The container market is worse than the shipping companies thought

Patrick Creuset, an analyst at Goldman Sachs, a famous investment bank, said recently that the coming consolidation recession may be more severe than the market expects, with Goldman Sachs predicting that Maersk's 2023 revenue will fall 37% and EBITDA (earnings before interest, tax, depreciation and amortization) will fall 72%. Average EBITDA decline of 8% from 2023 to 2027.

Patrick Creuset, who follows the shipping industry and focuses on Maersk, said in his latest report that container rates and shipping company earnings will continue to decline and downgraded Maersk's stock to "sell." His central argument is that rates will continue to fall until financial pressures force shipping companies to reduce expensive capacity. Even with rates falling further in recent weeks, monthly new ship deliveries represent about 1% of existing capacity, there are virtually no delays, idling and scrapping vessels remain low (currently inactive container ship capacity is only 4.3% of the existing fleet, according to Alphaliner's latest weekly report), and active capacity on major routes will increase significantly in November compared to October.

The CEO of Hapag-Lloyd recently said that the consolidation industry has always been cyclical, and this downturn is not as severe as after the 2008 financial crisis, when 55 percent of the existing capacity was about to be delivered, and now it is only 27 percent. But Goldman notes that EBITDA margins for shipping companies will fall more sharply in this down cycle than in previous ones, in part because shipping companies made so much money during the pandemic.

It sounds strange, but it makes sense. As a capital-intensive shipping industry, shipping companies often expand capacity through debt financing. Before the epidemic, the balance sheet of shipping companies was generally highly leveraged, and when the market went down and cash flow was insufficient, they would immediately take measures to reduce capacity and costs, let alone order new ships.

As of April 2020, large and mid-sized shipping companies such as CMA CGM, Hapag-Lloyd, HMM, PIL, Yangming Shipping, and Star are at risk of bankruptcy because their current liabilities exceed their current assets. But after lining their pockets with huge profits, shipping companies are generally in good financial shape, with billions in cash flow on their books and no pressure to delay orders or take on new ships.

Another reason is the weakening of liner alliances, which means it will be harder for the industry to manage capacity, and shipping companies will need to think about ensuring their networks are strong enough if they are to operate independently. Whether it is the official dissolution of the 2M alliance at the beginning of this year, MSC and Mediterranean have gone their own way, or the EU has announced the termination of CBER, which has made the survival of the alliance and the scale of the alliance more uncertain. After MSC announced a solo flight, the rapid growth momentum of the fleet has not decreased, and shipping companies like Maersk, which is determined to take the road of logistics, also need to maintain a certain scale of route networks to attract customers. So far, it seems, shipping companies are not showing the self-discipline they should in terms of capacity and are still ordering new ships.

The only savior can only be market demand, Maersk Chief executive Vincent Clerc said in an interview that global trade showed signs of picking up, and the rebound next year will be mainly driven by rising consumer demand in Europe and the United States. But he did not give the basis for the data, instead, Citibank announced that due to high inflation, the US credit card data in September showed that consumer spending decreased year-on-year, especially the growth of necessities such as furniture slowed down (this is the main goods imported to the United States), and consumer spending decreased and confidence weakened is a precursor of economic recession.

It is often assumed that container transport trade growth is in line with GDP growth, but in the case of anti-globalization, global trade growth has been slower than economic growth, according to Sea-Intelligence calculations, container transport demand since 2019, 5.9% lower than GDP growth; Unctad's forecasts also point to global container trade volumes growing by more than 3 per cent in the 2024-2028 period, down from the long-term growth rate of about 7 per cent over the past 30 years, clearly not enough to fill the glut of new ships that are still being launched.

The port community believes that after the best times ended, the container industry quickly ushered in the worst times. As we all know, according to the basic principle of supply and demand imbalance, the market is in a downward cycle, but we cannot predict the future market trend by referring to the past. This time, shipping companies have sufficient cash flow and do not have to worry about bankruptcy. However, the sound financial situation makes shipping companies lack the motivation to actively manage shipping capacity, and other industry participants call for strengthening the supervision of shipping companies. The market downturn will last longer than expected.