Shipping company stocks plummet
Investors bow to container ships
By Jannik Tillar
12/11/2022, 6:02 p.m
During the pandemic, container shipping prices are skyrocketing. Shipping companies expect demand to remain high in the coming years. But freight rates are already falling – super fast. Stocks lose massively.
For a long time it was said that container prices would never fall again. Driven by the corona crisis, demand shot up in 2020, followed shortly afterwards by prices. And that didn’t change for a while. In January, the crossing from Shanghai to Hamburg cost just under 8,000 dollars for a standard container. And the shipping companies actually thought it would stay that way.
Today, almost a year later, the situation is different: the freight rate, another word for the transport price, is less than $1,500. The shares of shipping companies such as Hapag Llyod are more than 30 percent in the red, and hardly any analysts are currently recommending a buy. How did it come to this – and where is it headed in the coming months?
Industry representatives were still self-confident at the end of May. In a PWC survey, they stated that 93 percent of German ocean-going shipping companies were working at full capacity. “Today, the problem is no longer excess capacity with a lack of demand, but on the contrary a lack of transport capacities with a sharp increase in demand,” commented Burkhard Sommer from PWC’s Maritime Competence Center. Two thirds of the shipping companies also stated that they expect cargo volumes to increase in the next five years.
Freight rates fall “super fast”
In the meantime, however, confidence has clouded over. Hapag-Lloyd is probably presenting a record net profit of around 19 billion euros this year. But it is already becoming apparent that the coming year will be more difficult. At the beginning of November, boss Rolf Habben Jansen reported falling spot rates, i.e. the prices for short-term bookings. And competitor Maersk became even clearer. “Freight rates are falling super fast. Faster than I would like,” explained boss Soren Skou at the Hamburg business journalists’ club. The concern is clear: Even if the freight volume continues to rise, the rapidly falling freight rates are likely to reduce sales overall.
There are several reasons why transport prices are falling. First and foremost, shipping companies are cyclical, which means their performance depends on overall economic development, or at least on the outlook. And that was exactly what was negative in the end. “The industry is suffering from the macroeconomic skid marks from the Ukraine war, the energy crisis, rising interest rates and weaker consumer confidence,” says analyst Christian Cohrs, who observes Hapag-Lloyd for Warburg Research. This development ensures a lower demand, which is reflected in the falling prices. However, he uses a leverage effect to explain why freight rates are falling so rapidly: “Corona triggered a shock in demand for consumer goods. At the same time, there were severe inefficiencies in the transport chain, for example due to Zero Covid in China or handling bottlenecks in the USA. This double positive effect has become evident now resolved, leading to a double effect downwards.”
Cohrs currently sees Hapag-Lloyd’s fair price level at 167 euros. That would be another 22 euros less than the closing price on Wednesday. So far, Cohrs, who has given Hapag-Lloyd a “sell” rating for several months, has been correct: the price rose from 287 to 450 euros between January and June. But then came the rapid crash. “It was clear that the signs would turn around at some point. They are doing so now. This also means that the earnings prospects are clouding over significantly.”
More new construction than scrapping
A third point also comes into play here: the freight capacities. As of now, the market research company Alphaliner expects growth of 2.3 million container equivalents (TEU) in the coming year. At the same time, only 0.65 million TEU are lost because the ships are over 25 years old. More supply would lead to falling prices – at least in theory. In fact, this is also one of the exciting questions in the coming months, says Cohrs. The calculation is not quite that simple: “The shipowners can operate very actively in capacity management. On the one hand, they can send ships into the dock, which has hardly happened recently, and scrap old or inefficient ships or at least temporarily decommission them.”
In other words, the shipowners could do something to counteract the new capacities. But the question is how disciplined the shipowners are. “Actually, it should be clear to everyone in the industry that the price war is of no use to anyone,” says Cohrs. This was also shown in the pre-Corona years, when the shipping companies undercut each other in price. This has led to deep red corporate balance sheets year after year. Now, after the record profits, most companies are in good health again and theoretically ready for the next price war. But unlike then, the industry is now in a position to be able to push through reasonable prices.
Prices on the Shanghai Shipping Exchange are currently still 20 percent above the pre-corona level. On the other hand, raw material prices and unit costs have risen. Most recently, Hapag-Lloyd’s Ebitda margins in the third quarter were more than adequate at 57.8 percent. “Of course, a price war cannot be ruled out – especially if we fall into a deep recession. But I expect that shipowners will shy away from it.”
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