Red Sea woes may end shipping slump as shipping rates rise

US-owned merchant ship, Gibraltar Eagle, The Houthis bombed it on MondayUS Central Command said.

Some market watchers expect the turmoil to lead to a reversal in the fortunes of an industry that was mired in last year's recession.

“In terms of higher rates in 2024, this could add several billion to the VOC bottom line even if this continues for two or three weeks,” Alan Baer, ​​CEO of logistics company OL USA, told CNBC in an email. Just a few more weeks.”

Vessel Operating Combined Carriers (VOCC) are marine carriers that own and operate ships responsible for managing and transporting cargo. Maersk, Evergreen, and COSCO are some of the most prominent VOC companies.

“If this continues for three to six months [profits] “It will again slowly approach 2022 levels as operating expenses should be lower than what carriers experienced during the chaos of 2021 and 2022,” Baer said.

The global shipping industry witnessed a recession, affected by high inventories and a decline in consumer spending, which led to several bankruptcies last year. Before the Red Sea attacks, global shipping container prices had more than halved as of 2022, a stark reversal from global shipping rates. Post-pandemic boom.

A recent research note from Jefferies said interest rates in Asia and Europe averaged around US$1,550 per European spot unit in 2023, but have now doubled to more than US$3,500 per European spot unit. FEU is a standard unit for measuring the capacity of a 40-foot shipping container, which is usually the largest standard size for container ships.

“When we were in November, we pretty much saw the bottom…prices were at the bottom per barrel,” said Paul Brashear, vice president of transportation and intermodal at ITS Logistics. He noted that the poor rates extend not only to shipping, but to trucking as well. This was not always the case.

Container shipping companies achieved profits amounting to $364 billion in 2021 and 2022 combined, according to Reuters. Data from John McCown's container reporta compendium of the industry, which is amazing in comparison Cumulative losses of $8.5 billion witnessed by the industry from 2016 to 2019.

But the industry's net income fell 95.6% year over year to $2.6 billionIt is the third quarter For the year 2023.

While the recent hikes in freight rates may not help shipping companies regain their post-pandemic glory days, they will significantly boost profitability.

Container ship profitability is expected to rebound in the first quarter of 2023 with current high prices, said Nico Lohmann, chief economist at ING. He said in a report last week.

In addition, brokerage Jefferies said it had “significantly raised” 2024 earnings forecasts for some shipping giants on the back of “higher utilization, higher capacity and tighter supply-demand balance as a result of redirecting ships away from the Red Sea.” “

The brokerage raised Maersk's 2024 EBITDA forecast by 57% to $9.3 billion, Hapag Lloyd's by more than 80% to $4.3 billion, and raised ZIM's forecast by 50% to $0.9 billion.

“We expect the freight slump to end this year, likely late in the third quarter,” said Brashear of ITS Logistics.

As tensions continue to rise in the Red Sea with the US and Britain launching strikes against Houthi targets, and the rebel group vowing to retaliate, prices may not fall anytime soon.

Brashear noted that shipping companies' contracted rates and spot market rates may rise further.

Contract rates, which are currently negotiated, are typically set from January to March each year and are locked in for the rest of the calendar year.

The upcoming Chinese Lunar New Year could also lead to higher interest rates before the holiday shutdown, Brashear said. The holiday traditionally sees an increase in exports from Asia as companies try to move more goods before companies in Asia stop operating for at least two weeks.

Other industry observers believe it is still too early to make definitive forecasts.

Amrit Singh, senior shipping analyst at LSEG, told CNBC that while higher rates are expected to help companies profit to some extent, it largely depends on how long the disruption lasts.

“The involvement of various multinational navies including the US Navy may deter further attacks on ships, leading to a correction in shipping rates,” he said. The United States in December launched a multinational naval force, Operation Prosperity Sentinel, in an attempt to protect trade in the key waterway.

In addition, there is also the problem of oversupply of containers.

Container lines went on a ship-buying spree after posting record profits in the wake of the pandemic, many of which arrived in 2023 and led to… Excess capacity in the container market.

“In general, it will still be container shipping [find it] “The oversupply problem is difficult to manage,” said Daejin Lee, global head of research at Fertistream.

Demand for ocean shipping remains weak, and recent developments in the Red Sea are helping carriers absorb some of this excess capacity, said Rahul Kapoor, global head of shipping analysis and research at S&P Global.

“This is worse than Evergiven… but not as bad as Covid,” he said. “What we saw [during] “Covid has been a global disruption.”

— CNBC's Ganesh Rao contributed to this story.