples of such builders include:

  • Samsung heavy industries,
  • Hyundia
    • Hyundai says it’s been its busiest period in years with the focus being on container ships. Their order book is filled until well into 2023.
  • Daewoo
    • South Korean yards build one third of all ships.
  • China State Shipbuilding, China Shipbuilding Industry
  • Japan: Imabari Shipbuilding
  • Italy: Fincantieri

Shipping Operators have seen their revenue grow to new heights. For example, Evergreen monthly revenues have grown 145% YoY and Yang Ming has seen a monthly revenue climb of 137%. Major players include;

  • P. Moller-Maersk,
    • Maersk profits enables it to buy more ships from shipbuilders.
  • CMA CGM and
  • Hapag-Lloyd has seen a surge in profit gains due to rising freight rates.
  • Evergreen

 

The world’s leading container ship operators based on twenty-foot equivalent units

 

 

Container liner global market share showing top 10 liners controlling 85% of the market.

 


Share price performance year to date of major maritime industry players.

 

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