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Ocean carriers grapple with mega-profit math complications

Shipping sector looks to sustainable growth after reaping benefits from pandemic demand
Container ship loading at the Port of Metro Vancouver’s GCT Deltaport container cargo terminal | CHUNG CHOW

While many industries have suffered under the weight of the COVID-19 pandemic during the past three years, the shipping sector was not one of them.

But while near-record revenue and profit were the norm across the sector as demand for goods spiked during the pandemic, industry officials and research analysts say conditions are already showing signs of nor malizing. Ship builders, freight lines, ocean carriers and other cargo transporters will there fore likely consolidate their gains rather than roll the dice on major pushes to keep bot tom-line numbers high.

Werner Antweiler, associate professor at the University of Brit ish Columbia’s Sauder School of Business and chair of the school’s 
international trade policy pro gram, said freight rates on various shipping lanes have already fallen from last year’s peak.

For example, the Global Con tainer Index, which tracks con tainer shipping costs, dropped to US$3,040 on Nov. 18, a price not seen since December 2020. That number was above US$7,500 for much of 2021 and 2022 and peak ed at US$10,996 in September 

“There is clearly light at the end of the tunnel,” Antweiler said. “Prices are still elevated for freight, but not as dramatic as $10K for a shipping container. Shipping from China to the U.S. and Europe is still expensive, but not in other directions. The bottlenecks are starting to clear up.”

The consumer demand for goods in lieu of services during the pandemic that drove freight prices sky-high has already left its mark.

Atlas Corp. (NYSE:AT CO), the parent company of Van couver’s Seaspan Corp., said revenue in 2021 reached US$1.65 billion, up about 16 per cent from 2020. Net earnings, mean while, more than doubled from US$192.6 million to US$400.5 million. (Atlas, in turn, an nounced earlier this month that it has agreed to be acquired by Poseidon Acquisition Corp. for US$10.9 billion.)

“2021 was a milestone year for Seaspan,” said Bing Chen, Sea span’s chair, president and CEO and a director at Atlas, during the 
company’s annual report pres entation earlier this year. “In re sponse to the customer demand, we leveraged our integrated plat form, our people, process and systems to execute our 70-vessel new-build program – 25 of which are LNG dual-fuel and three of which have been delivered ahead of schedule.”

Elsewhere, major shipping lines like A.P. Moller – Maersk (CPH:-MAERSK-B) announced similar gains. Revenue for the world’s biggest shipping and logistics company jumped to US$61.8 bil lion in 2021 from US$39.7 billion in 2020. Its 2021 profit hit US$18 billion, which was more than four times its 2020 profit of US$3.3 billion.

But Maersk CEO Soren Skou noted that such huge gains are not sustainable.

“Exceptional market condi tions led to record-high growth and profitability in A.P. Moller – Maersk,” Skou said in his statement about the company’s 2021 earnings. “However, it also led to supply chain disruptions and severe challenges for our customers. We spent tremendous efforts in mitigating bottlenecks by expanding capacity across [the company’s ocean division], improving productivity in ter minals and growing our global logistics footprint.”

That approach, said Simon Fra ser University (SFU) professor of economics David Jacks, is what people should expect from ship ping companies in 2023 as they consolidate gains and re-invest in the industry’s top area of con cern: The land-side logistics that connect to ships.

“This is one of those things that everyone outside of the industry forgets or neglects when every thing is running smoothly,” he said. “But we are now seeing tremendous pressure growing from the lack of capacity in parts of the network – in particular, inter-modal connections in the ports – and restrictions related to public health, which are affect ing labour supply in the shipping industry.”

Jacks, who is on leave from SFU and serving as the J.Y. Pillay professor of social sciences at Yale-NUS College in Singapore, noted that the shipping indus try had suffered a decade-long malaise in the 2010s prior to the pandemic. That depressed mar ket culminated in the 2016 col lapse of South Korean container shipping giant Hanjin Shipping. 

“I expect the freight lines will exercise some discipline here in order to avoid the bust in ship ping rates and profits that they have experienced in the decade prior to COVID,” Jacks said. “At the same time, they are modestly expanding the number of ships in their fleets and/or upgrading the size of their ships. The ex perience of the past two years suggests that much more needs to be done on the land-side of the equation. That is, govern ments and port authorities could do more to either enhance port capacity or streamline current freight-handling processes.”

That is what both Seaspan and Maersk emphasized in their growth strategy beyond this year. 

Executives from the two com panies said their corporations were expanding beyond trad itional shipping services and becoming inter-modal logistics companies that handle customer demands across a wider range of global supply chain links.

In his presentation at Seaspan’s 2021 annual financial results, Seaspan’s COO Torsten Pedersen emphasized that all players in the sector are now positioning themselves in different areas of the overall value chain. Ship ping companies are consequently taking charge of more of their supply lines and moving closer to land-side operations and ports to improve cargo efficiencies and reduce reliance on other parties.

“Cash is currently plentiful in the industry and no longer a unique selling point,” Pedersen said. “The currencies of the coming years instead become deep tech nology knowledge, particularly around decarbonization and fleet efficiency. It will be operation capabilities to keep [things] mov ing in the face of fragile supply chains.” 

A major part of that direction, officials indicated, will be the sustainability and green energy side of operations. Seaspan of ficials said that is why they are optimistic about a 2021 joint venture with China’s ZE Group(Zhejiang Energy) to tap into its experience in sectors like natural gas development.

The timing isn’t a coincidence. 

The International Maritime Organization has decreed that, starting on Jan. 1, 2023, all freighters will have to measure their energy efficiency and sub mit data to determine their oper ation’s overall carbon intensity indicator. 

But that isn’t the only challenge shipping is likely to face in 2023. 

Antweiler noted that macro-economic factors that drove shipping profits to new heights last year are now revers ing: Ports are reopening in stress points like China, high interest rates are dampening consum er demand for goods and over all consumption patterns are changing.

“[The] shift from products to services is happening as we are exiting the COVID economy,” he said. “This shift in demand has eased demand on cargo.… My sense is that the macroeconomic drivers are the ones most im portant. However, some supply chain issues remain, especially as far as China is concerned be cause of the ongoing economic difficulties.”