South Korean ocean carrier HMM expects “downward pressure” on demand growth in the second half of 2022.
HMM reported Wednesday its operating profit shot up by 153% year over year, but the South Korean ocean carrier isn’t counting on revenue figures to be quite as impressive in the second half of 2022.
Seoul-headquartered HMM said the operating profit for the first half of 2022 was KRW 6.08 trillion ($4.68 billion), up from KRW 2.4 trillion ($1.8 billion) in the first six months of 2021.
First-half revenue leapt by 87% year over year from KRW 5.33 trillion ($4.1 billion) to KRW 9.95 trillion ($7.66 billion).
Net profit was the most impressive figure of all — up 1,560% from KRW 365 billion ($281 million) in 2021 to KRW 6.06 trillion ($4.65 billion) this year.
“HMM significantly improved earnings in H1 2022, mainly led by high freight rates and efficient fleet operations,” the company said in an earnings statement. “The Shanghai Containerized Freight Index (SCFI) in H1 2022 was 4,504 points, up 49% from 3,029 points in H1 2021.”
Second-quarter earnings also significantly improved year over year. Revenue was up 73% from KRW 2.9 trillion ($2.23 billion) to KRW 5.03 trillion ($3.85 billion). Operating profit increased 111% from KRW 1.38 trillion ($1.06 billion) in Q2 2021 to KRW 2.937 trillion ($2.264 billion) this year. Net profit leapt 1,290% from KRW 211 billion ($162 million) to KRW 2.933 trillion ($2.261 billion).
HMM said it was able to attain record results despite fuel costs rising 35% from the first to the second quarter of this year.
“The financial structure has remained strong,” it added. “HMM’s debt-to-equity ratio has improved to 46% in June 2022 from 73% in December 2021.”
HMM provided only three points in the “outlook and plans” section of its earnings release, which hint that results for the second half of 2022 might not be as astounding as those for the first six months of the year.
“Demand growth is expected to be under downward pressure due to considerable uncertainties mainly related to widespread inflation, rising oil prices and [a] recurrent coronavirus situation, in addition to geopolitical tensions,” HMM said.
It added that the “global supply chain is forecast to remain strained in the coming months” and port congestion at locations around the world is “still pervasive.”
HMM said it unveiled a mid- to long-term strategy in July and “will spearhead an effort to address the full range of future challenges and lay a solid foundation for sustainable growth.”
HMM will spend more than $11.3 billion as part of the growth strategy that includes expanding its container ship fleet from 820,000 twenty-foot equivalent units to 1.2 million TEUs by 2026.
Tankers stocks are doing great. Dry bulk and container stocks temporarily stopped the bleeding. “Maxim stocks” still underperform.
Shipping stocks are not considered “buy and hold” investments these days — for good reason. It’s all about timing. Case in point: Tanker stocks are now soaring after years mired in negative territory.
Fresh 52-week highs were hit Tuesday by Scorpio Tankers (NYSE: STNG), Ardmore Shipping (NYSE: ASC), Euronav (NYSE: EURN), DHT (NYSE: DHT), International Seaways (NYSE: INSW) and Teekay Tankers (NYSE: TNK).
Tankers stocks are up double digits year to date (YTD), in some cases triple digits. However, the rebirth of tanker stocks comes after two painful “bagholder” years. Anyone who bought and held a basket of tanker stocks since January 2020, pre-COVID, would have only recently broken even.
To gauge how shipping stocks have fared, American Shipper crunched the numbers by segment — tankers, dry bulk and containers — both YTD and across the COVID era.
The pattern of winners and losers YTD is very different from the medium-term pattern over the course of the pandemic. From Jan. 1 to Monday’s close, tanker stocks were up 88%. Dry bulk stocks were up 21% and container shipping stocks just 1% (for methodology, see below).
In contrast, shares of shipping companies that have sold equity via Maxim-related deals were down 42% YTD.
This year has been a continual upward climb punctuated by a few brief pullbacks for tanker stocks. Dry bulk shares kept pace with tanker shares until June, after which lower spot rates and economic headwinds took their toll. Dry bulk shares have seen a small recovery since mid-July.
Container shipping shares maintained their winning streak until the end of March. Then they fell back, although, like dry bulk shares, they’ve regained some ground since mid-July.
The Maxim-linked shipping share average jumped briefly in March due to a fleeting spike in one equity, Imperial Petroleum (NASDAQ: IMPP), after which that stock and the overall average slid lower.
Product tankers trump crude tankers in 2022
Tanker stock performance has diverged based on tanker type this year. Shares of pure product-tanker owners are far outperforming the rest, up by an average of 173% year to date. Mixed fleet owners — with both crude and product tankers — are up 73%. Pure crude-tanker owners are up 47% (an impressive gain considering that crude tanker owners are still reporting losses).
COVID-era shipping stock performance
Over the course of the pandemic, container shipping stocks have been by far the biggest winner. As a group, they’re still up 409% on average since Jan. 1, 2020, despite flat performance in 2022 YTD.
Dry bulk shares have been the second-biggest winner. Even with this year’s retrenchment, they’re up 129% since January 2020. In contrast, tanker stocks — which are more in the spotlight this year — are essentially flat versus January 2020 (up 3% as of Monday’s close).
Highlighting the importance of stock-trade timing, the performance of different tanker segments over the medium term was the reverse of 2022 YTD performance. Since Jan. 1, 2020, product tanker stocks fared the worst, mixed-fleet stocks were in the middle, and crude tankers fared best.
‘Maxim stocks’ down over 90% vs. pre-pandemic
The performance of the Maxim-linked shipping equities over the medium term highlights just how important it is to get in and out of such equity bets very quickly.
Keeping in mind that the maximum loss is 100%, the share values of Top Ships (NASDAQ: TOPS) and Globus Maritime (NASDAQ: GLBS) were both down 98% at Monday’s close versus Jan. 1, 2020. Over the same time frame, shares of Seanergy (NASDAQ: SHIP) and Castor Maritime (NASDAQ: CTRM) were both down 91%.
Shares of Imperial Petroleum — a spinoff of StealthGas (NASDAQ: GASS) that Maxim has supported — have lost 95% of their value since the stock began trading in early December. Shares of OceanPal (NASDAQ: OP) — a spinoff of Diana Shipping (NYSE: DSX) that conducted an offering with Maxim as sole bookrunner — have lost 91% of their value since they began trading in late November.
A new shipping equity doing Maxim-placed offerings emerged last month. Seanergy spun off United Maritime Corp. (NASDAQ: USEA) into a separate listing that began trading on July 7.
In just one month, United Maritime’s shares shed 71% of their value.
Methodology for shipping stock averages:
Averages use adjusted closing price data of U.S.-listed shipping stocks from Yahoo Finance. Segment averages were not weighted by market cap.
Only large “pure” owners in each segment were included in averages.For the pure product-tanker average: Scorpio Tankers and Ardmore Shipping. Crude tankers: Euronav, DHT and Nordic American Tankers (NYSE: NAT). Mixed-fleet operators: Teekay Tankers, Frontline (NYSE: FRO) and International Seaways. Tanker owners with significant holdings in non-crude/product segments, such as Navios Partners (NYSE: NMM) and Tsakos Energy Navigation (NYSE: TNP), were excluded.
The dry bulk average was made up of the four largest U.S.-listed pure bulker owners by market cap: Star Bulk (NASDAQ: SBLK), Golden Ocean (NASDAQ: GOGL), Genco Shipping & Trading (NYSE: GNK) and Eagle Bulk (NASDAQ: EGLE).
The container shipping average comprises liner operators Zim (NYSE: ZIM) and Matson (NYSE: MATX), as well as pure container-ship lessors Danaos (NYSE: DAC), Global Ship Lease (NYSE: GSL) and Euroseas (NASDAQ: ESEA). Costamare (NYSE: CMRE), Atlas (NYSE: ATCO) and Navios Partners were excluded due to significant noncontainer holdings.
The Maxim stocks average comprises Top Ships, Seanergy, Castor Maritime, Globus Maritime, Imperial Petroleum and OceanPal. Due to the recency of its listing, share pricing of United Maritime was excluded.
Georgia Ports Authority kicks off the start of its new fiscal year with volumes at over a half million TEUs.
July volumes at the Georgia Ports Authority were 18% higher year over year, kicking off what the operator says is “the fastest start ever” for a new fiscal year.
GPA handled 530,800 twenty-foot equivalent units in July. The 2023 fiscal year runs from July 1 to June 30, 2023.
Since January, GPA has handled 3.4 million TEUs, which is 7% higher than the same period in 2021.
July’s volume growth comes as East Coast and Gulf Coast ports have been seeing an increase in vessels as operators seek to divert traffic from congested West Coast ports. Uncertainties with labor at the West Coast ports may have also been a factor. The International Longshore and Warehouse Union’s contract with the ports expired June 30.
GPA experienced a dip in loaded imports at the Port of Savannah in June — May’s loaded imports totaled 253,508 TEUs — as vessels backed up off the East Coast.
But loaded imports rebounded in July, boosting GPA’s overall volumes. July’s loaded imports of 251,761 TEUs represent the second highest month for that category since January. The figure is 6% higher than June’s 236,481 TEUs and 10% higher than July 2021’s 227,876 TEUs, according to GPA data.
“The Port of Savannah has clearly become a preferred East Coast gateway for shippers globally, including cargo diverted from the U.S. West Coast,” GPA Executive Director Griff Lynch said in a news release.
While the amount of vessels waiting to dock may have eased from last month, that number remains in double digits. As of Tuesday morning, 40 vessels were at anchor waiting to dock at the Port of Savannah, according to its website.
Meanwhile, ship-position data from MarineTraffic from Tuesday morning reflects the backup. However, data can change by the hour as well as daily.
According to a Saturday operational update from vessel operator Hapag-Lloyd, waiting time for ships at anchor was 14 to 18 days.
GPA’s Lynch says the port has undertaken a number of initiatives to handle the increased traffic, including shifting operations to start two hours earlier to 4 a.m. EDT to better suit drivers’ needs. That time change became effective Aug. 1.
In July, the Port of Savannah’s gate operations averaged 15,000 truck moves per weekday, GPA said. That figure includes both import and export transactions.
Meanwhile, infrastructure projects to increase berth capacity are underway at the Port of Savannah. GPA ordered eight new ship-to-shore cranes, with four arriving in February. The remaining four will arrive by the end of 2023. A project to expand berth capacity by 1.4 million TEUs at the Garden City Terminal is 60% complete, while the Garden City Terminal West project will add 1 million TEUs of container yard capacity in 2023 and 2024.
GPA aims to grow annual berth capacity from 6 million to 7.5 million TEUs by 2023 and to 9 million TEUs by 2025.
Port congestion and voyage cancellations by shipping lines are preventing a steeper slide in spot container freight rates.
There’s an old Greek shipping saying that goes: “Ninety-eight tankers and 101 cargoes, boom. Ninety-eight cargoes and 101 tankers, bust.” This doesn’t translate so well into modern-day container shipping because the consolidated liner sector manages the number of ships in service a lot better than the fragmented tanker business.
Tanker spot rates can plunge violently lower when supply exceeds demand. One of the big questions for container shipping has been: Will spot rates plunge precipitously after demand pulls back, as it has in the past in bulk commodity shipping? Or will there be a gradual decline toward a soft landing?
So far, it looks gradual. Trans-Pacific rates have steadied in July and early August. In fact, some indexes show spot rates ticking higher again.
Spot rates are at least temporarily plateauing because U.S. import demand remains above pre-COVID levels, some U.S. ports remain extremely congested, and ocean carriers are “blanking” or “voiding” (i.e., canceling) sailings, both because their ships are stuck in port queues and because they’re matching vessel supply with cargo demand to avert the fate of Greek tanker owners.
“Void sailings are still the go-to options for carriers at this point to try and stymie the fall in rates,” said George Griffiths, managing editor of global container freight at S&P Global Commodities.
“Congestion is still the buzzword for East Coast ports, with Savannah currently feeling the full force of loaded imports and associated delays,” he told American Shipper.
FBX trans-Pac rates up 3% from recent lows
Different spot indexes give different rate assessments but generally show the same trends. The Freightos Baltic Daily Index (FBX) Asia-West Coast assessment was at $6,692 per forty-foot equivalent unit on Friday.
The good news for shippers booking spot cargo: That’s just one-third of the all-time peak this index reached in September. The bad news: Friday’s assessment is up 2.7% from the low of $6,519 per FEU hit on Aug. 2, and it’s still 4.5 times higher than the rate at this time of year in 2019, pre-COVID.
The FBX Asia-East Coast spot rate assessment was at $9,978 per FEU on Friday, less than half the record high in September. However, it was up 3.5% from the recent low of $9,640 on Aug. 2 and still 3.6 times higher than 2019 levels.
Drewry indexes show gradual slide
The weekly index from Drewry portrays a gentler descent than the FBX, because Drewry did not include premium charges in its spot assessments at the peak.
Unlike the FBX, Drewry’s Shanghai-Los Angeles assessment does not show a recent uptick. It was at $6,985 per FEU for the week announced last Thursday, its lowest point since June 2021. It was down 44% from its all-time high in late November 2021, albeit still 4.2 times higher than rates at this time of year in 2019.
Drewry’s weekly Shanghai-New York assessment was at $9,774 per FEU on Friday. Rates were relatively stable over the past two week, yet the latest reading is the lowest since June 2021 and down 40% from the peak in mid-September.
Drewry’s Shanghai-New York assessment on this route is still 3.5 times pre-COVID levels.
S&P Global: East Coast rates 50% higher than West Coast
Daily assessments from S&P Global Commodities (formerly Platts) show a widening divergence between North Asia-West Coast and North Asia-East Coast Freight All Kinds (FAK) rates.
S&P Global assessed Friday’s North Asia-East Coast FAK rate at $9,750 per FEU, up 2.6% from the recent low hit on July 29. Spot rates on this route have roughly plateaued since late April, according to this index.
S&P Global put Friday’s North Asia-West Coast rate at $6,500 per FEU, still gradually falling and at the lowest point since late June 2021. The gap with East Coast assessments has been widening since May, with the East Coast rates now 50% higher than West Coast rates.
“East Coast rates are significantly higher than West Coast rates due to the congestion we are seeing,” said Griffiths.
Port congestion still very high
Matthew Cox, CEO of ocean carrier Matson (NYSE: MATX) explained on his company’s quarterly call earlier this month: “In fall of last year, we saw over 100 vessels waiting at anchor or offshore waiting to get into the ports of Los Angeles and Long Beach. We still have 100 ships waiting. But a lot of that congestion has moved into different ports. We [have] the same number of ships but just more distributed to different places.”
The count fluctuates by the day (and by the hour as ships enter and leave queues) and is now down 15% from its peak — but still historically high. As of Monday morning, there were 130 ships waiting offshore. East and Gulf Coast ports accounted for 71% of the total, with the West Coast share falling to just 29%.
The queue off Savannah, Georgia, was the largest at 39 ships on Monday morning. It was considerably higher just a few days earlier. According to Hapag-Lloyd, there were 48 container vessels off Savannah on Friday, with wait times of 14-18 days.
The queue off Los Angeles/Long Beach has now virtually vanished. On Monday morning, it was down to just 11 container vessels, according to the queue list from the Marine Exchange of Southern California. It hasn’t been that low since November 2020. It hit a high of 109 ships on Jan. 9.
Spot rate easing expected to continue
On last Wednesday’s quarterly call by ocean carrier Maersk, CFO Patrick Jany said port congestion preempted a steeper drop in spot rates. Even with support from congestion, he predicted short-term rates will decline further in the months ahead.
“We have seen an erosion of short-term rates in the past few months that has been stopped here and there by renewed or new disruptions,” Jany said. “The erosion of the short-term rates will continue. It won’t be a one-day drop but a progressive erosion toward a lower level of short-term rates in the fourth quarter.”
Jany predicted that when rates stop falling, they “will stabilize at a higher level than they were in the past [pre-COVID] and higher than our cost level.”
According to Cox at Matson, spot rates “are adjusting slowly. There’s no falling off a cliff. The word we use is ‘orderly.’ We’re seeing rates decline from their peak, but … we expect an orderly marketplace for the remainder of the year, with our vessels continuing to operate at or near capacity.”
The South Carolina cold chain facility opening next year will handle Port of Charleston imports and exports of proteins, fruits and vegetables.
Performance Team – A Maersk Company will open a cold storage facility in Charleston, South Carolina, early next year designed to get imports of proteins, fruits and vegetables to 80 million U.S. consumers within one day and 225 million consumers within two days.
“We have been evaluating South Atlantic cold chain market opportunities for the past three years, and this opportunity stood out in a strong way for a number of good reasons. The South Atlantic is one of the fastest-growing areas in the nation, and we see lots of business opportunities thanks to a competitive port that we can connect our logistics and services to with all our brands here — Maersk, Hamburg Süd and Sealand,” said Mike Meierkort, head of logistics and services for Maersk North America, during a groundbreaking ceremony in Charleston last week.
A Maersk spokesman told FreightWaves the facility would be in “a very strategic location” along Interstate 26 less than 30 miles from the Port of Charleston. He declined to share the size of the cold storage building or the cost of construction.
According to the release, the facility, which will be developed by RL Cold and constructed by Charleston-based Primus and will open in the first quarter of 2023, “will offer a truly unique value proposition to customers through supply chain simplification benefits by integrating cold storage solutions with ocean transit and drayage, refrigerated inland trucking, blast/quick freezing, USDA meat inspections, boxing/repacking and other value-added services based on customer needs.”
Diogo Lobo, head of cold chain logistics for Maersk North America, said: “Customers are looking for more cold storage space in Charleston to grow their exports to the destinations the Port of Charleston serves. There’s a strong refrigerated market in poultry, pork, beef, seafood and potential for fruits and vegetables too.
“We are creating the capacity needed in the market to handle fresh produce, with multiple chambers designated for the different seasons and commodities. We will have a 20,000-square-foot repack room designated for value-added service to the retail sector. We will be a one-stop shop for the temperature-controlled products going to the grocery sector.”
South Carolina Ports announced last month that it had a record 2022 fiscal year, handling 2.85 million twenty-foot equivalent units, a 12% increase year over year, at the Port of Charleston’s terminals.
Federal regulators are pressuring carriers at the Port of New York and New Jersey to compensate shippers and carriers for container storage.
The head of the Federal Maritime Commission is warning ocean carriers serving the Port of New York and New Jersey to stop forcing shippers and drayage truckers to store their containers — and pay them for it when they do.
FMC Chairman Dan Maffei is ratcheting pressure on carriers following a meeting with truckers and marine terminal operators at the port on Wednesday.
“The [FMC] has already been investigating reports of carriers charging per diem container charges even when the shipper or trucker cannot possibly return the container due to terminal congestion,” Maffei said in a statement released Thursday. “I will ask that this investigation be broadened and intensified to cover instances where shippers and truckers are being forced to store containers or move them without proper compensation.”
The National Industrial Transportation League and Bi-State Motor Carriers Association last week urged the FMC to suspend demurrage and detention at the port as congestion worsens amid spiking import volume. Maffei and the agency’s acting director of the bureau of enforcement, investigations and compliance, Lucille Marvin, followed up with a visit to the port to see conditions firsthand.
“When ocean carriers continue to bring thousands of containers per month to a port and only pick up a fraction of that number, it creates an untenable situation for terminals, importers and exporters, trucking companies and the port itself,” Maffei said.
Carriers most behind in picking up their empty containers will be asked for a plan to get caught up.
“Whatever their answers may be, I will do everything in my power to ensure that carriers do not receive involuntarily subsidized storage for empty containers that belong to them,” Maffei asserted. “If it can be shown that a shipper or a trucker is not allowed to return a container then, not only should they not be charged per diem, but the carrier should compensate that trucker for the space it takes up.”
Maffei defended the stricter stance against ocean carriers as being in line with its demurrage and detention rules because it promotes the movement of cargo “since chassis and space would be freed up by carriers taking full responsibility for the empty containers resulting from the increased volumes of import cargo they bring in.”
As record-breaking container ship queues threaten to tie up ports around the country ahead the of the fall peak shipping season, the Port of New and New Jersey announced Tuesday it will be charging ocean carriers a $100 per-container fee on long-dwelling import or export containers, with the goal of freeing up space and improving the balance between imports and exports. The new tariff is effective as of September pending a mandatory 30-day federal notice.
NOAA Fisheries aims to reduce whale strikes on the East Coast of the United States with new vessel speed regulations.
North Atlantic right whales are “one of the world’s most endangered large whale species,” according to the National Oceanic and Atmospheric Administration (NOAA). To protect the approximately 350 remaining, NOAA Fisheries proposed amendments to the current vessel speed regulations on the East Coast of the U.S.
The largest threats to whales are collisions with ships, entanglements with ropes and nets, and climate change, according to NOAA.
In speed zones, vessels are required to lower their acceleration to 10 knots or less. A whale’s risk of death from vessel strikes at this speed is reduced by 80% to 90%, according to ocean conservation nonprofit Oceana.
The amendments proposed last week would broaden the areas and timing of seasonal speed restricted zones. Outside of the seasonal speed zones, dynamic speed zones would be established in areas where right whales are detected and they would last 15 days after the last whale detection.
But many cargo vessels aren’t adhering to current speed limits in whale feeding and breeding zones, according to an Oceana study. It’s unclear if NOAA Fisheries’ proposed changes to the vessel speed restrictions would reduce whale strikes without greater enforcement efforts.
“If NOAA is serious about its mandate to save North Atlantic right whales from extinction, speed zones must be designated in the areas where whales currently are and they must be enforced,” Whitney Webber, campaign director at Oceana, said in a statement. “Until speed zone rules are mandatory and violators held accountable, North Atlantic right whales will continue to die on NOAA’s watch.”
Vessels aren’t complying with speed limits in whale zones
In one area along the South Carolina coast, nearly 90% of vessels exceeded the speed limits in place to reduce whale strikes, according to the study.
Cargo vessels were found to be the least compliant ship type in areas with speed limits, whether they were mandatory or voluntary.
Seasonal management areas with mandated speed limits that saw the worst compliance from 2017-20 were:
Wilmington, North Carolina, to Brunswick, Georgia (almost 90% noncompliance).
Port of New York and New Jersey (almost 80% noncompliance).
Calving and nursery grounds from Georgia to Florida (more than 70% noncompliance).
Entrance to the Chesapeake Bay (almost 65% noncompliance).
Entrance to the Delaware Bay (over 55% noncompliance).
Two-thirds of the vessels that exceeded 10-knot limits in speed reduction zones operated under foreign flags. The United States, Panama, Marshall Islands, Liberia, Germany and Singapore were the countries with the highest number of noncompliant vessels.
Shipping companies aim to protect whales
This level of noncompliance, especially among cargo vessels, is at odds with the message some shipping companies are sending about their whale safety efforts.
In March, CMA CGM announced it is partnering with Woods Hole Oceanographic Institution to assemble and deploy two acoustic monitoring buoys off the coasts of Norfolk, Virginia, and Savannah, Georgia, both considered critical habitats and breeding grounds for right whales. The buoys will transmit near real-time data to ship captains, giving them the opportunity to slow down their vessels or change course if they are near whales.
When vessels collide with whales, it is often fatal for the animals. About 90% of deaths from whale strikes may go unnoticed because they die and sink in the ocean, according to Friend of the Sea, a global marine conservation project that is part of a larger environmental group, World Sustainability Organization.
“Hapag-Lloyd is aware of the impact that shipping has on whales and endangered species,” said Capt. Wolfram Guntermann, director of regulatory affairs at Hapag-Lloyd. “To protect them, we reduce our vessels’ speed in many high-risk regions and we strictly follow the established areas to be avoided, where many whales are found.”
There are fewer than 100 reproductively active female North Atlantic right whales left, NOAA said. Over the past two and a half years, NOAA Fisheries documented four lethal right whale vessel strike events in U.S. waters.
Along with the proposed amendments to the vessel speed regulations, NOAA Fisheries provided a road map for using ropeless fishing gear to prevent entanglements with whales. The agency is accepting public comments on the proposed changes until Sept. 30.
Chinese military exercises in the Taiwan Strait will delay shipments. Further escalation could have dramatic supply chain effects.
China will conduct live-fire military exercises in the Taiwan Strait and around Taiwan from Thursday to Sunday in retaliation for House Speaker Nancy Pelosi’s visit — exercises that are expected to breach Taiwan’s territorial waters and block some busy international shipping lanes.
Any escalation of tensions would create yet another major threat to global supply chains.
If the strait were ever closed to commercial traffic, it would be a negative for cargo shippers and a positive for ship owners and operators. Delays would push up transit time and reduce effective vessel capacity, boosting freight rates.
“Obviously, if it were to close, it would have a dramatic impact on shipping capacity, in the sense that everybody would have to divert around Taiwan and add to the length of the voyages,” Skou said. “That would absorb significant capacity. But I have to say that there seems to be no suggestion that this is where we’re going.”
Bloomberg calculated that almost half of the world’s container ships and 88% of larger container ships transited the Taiwan Strait this year. It also reported that some liquefied natural gas (LNG) carriers have already rerouted or slowed speed in response to the coming military exercises.
Brief ‘partial blockade’ or something bigger?
According to Peter Williams, trade flow analyst at VesselsValue, “With China conducting significant military drills and military tests around Taiwan … there is potential for substantial disruption to trade in the region.”
VesselsValue analyzed location data on commercial ships currently in Taiwanese waters, as well as those en route to Taiwan. As of Wednesday, it found 256 container ships, tankers and bulkers in Taiwanese waters, with another 308 destined to arrive. Of inbound container ships, tankers and bulkers, 60 are scheduled to arrive before the Chinese military drills conclude on Sunday.
Shipping agency GAC warned in customer notice that “some of the exercise areas are within the VTS [Vessel Traffic Service] range of various ports of Taiwan. The port control bureau has set up a warning range. If a vessel enters the area, it will prompt a warning by the port VTS and be requested to leave as soon as possible to avoid any accidents.”
According to Evercore ISI analyst Krishan Guha, “With China warning foreign planes and ships to stay away while its military exercises proceed, the result is what Taiwan’s ministry of foreign affairs terms a blockade, though possibly only a partial one, with some air and sea lanes still potentially open.”
Guha continued: “The current exercises and effective partial blockade are scheduled to last only a few days but could be extended or restarted, leading to a more prolonged crisis, as well as more serious disruptions to global chip and other tech-component supply chains.”
Container shipping giant Maersk sees continued strength in U.S. imports and ongoing supply chain disruptions globally.
The container shipping boom refuses to end on its predicted schedule. Maersk previously guided for a sharp slowdown starting in July. That didn’t happen. Now it sees a gradual pullback toward the end of the year.
On Tuesday, the world’s second-largest container liner operator pre-reported an all-time high $10.3 billion in earnings before interest, taxes, depreciation and amortization for Q2 2022. During a conference call on Wednesday, Maersk CEO Soren Skou said that Q3 2022 will be “equally good,” i.e., around $10 billion.
Maersk has pushed back expectations for a “normalization” of its ocean business until Q4 2022. Even then, it doesn’t see a collapse. Its new guidance calls for full-year EBITDA of $37 billion, implying Q4 2022 EBITDA of around $7 billion. If so, Q4 2022 would be the fourth- or fifth-best quarter in the company’s history.
What has kept the container boom going longer than expected? Maersk executives cited three causes: ongoing supply chain congestion, continued U.S. import demand strength and higher long-term contract pricing.
‘No quick resolution’ to congestion
According to Maersk CFO Patrick Jany, “Q2 saw a continuation of global congestion, with several disruptions offsetting the weakening demand and lower economic outlook and [supporting a] still very high level of freight rates. Although spot rates softened, they remain high in absolute terms.
“While the demand outlook is certainly down, various disruptions preempted a wider erosion of freight rates, which led to an overall market development that was very similar to that of the first quarter, with both higher rates and lower [year-on-year] volumes.”
Skou said he has been frequently confronted with questions from investors on the development of global congestion. He explained, “Congestion really ramped up last year on the U.S. West Coast as import volumes jumped at the same time labor supply dropped due to COVID. We had expected congestion to ease by the middle of this year.
“The situation on the ground is that while congestion has eased a bit on the West Coast, congestion has spread to the East Coast and to Europe.
“Containers are just not moving off the terminals fast enough. On the West Coast, we have a massive problem getting rail cars. Yesterday, we had 8,500 containers in our L.A. terminal waiting for rail cars. That is three or four times the average from a few years ago.
“Across the West Coast, East Coast and Europe, we see issues with customers not picking up containers because of full inventories. This picture means that a quick resolution of the global supply chain issue is increasingly unlikely.”
US imports remain at ‘very high levels’
“Import volumes into the U.S. remain at very high levels,” said Skou. In contrast, he noted, imports to Europe are back to pre-pandemic levels.
An analyst asked Skou why U.S. imports have remained strong despite U.S. retailers reporting excess inventories and slowing demand for some products.
He responded: “Some of the [excess] inventory, particularly in the U.S., is the ‘wrong’ inventory. So, our customers are complaining that they have the wrong inventory and they still have to import the ‘right’ inventory.
“There are certain product categories, especially in durable goods, where pretty much everybody has bought [what they needed]. Everybody has bought a new couch, a new set of lounge furniture, a new TV screen — all the things we spent our money on during the pandemic.
“You cannot go on buying things like another TV screen. But there is still actually very strong demand for faster-moving stuff, especially in lifestyle and retail goods.
“With inflation being rampant in the U.S., people are able to afford less than they were a few months ago. At some point, that should have an effect on U.S. imports. The only caveat there is that savings are also very, very high. Many wise people have said that we should always be careful not to count out the U.S. consumer.”
Maersk contract rates exceed expectations
Yet another reason why the container shipping boom is lasting longer than some expected: long-term freight contract coverage. Spot rates get more attention and spot rates are falling. But contract rates are up sharply year on year.
Contract rates have been even higher than Maersk previously thought, one of the key reasons why it just hiked full-year guidance.
“The conclusion of our 2022 contracting season was very strong,” said Skou. Maersk now expects 2022 contract rates to be $1,900 per forty-foot equivalent unit higher than 2021 contract rates. That’s $500 more per FEU than it predicted just three months ago. “That reflects much better performance, compared to our expectations, in the latter part of Q2 and over the summer,” said Skou.
Maersk now has 71% of its long-haul business on contracts, mostly with beneficial cargo owners as opposed to freight forwarders.
The company’s average freight rate, including both contract and spot, came in at $4,983 per FEU in Q2 2022, up 64% year on year and up 9% from the first quarter. It was the highest quarterly average rate ever reported by Maersk — and the current quarter looks like more of the same.
The Democrats’ inflation bill pares down ‘Build Back Better’ but includes $3 billion to help ports and terminals cut pollution.
Billions of dollars in federal grants aimed at reducing air pollution at seaports are included in the Democrats’ inflation bill with the caveat that the money cannot be used to automate container terminals.
The Inflation Reduction Act of 2022, announced last week by Senators Joe Manchin, D-W.Va., and Majority Leader Chuck Schumer, D-N.Y., is a pared down version of President Joe Biden’s “Build Back Better” package introduced last year but never passed.
The new version, which backers say will raise $739 billion in revenue by closing corporate tax loopholes among other budgetary changes, also invests in domestic energy production and manufacturing with a goal of reducing carbon emissions by roughly 40% by 2030.
One of the provisions in the bill makes available, until September 2027, $3 billion in grants and rebates to port authorities and marine terminals to purchase and install zero-emission cargo-handling equipment.
Build Back Better — which would have set aside $3.5 billion for the grants — included a restriction that funds awarded “shall not be used … to purchase fully automated cargo-handling equipment or terminal infrastructure that is designed for fully automated cargo-handling equipment.”
While the restriction is not included in the grant provision in the climate bill, the provision defines zero-emission port equipment or technology as being “human-operated equipment or human-maintained technology” and therefore continues to exclude automated technology from grant eligibility without the separate language.
Eligible cargo handling equipment or technology is further defined in the bill as producing zero emissions of air pollutants and greenhouse gases or that captures 100% of such emissions produced by ocean vessels at berth.
“This would go a long way to help seaports meet their emission reduction goals,” said Elaine Nessle, executive director of the Coalition for America’s Gateway and Trade Corridors. “Freight projects often have economic benefits for the entire country, but they can also negatively impact local communities, so it’s good to have resources at the federal level to offset those negative impacts.”
Maintaining a port automation exclusion is notable given that automation is considered a major factor in current negotiations between the International Longshore and Warehouse Union (ILWU) and U.S. West Coast marine terminal operators. The ILWU has been wary of automation expansion and downplayed claims by terminal employers on the extent of automation benefits promoted by management.
Truck stops not fans of inflation bill
Freight markets are not all-in on the inflation bill, however. NATSO, which represents truck stops and travel plazas, is urging lawmakers to oppose it because while it extends the biodiesel and renewable diesel tax credit, it provides a higher tax credit of up to $1.75 per gallon for sustainable aviation fuel (SAF) production.
“This legislation purports to create a ‘technology neutral’ clean fuels tax scheme, which fuel retailers have long supported,” said David Fialkov, NATSO’s executive vice president of government affairs. “[However,] favorable treatment for SAF flies in the face of this approach.”
“Providing more favorable tax treatment for a technology that has fewer environmental benefits undermines the intellectual integrity of the climate provisions in this bill,” he said.
Legislative outlook mixed
Because the proposed legislation — which could be voted on sometime this month — affects taxes and spending, it is considered a reconciliation bill. It can therefore avoid a Republican filibuster in the Senate and pass with a simple majority of 51 votes (versus a supermajority of 61 votes).
However, because U.S. Sen. Kyrsten Sinema, D-Ariz., has blocked progress on similar issues in the past, “her vote will be critical,” according to the law firm Gibson Dunn.
Gibson Dunn notes the next steps are for the Senate parliamentarian to review the bill to ensure that everything within it relates directly to the budget and a robust floor debate featuring a “vote-a-rama,” with votes on amendments that could extend beyond the energy, tax, and health care issues that make up much of the legislation. The Senate and House must then vote on the bill.