By the end of 2022, the container shipping industry will have earned an unprecedented half a trillion dollars of operating profit from two years of supply chain pain and record freight rates, according to estimates from research firm Drewry.

Having made a record $190bn last year according to Drewry estimates, the liner shipping industry is on track to post new profit heights in 2022. Looking at the latest figures, John McCown from Blue Alpha Capital described liner shipping’s Q1 results as “mind-bending”.

The 11 global carriers that publish their results posted a “staggering” $59.3bn net profit in the first quarter, the sixth consecutive quarter of the highest net income ever for the industry.

The container shipping industry profits in the first quarter of 2022 beat out those of FANG—an acronym for Facebook, Amazon, Netflix, and Google—by 103%, expanding the gap from last year’s fourth quarter when liner industry profits beat FANGs by 14%, according to analysis by Blue Alpha Capital.

McCown has maintained his initial profit forecast of $220.5bn for the container shipping industry in 2022. Whether Q1 is the absolute pinnacle of earnings remains to be seen.

Hapag-Lloyd, which reported a record operating profit of EUR4.3 bn ($4.8 bn) for the first three months of the year, indicated last week it expected second quarter results to come in “slightly south” of the period just gone.

On Friday, China cut its five-year loan prime rate from 4.60% to 4.45%. The reduction comes as China seeks to alleviate the adverse impacts seen from Covid-19 and the introduction of the “three red lines”, which has seen the property market experience eight straight months of home-price reduction and several developers come under pressure. In our view, the move is a clear indication that Chinese authorities is seeking to reverse some of the self-imposed constraints on its housing sector, as Bloomberg Economics currently forecasts that China’s growth will trail the US for the first time since 1976 and as the anticipated re-election of President Xi nears.

 
The Chinese government today announced it has implemented several measures to support the economy and will broaden its tax credit rebates, postpone social security payments, and loan repayments, and roll out new investment projects. The report also added that the Chinese Government will try to maintain the economic growth and achieve social and economic targets for 2022. In sum, we find this being supportive for raw-material intensive demand near-term and should continue to aid demand for dry bulk shipping in the coming months as seasonality builds towards October.

In August 2020 Mediterranean Shipping Co (MSC) embarked on an epic fleet build-up plan that is expected to result this week with its 200th secondhand ship purchase in less than 22 months, an S&P splurge that is unequalled in the history of shipping. Alphaliner’s latest statistics have MSC at 197 in terms of ships bought since August 2020, but broking sources suggest the Soren Toft-led firm is closing in on several more boxship targets.

VesselsValue data below shows how MSC’s fleet has appreciated since August 2020 in step with liner shipping’s phenomenal record period of earnings. At the same time, MSC has been ordering record volumes of newbuilds. MSC, which earlier this year surpassed Maersk at the top of the liner rankings, now has an orderbook of more than 1.7m teu, according to Sea-Intelligence. MSC’s orderbook alone would be the world’s fifth largest carrier, on a par with Hapag-Lloyd.

If MSC’s current fleet size is added to its orderbook the combined magnitude is 5.7m teu, the same size Maersk and MSC had in total when they started the 2M alliance just six years ago, analysts at Sea-Intelligence point out.

The dramatic expansion at MSC has seen the company’s founder, Gianluigi Aponte, double his fortune during the pandemic, even though his cruise ship empire has been badly hit by the global covid outbreak. Aponte, who turns 82 next month, is now worth $19bn, according to the Bloomberg Billionaires Index.

With its suddenly increased financial strength, MSC has been hunting other acquisition targets. Last month it agreed to buy Bollore’s African transport and logistics business for $6bn. In March it took a stake in Italian ferry operator Moby while earlier in the year it lodged a joint bid with Lufthansa to take over ITA, the successor to Alitalia.

With much of China locked down in April and some shipyards declaring force majeure, it was perhaps no surprise that deliveries for last month were quite modest, just 23 in total 12 from China 9 from Japanese yards and one each from the Philippines and South Korea.

To date 122 vessels have delivered of 11 MDWT consisting of 4 VLOC, 17 Capesize, 10 Post Panamax, 25 Panamax/Kamsarmax, 38 Supra/Ultramax and 28 Handysize. With strong freight markets demolition has remained subdued with just 12 vessels (half of which are Capesize) of 1.6 MDWT heading to the breakers so far this year.

291 vessels of 24 MDWT remain on the orderbook for 2022 and no doubt Chinese delivery schedules will undoubtedly be pushed back with so many of their yards idle during April thus we expect the delivery ratio to nominal orderbook to be somewhat less than last year’s impressive 83%. At the same time ordering is gaining pace with 775 dry cargo vessels of around 68 MDWT on the orderbook.

China dominates the forward orderbook with 451 vessels to Japan’s 272 with Philippines 49 and just two bulkers in South Korea. China also dominates the forward orderbook in certain vessel designs as for instance, China has 136 Kamsarmax’s scheduled to be delivered from their yards compared to just 31 from Japan and 24 from the Philippines. Only in the Handysize sector do Japan hold a numerical advantage with 85 vessels on order compared to China’s 59 with 2 scheduled from the Philippines.

The price of coal trading out of the port of Newcastle reached record highs this week, currently fetching USD 393/tonne, up 37% from a month ago and more than double the USD/tonne at the start of the year.

India is currently experiencing the highest average temperatures ever recorded and electricity demand from air conditioning is coinciding with growing office demand as Indians are returning to offices and factories thanks to the end of Covid curbs. The surge is causing blackouts across the country at a time when Monsoon is approaching, and logistics and a lack of coal train transport has hindered the coal in reaching the coal fired power plants.

India’s price cap on electricity has discouraged coal imports at current prices, but as officials struggle to address rising power demand, stricter measures are now being implemented. Earlier this week, India’s power ministry said it would cut domestic supply to state run utilities by 5% if they do not start importing more coal for blending by June 15.

Additionally, Europe’s ban on Russian coal following the invasion of Ukraine has led European buyers to pursue Asian cargoes to fill the gap, supporting the rise in prices and further limiting supply for Indian buyers.

As global wheat prices continue to push higher on supply concerns driven by export bans, severe weather disruptions and fertilizer shortages, we look at the outlook for the crop and how it will affect seaborne exports.

The USDA last week released its latest WASDE report which included fresh revisions to the current state of major agriculture markets. Export forecasts for the current marketing year were reduced by 3.2 MMT to 199.9 MMT. Within the release are fresh forecasts for the 2022-2023 marketing year, in which the association estimates global wheat production will decline for the first time in four years to 774.8 MMT. Prices reacted firmly to the upside thereafter by 5.4% to $12.31 per bushel on the CME exchange. Year-to-date, front-month wheat futures prices have increased by 62.4%.

Global wheat imports across the first four months of the year totaled 42.2 MMT, declining by 5.3% YoY. In comparison, bulk carrier demand from wheat, measured in dwt days, increased by 7.9% YoY. This has been buoyed by the re-emergence of wheat shipments out of South America, as shipments from Argentina nearly doubled in April to 2.2 MMT, with the majority heading to Indonesia, a very demand-intensive trade for the smaller vessels. Chinese bulk carrier demand from wheat, what has been relatively muted so far in 2022, increasing by just 1.6% YoY from January-April, may get a boost in the coming months. Concerns over Chinese wheat output, due to flooding, could spur additional buying from the country on the seaborne market across the summer months. So far China’s wheat of choice has been from Australia, with shipments in April more than doubling YoY to 643k tonnes. 

India announces export ban

While we had previously expected India to boost wheat exports following the surge in global prices, the country only managed to ramp up liftings for little over a month. Worsening crop conditions in the country has now caused the government to implement an export ban, apart from shipments in which credit has already been issued. The worsening weather outlook in the country, a severe heatwave, has raised fears of a worse-than-expected yield for the current marketing year which subsequently moved domestic prices higher. This leaves buyers worldwide with even more limited options to purchase from. Australia and the US now remain as the only major exporters that can support buyers avoiding Russian crop aiming to replace crop from the Black Sea.

April saw the highest level of wheat loaded in Indian ports on record, totaling 769k tonnes, with even more of the crop now stuck in ports that will be re-distributed back to the domestic market. This figure in April would likely have been even greater but port infrastructure was not sufficient in dealing with these large volumes. Most cargoes headed to Southeast Asia, with Indonesia a strong buyer. Bulk carriers have benefitted from considerable demand on this route from elevated coal trade, with wheat stems going in the opposite direction having also provided a boost to employment until the ban was put in place.

Russia still exporting

As we have previously noted, Russia continues unsanctioned by its major wheat buyers. As a result, these volumes have continued to be exported from the country’s Black Sea ports. In April, Russian wheat liftings totaled 1.7 MMT, rising by 74.4% YoY and the highest monthly total so far this year. In terms of destination, Egypt, Iran, and Turkey made up the bulk of the volumes. With shipments appearing strong so far since the invasion of Ukraine, liftings in the second half of the year are also expected to be unaffected, when most Russian wheat is shipped. Earlier this week, forecasts for the next Russian wheat crop were raised to 88.6 MMT because of better-than-expected weather conditions in the country.

European estimates lower

Since the invasion of Ukraine, buyers have looked towards the EU as an alternate source of wheat to replace Black Sea crop. However, so far in 2022, USDA estimates for European wheat have consistently fallen, with export forecasts falling 6.5 MMT to 31 MMT from January-May. In April, European countries exported 664k tonnes of wheat, falling 50.1% YoY. Due to the downward revisions, we now estimate European seaborne exports for 2022 at 14.8 MMT, which would represent an 8.5% decline YoY if realized. With wheat stocks in the bloc already low, the region’s export potential is reduced, with some countries likely holding some crop in reserve. Dry weather in France has raised concerns over Europe’s ability to help replace Black Sea supplies. In some regions of France, councils are reportedly considering implementing water restrictions that would include agriculture as a result.

Outlook

Around the world food security is continuing to become more and more imperative. If this trend continues, wheat, amongst other key grains, may see export declines particularly if prices remain elevated, with countries opting to prioritize domestic prices as we have seen in India. For 2022, we see a 15.3% decline in wheat shipments on the basis only minor volumes will make it out of Ukraine by barge or rail to other ports for export such as in Romania and Bulgaria. Ukraine is also facing a food supply shortage, and thus is opting to keep most food stocks in the country.

Following their first release of 2022-23 marketing year forecasts, the USDA estimate the first decline in wheat production in four years. So far, export forecasts remain unaffected. Something to consider is the mounting pressure on fertilizer supplies across key grain producing countries, including for wheat. Although less vital than for corn, for example, fertilizers still play a significant role in obtaining strong wheat yields. Any worsening of this situation would further reduce wheat output expectations and subsequently exports.

Since the war started, we have entered the South American grain exporting season, thus the smaller vessel sizes have continued to see demand as we would typically have seen. Only once the conventional Ukraine grain exporting season arrives will we see the true effect of the loss in volumes. From August-December 2021, Ukraine exported 26.9 MMT of grain by sea. At this point, it is difficult to pinpoint where extra demand can be generated to make up this loss in the second half of the year if Ukrainian ports remain shut as expected. Vessels that typically would do Black Sea stems during this period will naturally need to look elsewhere, filtering more supply into other regions.

The container industry made a $59.3bn profit in the first quarter, the sixth consecutive record quarterly profit for the sector. The McCown Container Results Observer noted that the result marked more than a threefold improvement over the same quarter last year, a record at the time. Profitability also increased, with net income representing 45.1% of revenue compared to 25.2% in the first and 41.8% in the final quarter of 2021. “By any and all financial measures, the 1Q22 results were the best actual quarterly performance by the container shipping industry in its history,” said the report.

Beneath the record profit figures, Container Trade Statistics data showed worldwide box volume falling 1.8% in the first quarter, adding to a 1.1% drop in Q4 2021 and 1.2% drop in Q3 2021.

A previous edition of the McCown report noted that container line profits in the third quarter of 2021 had exceeded those of the tech giants. The box sector continued to outperform Facebook, Amazon, Netflix and google, in Q1 2022 and even extended its lead as the tech companies experienced their usual seasonal Q1 dip in profits, and the container sector’s seasonal low failed to materialize.

The container sector has benefited from the fallout of the COVID pandemic, as a change in consumer habits in the West conspired with closures of ports and factories to disrupt supply chains. The interruption to the flow of equipment and vessels continues to effectively restrict transportation supply on many routes, leading the freight market higher. Effective capacity is still restricted by around 13%.

The McCown report noted that the highest profit margins were at those companies serving the Asia-Europe and Asia-North America routes, along with companies that had capacity to take on new business in recent quarters.

Looking ahead, McCown said that increased revenues have a long tail as most containers are moved under medium- and long-term contracts. Even if spot rates were to ease, earnings would take longer to fall.

Dislocated trade flows and changing supply-demand dynamics are expected to support dry cargo markets in the second half of this year as the world scrambles to meet its energy and food needs, according to market experts. The war in Ukraine is expected to wipe a huge amount of grain from the market this harvest season because Ukraine cannot export it and many countries have imposed trade sanctions against Russia. “No doubt the Russia-Ukraine war is adding further fuel to an already unstable and volatile shipping environment,” Athen’s shipbroker Sevi Katemoglou told TradeWinds.

The Baltic Dry Index (BDI), which measures the strength of the overall dry bulk sector, has risen since Russia invaded Ukraine on 24 February. The BDI has had a few ups and downs during this time, but it has improved 57% since 12 April to 3,189 points on Wednesday. The forward curve for capesizes and panamaxes, which carry grain and coal, indicates expectations for strong freight rates during the third quarter and an overall firm second half of 2022. Paper for the second half has settled higher each trading day this week for both vessel segments. Capesize forward freight agreements for the third quarter on Wednesday settled at $38,851 per day. Fourth-quarter contracts closed at $32,657 per day. Third-quarter contracts for panamaxes closed at $31,047 per day on Wednesday, while paper for the final quarter settled at $26,879 per day.

The European Union sources almost two-thirds of its grain from Ukraine, which supplies 7% of the world’s wheat. This shutdown of Ukraine’s grain exports is exacerbating a global shortage that has prompted countries, notably India, to stop exporting grain, to ensure they have enough to feed their own people. “While last month we saw India trying to capitalize on the grain supply shortfall by ramping up its wheat exports, a few days ago the Indian government announced an effective ban on wheat exports in order to secure its domestic needs and somewhat tame the commodity’s price, which hit all-time highs,” Katemoglou said. “Albeit we don’t expect this to have a material effect on the freight market, since quantities remain minimal, it is, however, telling of the prevailing uncertainty regarding grain supplies globally.”

The EU has proposed helping Ukraine export its wheat and other grains by rail, road, and river to get around a Russian blockade of Black Sea ports, the Associated Press has reported. Europe also gets about 70% of its thermal coal, roughly 44 MMT per year, from Russia. But the EU will ban Russian coal come August, forcing it to import from more distant exporters such as the US, Brazil, and Indonesia. And China and India, which account for more than one-third of the world’s population, have upped their unmatched demands for seaborne coal as both countries face severe energy crises. “China has applied a zero-import tax policy on coal since the start of the month, and with the Chinese ban on Australian coal still in force, Russia is expected to become China’s second-largest coal trading partner,” Katemoglou said. “The same goes for India, which is looking to increase its coal imports to tackle the current limited electricity capacity of its domestic utilities.”

Rates for dry bulk shipping will always have the potential to move higher if the war, Covid lockdowns and energy shortages continue to dislocate trade, said John Kartsonas, founder of dry bulk exchange-traded fund platform Breakwave Advisors. “Coal and grains are vital commodities that don’t necessarily rely on profitability when it comes to trade,” he told TradeWinds. “After all, people need energy and food to survive. I think if the current situation drags on into the second half of the year, the potential for even higher rates is there.” An end to the war might boost Russian coal and gas exports and thus lower rates relatively quickly, but it may not have the same impact on grain demand, Kartsonas said. “For grains, I think the situation can normalize only longer-term, as the war has taken a heavy toll on Ukraine infrastructure, something that takes years to bring back to some type of normality,” he added.

Shipowners wonder how the global inflation surge will affect their business. The rest of the world, however, sees things the other way around, it worries about how shipping players make life expensive for everyone else. With charter rates for container ships soaring, mainstream media have begun paying attention to the nuts and bolts of the maritime network. Ship queues and supply chains, once a subject of dreary analyst reports, are suddenly becoming hot news for major network TV shows. Even researchers at the IMF descended from their ivory tower to investigate the matter. After crunching numbers from 143 countries, they conclude that every time freight rates double, global inflation picks up by about 0.7 percentage points.

As shipping costs increase at an even faster clip than last year, the IMF forecasts that the cost of moving containers will boost inflation by about 1.5% in 2022. That may contribute less to inflation than rising fuel and food prices. Shipping costs, however, are just as painful, the researchers say, because of some characteristics that economists, politicians, and businesses find particularly annoying. First, shipping costs are much more volatile, making them hard to predict and adjust to. Second, they feed through to producer prices very quickly, within just two months. Third, they tend to hit harder in poor, land-locked or remote island states, which typically import a relatively larger share of the products, commodities, and goods they need. Small wonder, then, that regulatory pressure is mounting.

On 21 March, the US Federal Maritime Commission (FMC) announced that it was expanding a probe into liner operators and their practices. “The FMC’s expanded ocean carrier audit programme will provide better visibility into which ocean carriers work well with US exporters, and more importantly, which ocean carriers can and should do more to support exporters,” chairman Daniel Maffei said. A month earlier, small shippers in the European Union urged regulators to act, complaining that oligopolistic liner companies are boosting inflation rates and use their financial strength to drive freight forwarders out of business.

The war in Ukraine has made things even worse since, with soaring prices for natural gas and oil sending policymakers squirming for quick fixes. Even countries highly sympathetic to shipping interests, such as Greece, are toying with ideas to cap prices in the industry. On 9 March, Greek Prime Minister Kyriakos Mitsotakis urged his EU counterparts to consider putting a ceiling on LNG seaborne transport rates as part of wide-ranging market controls to curb soaring energy costs. Maintenance and dry dockings are getting more expensive. As commodity prices soar, yards are charging more for steel renewals. This could be a drain on owners with older vessels that require more extensive repairs. “Everything is getting dearer, from paints to lubricants,” one ship manager moans. Ports and channels react to higher input prices by raising dues. The Suez Canal increased passage fees twice between November and February.

Politics, however, is just one part of the equation. Traditional ship management is getting trickier as well. Whether caused by Covid or Ukraine, inflation is already driving all types of costs higher, from bunkers and crewing to maintenance and finance costs. “Earlier in the year, there was a general expectation that inflationary pressures will settle down quickly. However, it seems that this is not the case and that we need to adapt to a high-inflation era,” says Loukas Barmparis, president of Safe Bulkers. The most immediate cause of concern is bunkers. With Russia covering one-fifth of global supply for high-sulphur and low-sulphur fuel and marine gasoil, their prices are “anticipated to remain elevated for the foreseeable future”, tanker owner Euronav said on 31 March, a week before announcing a merger plan with rival Frontline. Cost synergies were one of the reasons the two companies put forward for their proposed combination.

Exchanging Ukrainian crews alone could increase expenses by up to $500,000 per year, as war reduces seafarer availability and complicates their repatriation, Euronav said. A scramble to replace them with crews from elsewhere, mainly the Philippines, is already sending crewing costs higher, says Panos Zalachoris of Status Maritime, a major Greece-based crewing agent. Even regular crew travel is getting dearer. “Plane tickets are two to three times more expensive than they used to be,” Barmparis tells TW+. Rising prices affect balance sheets in other ways as well. CFOs have been treated to ultra-low interest rates. As central banks raise interest rates to bring inflation under control, however, finance costs rise with them. With most shipping loans linked to the Libor benchmark interest rate, over-leveraged companies will feel debt repayments weighing heavier. If earnings remain robust, shipping companies should be able to shrug off rising costs. That applies particularly to container ships and broadly for bulkers. “Our management doesn’t consider inflation to be a significant risk to direct expenses in the current and foreseeable economic environment,” Navios Maritime Partners, a US-listed behemoth with more than 100 ships, stated in its annual 20-F filing in April.

When talking about inflation, shipping executives are not focusing on costs but are mostly concerned about the impact it might have on consumption, economic activity, and seaborne trade. “Central banks are raising interest rates … oil and gas prices are skyrocketing and a new outbreak of Covid is lurking in China, I can’t imagine a more difficult environment to give a quarterly guidance, but let me try,” Niels Stolt-Nielsen, chief executive of tanker company Stolt-Nielsen, said in March. Some people are even bullish. Managers of Tufton Ocean Assets says shipping tends to perform well in periods of inflation. That can be particularly true for owners focusing on asset plays. The industry might also benefit from financial investors seeking to enter the business as they channel some of their funds into hard assets. “We won’t be surprised to see … hungry buyers in the next quarter as well, especially as inflation remains high and tangible asset investments continue to make a lot of sense,” Eva Tzima, head of research at Seaborne Shipbrokers, wrote in April.

Inflationary upheaval may also lead to more port congestion, boosting shipping earnings even further. As inflation in Greece hit a 25-year high, workers at the container terminal of Piraeus went on strike in February to press their employer, China’s Cosco group, for higher wages. On 14 April, the workers were back. “With inflation running at full speed every month, the wage increases proposed by management cover just a fraction of the price increases for fuel, bread and electricity,” one of their unions said.

Golden Ocean, the Norwegian dry bulk owner, is expecting a “sustained period of firm rates” based on steady demand and low fleet supply. Although the global recovery from the Covid pandemic faces challenges, with revisions downwards in many countries, some of the forecasts are still higher by historical standards and the company is positive on the outlook for dry bulk demand.

Even with lowered economic growth forecasts, global tonne-mile demand is forecast to increase by 2.1% this year and 2.7% in 2023, the company, owned by billionaire John Fredriksen, said. New efficiency rules due to enter into force on January 1 will have a “significant effect” on the fleet, it said, adding that any vessel built before 2014 will have limited options to meet the standards apart from cutting sailing speeds, with the further potential for early retirement. The orderbook is at a 30-year low, which supports the positive supply dynamics, according to a statement.

After growing by 3.8% in 2020 and by about 4.2% per year on average over the last decade, the global dry bulk fleet is forecast to grow by 3.6% in 2022 and just 2.2% in 2023, well below organic replacement levels, it said. Depending on the impact of the new IMO standards, fleet growth may slow even further as more than 17% of the vessels in the global fleet are 15 years of age or older and may no longer be commercially viable, it added. Very few new vessels have been ordered given high steel prices and limited yard capacity. That has led to newbuilding prices for capesizes and panamaxes rising to the highest since 2009.

The company posted net income of $125.3m for the three months ending March 31, compared with $23.6m in the year-earlier period. It declared a dividend of $0.50 per share. “Golden Ocean delivered another strong quarter on the back of a firm panamax market and a high degree of contract coverage for our capesize fleet secured at attractive levels last year,” chief executive Ulrik Andersen said in a statement. “With the anticipated strengthening of the freight market in the second half of the year, we expect to generate significant cash flows.”

The company has signed a $275m loan agreement to refinance 14 capesizes, with the new facility expected to improve cash breakeven rates for those vessels by about $1,500 per day.