Blockbuster container shipping results collide with sinking sentiment

container line shipping ZimZim continues to outpace growth rates of rival container shipping lines, but investor demand fears are on the rise.

container line shipping Zim

Zim, the world’s tenth largest container shipping line, posted the best quarterly results in its history on Wednesday. It hiked its full-year guidance and now predicts 2022 earnings will be around 20% higher than in 2021. And yet, shares of Zim — by far the largest U.S.-listed shipping company by market cap — fell as much as 8% in the hours after its earnings release.

The record results from Zim (NYSE: ZIM) came on the same day as a 25% plunge in shares of Target (NYSE: TGT) and a 1,165-point drop in the Dow amid investor fears of inflation and rising retail inventories.

Ample retail inventories imply reduced import demand, a negative for container freight rates. Inventories are up 43% year on year at Target, 32% at Walmart (NYSE: WMT) and Home Depot (NYSE: HD), and 10% at Lowe’s (NYSE: LOW).

Zim outpaces other container shipping lines

Zim reported net income of $1.7 billion for Q1 2022, almost triple net income of $590 million in the same period last year. 

Throughout the pandemic era, Israel-based Zim has boosted quarterly revenues at a much faster pace than its larger competitors.

Between Q4 2019 — the last quarter unaffected by COVID — and the most recent quarter, Zim’s quarterly revenues have surged by 349%. Over the same period, Hapag-Lloyd’s quarterly revenues are up 187% and Maersk’s ocean revenues are up 121%.

Zim has outpaced its much larger container shipping rivals by concentrating more of its fleet on higher-paying markets like the trans-Pacific, by keeping more of its capacity in the spot market than some other carriers do, and by growing its fleet more quickly.

Higher freight rates, faster volume growth

Zim’s average freight rate came in at $3,848 per twenty-foot equivalent unit in Q1 2022, double its rate in Q1 2021.

Maersk and Hapag-Lloyd cover a much more diversified range of container shipping trades than Zim does and have higher contract coverage. As a result, Zim’s first-quarter average rates were 69% higher than Maersk’s and 39% higher than Hapag-Lloyd’s.

Since Q4 2019, Zim’s average quarterly freight rates are up 278%. In contrast, Hapag-Lloyd’s are up 161% and Maersk’s 145%.

container shipping rates
Chart: American Shipper based on carrier data

Cargo volume is the other key driver of Zim’s revenue-growth outperformance.

Maersk and Hapag-Lloyd have low fleet growth in percentage terms (off a much larger base), and much of the incremental capacity has been offset by port congestion. Zim has dramatically expanded its fleet size off a small base over the past two years, primarily by leasing ships. The more ships Zim leases, the more revenue it generates in the near term (and more risk from lease costs it faces in the medium term).

Zim carried 859,000 TEUs in Q1 2022, up 5% year on year. Since Q4 2019, pre-COVID, Zim’s quarterly volumes have risen 23%. In sharp contrast, Hapag-Lloyd’s are down 1% and Maersk’s are down 9%.

container shipping volume
Chart: American Shipper based on carrier data

More sector focus on contract rates

Last year, the story of container shipping’s boom was largely focused on spiking spot rates. This year, attention has turned to contract rates.

The thesis that 2022 container shipping profits will top 2021 profits goes like this: Spot rates, even though they’re on the decline, will end up much higher on average for the first half of this year compared to the first half of last year. Second-half spot rates will probably fall year on year, offsetting some of the gains in the first half.

container shipping rates
Global composite spot rate in $ per FEU. Blue line = 2022, green line = 2021. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

But even if second-half spot-rate declines are extreme, contract rates should come to the rescue. In the trans-Pacific trade, annual contracts often run from May 1 to April 30. Contract rates during the first half of 2022 (signed last year) are much higher than the previous annual rates. And the new contracts that started May 1 are up sharply yet again, which should buoy average rates (including both contract and spot) in the second half of 2022.

Maersk has 71% of its 2022 volumes on contract, Hapag-Lloyd 50%. A little over 25% of Zim’s global business is on contract, including 50% of its trans-Pacific business.

During Wednesday’s call, Zim CEO Eli Glickman confirmed that contract rates for this year have more than doubled. 

Zim increased guidance for full-year earnings before interest, taxes, depreciation and amortization to $7.8 billion-$8.2 billion (up from $7.1 billion-$7.5 billion previously, or by $700 million at the range midpoints). “The main reason for the improved outlook is better than initially anticipated contract rates,” said Zim CFO Xavier Destriau. “Those contract rates kicked in on May 1, so that will largely impact Q3 and Q4.”

Spot rates could soon fall below contract rates

Destriau said that Zim’s guidance assumes “spot rates would start to normalize in the second half and to some extent, the reduction in the spot market would be offset by the incremental revenue we generate on the contract cargo compared to last year.”

As spot rates pull back, the market focus is turning toward how spot rates compare to contract rates. Historically, if spot rates fall too far below contract rates, cargo shippers switch volume to spot, given that most annual contracts are not legally binding.

Chart: Xeneta

Xeneta reported during a webinar on Tuesday that Asia-East Coast spot rates are already below contract rates.

Xeneta’s data also shows that the spot-to-contract rate gap in the Asia-West Coast trade narrowed dramatically between mid-March and mid-May.

Destriau confirmed that the average rate of Zim’s trans-Pacific annual contracts starting in May “is not that far off from where the spot rate is today.”

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Container shipping rates: Still sky high but falling back to Earth

container shipping ratesContainer shipping spot rates are easing, at least temporarily, and far fewer ships are stuck waiting off U.S. ports.

container shipping rates

It’s still very expensive to ship containers full of goods across the oceans. Spot rates globally are still more than quadruple pre-pandemic levels. But rates are now materially lower than they were a few months ago — and falling by the week. The Shanghai Containerized Freight Index (SCFI) logged its 15th consecutive weekly loss on Friday.

In April, container shipping indicators were mixed. Some, like the SCFI, pointed lower. Others didn’t. As of mid-May, indicators are much more aligned: pointing down.

The question ahead is whether peak season volumes, the end of China lockdowns and port labor unrest will cause spot rates to spike yet again in the second half, or whether falling import demand due to inflation and the end of stimulus will pull ocean spot rates lower still — perhaps even below annual contract rates.

Container shipping rates off highs

Weakness in the Asia-West Coast trade is now showing up in the Freightos Baltic Daily Index (FBX). This mirrors the trend previously shown by the weekly Drewry World Container Index.

Between May 2 and May 11, the FBX Asia-West Coast assessment — which includes premium charges — sank 25% to $12,217 per FEU. It subsequently rose to $13,806 per FEU as of Friday. But even so, Friday’s rate was down 33% from the lane’s all-time high in late September.

The Drewry Shanghai-Los Angeles assessment, which doesn’t include premiums, was down to $8,666 per FEU as of last week.

That’s 23% below levels in the third week of January and 30% below the index’s late-September record.

container shipping spot rates
Spot rate in $ per FEU. Blue line = FBX, orange line = Drewry. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

Asia-East Coast routes show the same directional trend: down. The FBX Asia-East Coast rate assessment fell 15% from $18,711 per TEU on May 2 to $15,982 per FEU on Friday. The index was down 28% from the record high in late September.

The Drewry Shanghai-New York rate assessment was $10,926 per FEU last week, down 22% from mid-January and 32% from the all-time high in mid-September.

container shipping spot rates
Spot rate in $ per FEU. Blue line = FBX, green line = Drewry. Chart: FreightWaves SONAR

The Platts Container Rate Index previously showed a different pattern than several other indexes, with its Asia-East Coast spot rates still rising. Now, Platts is also showing declines. It put Asia-East Coast spot rates at $10,500 per FEU as of Friday, down 11% from the all-time high of $11,850 in mid- to late April.

Platts’ Asia-West Coast assessment declined to $8,000 per FEU, 16% below the index’s all-time high in February.

Chart: American Shipper based on data from S&P Global Commodities

Platts, which is a part of S&P Global Commodities, said Monday that “persistent weak demand and a bearish sentiment over the market pressured rates to multi-month lows.” Spot rates are now “edging closer to contracted term rates,” it added.

Blank sailings for Asia export services

The three alliances — 2M, Ocean Alliance and THE Alliance — “blanked” (canceled) sailings during the initial Q2 2020 lockdowns due to falling import demand. Blank sailings artificially reduced sailing capacity to prop up rates. During the height of congestion in late 2021 and early 2022, carriers blanked sailing for a different reason: There were too many ships stuck waiting at export ports to pick up imports on the other side of the ocean.

Now, it appears carriers are blanking sailings for a mixture of reasons: congestion, reduced exports out of China, as well as reduced import demand.

“Shipowners have continued announcing blanked [canceled] sailings and port omissions as volumes wane, in a bid to prop up freight rates,” said Platts.

One U.S. freight forwarder source told Platts that it has seen “drastic volume declines for the past six weeks. It’s all the blank sailings now. That’s going to stabilize rates, in my opinion.”

Simon Sundboell, founder of eeSea, believes China lockdowns are playing a role in blank sailings. “During the early stage of lockdowns, carriers might have accepted a slightly lower utilization to keep the vessels and equipment conveyor belt moving,” he told American Shipper. “But below a certain utilization, it does make sense to blank the vessel instead.”

According to project44, the 2M Alliance will blank 39% of its sailings globally between April 25 and June 12 “due to a drop in [vessel] demand caused by the situation in China.” The Ocean Alliance will blank 37%, THE Alliance 33%.

Last week, Xeneta CEO Peter Berglund said that 63 sailings with capacity of 517,300 twenty-foot equivalent units had been blanked from the Asia-West Coast lane over the prior five weeks.

Berglund attributed the move to “both a softening of the demand picture as well as a strengthening of carrier resolve to protect the healthy spot rates which have served them so well.”

US port congestion off its highs

Blank sailings can reduce ship queues at ports, due to reduced arrivals.

In February and March, Sea-Intelligence predicted that the ship queue off Los Angeles/Long Beach “would grow again” as liners added services following the Lunar New Year holiday. Sea-Intelligence also predicted heightened pressure on East Coast ports, based on liner schedules showing much higher calls.

It hasn’t turned out as predicted, whether due to blank sailings or other reasons.

The queue off Los Angeles/Long Beach fell to 29 container ships on Thursday, according to the Marine Exchange of Southern California. That’s the lowest level since early August 2021.

Chart: American Shipper based on data from Marine Exchange of Southern California

And while there has indeed been more congestion off East and Gulf Coast ports this year, the total number of waiting ships is down from earlier highs. 

There were around 70 container ships waiting off these coasts in late February. On Monday, ship-position data from MarineTraffic showed only 45 ships waiting offshore.

Almost all of the East and Gulf Coast port queues have declined since February, with the exception of the one off New York/New Jersey, where an unusually high 20 ships were waiting on Monday.

Click for more articles by Greg Miller 

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Has the peak of container shipping’s epic boom already passed?

container shipping Hapag-LloydOcean carrier Hapag-Lloyd sees consumer demand and spot rates slipping, with market highs in the rearview mirror.

container shipping Hapag-Lloyd

Another quarter, another earnings record for Germany’s Hapag-Lloyd, the world’s fifth-largest container line operator. But the focus now is less about what happened a few months ago and more about what’s happening now with China lockdowns and consumer demand, and what’s around the corner for supply chains and ocean freight rates.  

The implied message of Hapag-Lloyd quarterly release and conference call was: The container boom peaked in the first quarter; it’s downhill from here. Spot rates are falling. Goods demand is falling. “There have been signs that the market has passed its peak [in Q2 2022],” acknowledged CEO Rolf Habben Jansen in the earnings release.

The second quarter is shaping up better than expected but “should be somewhere slightly south of Q1,” said CFO Mark Frese during the call. In Q3 and Q4, Hapag-Lloyd sees things going a lot more than “slightly south.” Its guidance implies a 50% drop in second-half earnings versus the first half.

“For spot rates, there are regional differences,” Frese said, noting that North America’s import demand is holding up better than Europe’s.

“But overall, the trend is the same: We are seeing a softening of spot rates nearly globally.” He added that he was not referring to indexes, but rather, to “what we are seeing from what’s incoming [to Hapag-Lloyd’s booking system] right now.”

container shipping spot rates
Spot rates in $ per FEU. Blue line = Shanghai to LA, green = to Rotterdam, orange = to NY, yellow = to Genoa. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

“Consumer sentiment is changing over time. Consumer behavior is changing. Inflation is going up. Disposable income is pressured,” he said.

“We see volume growth lower than previously expected due to … consumer sentiment. We all feel it.”

China lockdowns vs. demand decline

A seeming paradox is that port congestion remains very high globally even as spot rates are under pressure. Frese said that the Ukraine-Russia war and the China COVID lockdowns have made supply chain disruptions even worse.

Congestion historically drives spot rates higher by reducing effective transport supply. However, there can be a transitional period when spot rates go down even as congestion remains high, as consumer demand falls prior to the clearing of congestion. (After congestion clears, more vessel supply is released into the market, accelerating spot-rate declines.)  

Frese noted that rates are particularly weak out of China, where Hapag-Lloyd sees lockdowns currently reducing outbound volumes by 20%-25%. But he said that COVID-driven export snags in China are coinciding with declines in import demand in places such as Europe.

Frese said he expected spot rates to come down “even if congestion stays at the [current] level or even if there are new reasons [for congestion], due to the overall sentiment we are seeing right now that demand is softening.”

When China reopens and delayed exports makes their way into the supply chain, some market watchers expect a surge in queues of ships waiting off U.S. ports. In this scenario, extreme congestion conditions return in the second half as the wave of delayed China cargo coincides with traditional peak-season flows.

Asked about this possibility, the Hapag-Lloyd CFO answered: “Could we see a rebound out of China after China opens and everything is normal? Yes and no. Yes, when China reopens again there will be some rebound. But overall, we have to accept that demand is going down over time.” In other words, falling demand could offset some of the gains from China’s reopening and peak season.

Spot rates could fall below contract rates

Hapag-Lloyd has half of its 2022 volumes on long-term contracts and half on spot (of the long-term contracts, 90% are one-year deals, 10% two- to three-year deals). “While spot rates are expected to decline further, our long-term contracts should safeguard our earnings, at least to some extent,” Frese said.

He predicted that “in the second half we will begin to see a strong reduction [of spot rates]. Maybe, over time, we will even see the change between long-term and short-term rates, with spot rates going below [long-term rates].”

Then, in 2023, a big wave of container-ship newbuilds begins to hit the water. “Newbuild ordering activity continued in Q1, pushing the orderbook to fleet ratio to around 25%. We will see what the consequences in the future will be of that. Demand growth is expected to slow down to more sustainable levels while the capacity influx will increase in 2023.”

Hapag-Lloyd Q1 2022 results

Hapag-Lloyd pre-announced earnings and full-year guidance on April 28 and provided more details on Thursday.

It reported net income of $4.7 billion for Q1 2022 versus $1.5 billion in Q1 2021. It posted Q1 2022 earnings before interest taxes, depreciation and amortization of $5.3 billion, topping the previous quarterly EBITDA record of $4.7 billion set in Q4 2021.

Volumes were flat — limited by congestion — but freight rates soared, driving the best-ever results. Hapag-Lloyd’s rates averaged $2,774 per twenty-foot equivalent unit in Q1 2022, up 84% year on year and up 16% from Q4 2021.

“In the very short term, we expect the exceptional profitability level to continue,” said Frese.

Hapag-Lloyd projects full-year 2022 EBITDA of $14.5 billion-$16.5 billion. Last year’s EBITDA was $12.8 billion. Thus, despite tempered demand and spot rates, Hapag-Lloyd’s first half has been so strong that it should end the year with yet another record.

Hapag-Lloyd earnings

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Russia’s isolation deepens as shipping lines make final port calls

Russia container shippingFirst came a pause in cargo bookings to Russia. Now, ocean carriers have halted almost all of their Russian port calls.

Russia container shipping

Russia’s ocean container imports continue to collapse as shipping lines wind down the last remnants of their services to the country’s ports.

Russia — now effectively a pariah within Western logistics circles — still has cargo import options. Yet the loss of virtually all of its ocean shipping links makes obtaining consumer goods and components much more difficult.

Elvira Nabiullina, Russia’s Central Bank chairwoman, recently warned that the range of consumer goods available in her country is already shrinking and Russian companies needing foreign components are facing “serious problems.”

Top carriers wind down service

The world’s top container lines paused bookings to Russia in the days after the invasion of Ukraine. However, some service continued, including efforts to evacuate liner-owned empty containers from Russian ports.

In the third week of April, automatic identification system (AIS) vessel-position data showed that at least 10 MSC container ships and five Maersk ships had either recently called or were planning to call in St. Petersburg in the Baltic Sea or Novorossiysk in the Black Sea. MSC and Maersk are the largest and second-largest ocean carriers in the world, respectively.

As of Wednesday, AIS data showed MSC’s calls to Russian ports were down to three ships: the 2,604-twenty-foot equivalent unit MSC Lara, arriving in Novorossiysk on Thursday, and the 2,490-TEU MSC Pamira III and 2,250-TEU MSC Andriana III, which recently departed Novorossiysk.

Maersk has now completely ended its Russian service. It announced the cessation “of all vessel operations” on May 4.

According to Alphaliner, “The 3,596-TEU Voga Maersk made its last call at St. Petersburg on April 29. Earlier that week, four of her sister ships — the Venta Maersk, Vayenga Maersk, Vuoksi Maersk and Vaga Maersk — called to evacuate empty containers to North European ports.”

Maersk’s Rotterdam-to-St. Petersburg service with two 3,596-TEU vessels ceased in March. Maersk made its last call to Novorossiysk with the 2,274-TEU Nele Maersk on April 21, said Alphaliner.

Vessel-position data shows that container-ship calls to St. Petersburg and Novorossiysk are now extremely limited. Remaining service providers are generally small container ships with capacities of under 1,000 TEUs and general cargo ships with container capacities of under 500 TEUs.

Container ship calls to Russia plunge

U.K.-based data provider VesselsValue tracks the weekly frequency of container-ship calls at Russian ports. In the nine weeks since the invasion (through the first week of May), weekly calls were down 38% compared to the nine weeks prior to the invasion.

Chart: American Shipper based on data from VesselsValue

The drop was driven by a 55% plunge in calls to Russia’s European ports. There were just four calls to Novorossiysk during the first week of May, according to VesselsValue. That’s less than a third of the pre-invasion weekly average.

Meanwhile, container-ship calls to Russia’s Pacific container gateway in Vladivostok (located far from main population centers) have been relatively unscathed. They’re only down 9% post-invasion.

Bookings to Russia plunge

Data from FreightWaves’ SONAR Container Atlas, a new ocean data platform released Tuesday, highlights the severity of Russia’s ocean container import crash.

Not only is the number of calls sinking, but the average capacity of remaining vessels is shrinking with the wind down of Maersk and MSC services that deploy larger ships. Using ship-position data, SONAR Container Atlas shows that the capacity of container vessels destined for Russia has fallen to roughly one-sixth of pre-invasion levels.

Russia TEU vessel capacity
Chart: FreightWaves’ SONAR Container Atlas (To learn more about FreightWaves SONAR, click here.)

The volume of bookings (made via the booking data source for SONAR Container Atlas) is likewise around one-sixth of its pre-invasion levels.

Russia ocean booking volume
Chart: FreightWaves’ SONAR Container Atlas

And during the month after the invasion, SONAR Container Atlas data shows huge spikes in booked cargo that was not loaded by ocean carriers. 

Chart: FreightWaves’ Container Atlas

Declined bookings surged to over five times normal levels in the aftermath of the invasion. So, not only did bookings plummet, but a large chunk of Russia’s expected imports never even made it onto the ships. No wonder Nabiullina is concerned about her country’s dwindling consumer goods and components.

Click for more articles by Greg Miller