Never let a good crisis go to waste, argues an aphorism usually attributed to Winston Churchill. And that goes double when two crises come along at once. Given that someone probably had to make a fortune from the literally killer combination of the most devastating pandemic to hit the world in a century and the most serious war in Europe since 1945, it might as well be the shipping industry. The party has not been quite as much fun as the mid-2000s, the last time shipowners were seriously rolling in money, although the hangover we collectively endured throughout the 2010s was surely sufficient penance for the excesses of the period. While the upturn in almost all segments seen over the last two years has been with us for only a relatively short spell of time, it went a long way to making up for the pain of a decade of red ink.
Since 2020, container lines have collectively made a phenomenal $400bn in earnings before interest and taxes. Results in the third quarter will still be strong, perhaps even the best yet. But that is down to revenues from contracts signed earlier in the year. The past few months might have seen what Churchill would have called the end of the beginning, with demand slowing because of the world political situation and the first fears of looming recession. Container volumes, particularly into the US, are still looking pretty good. But they are evidently fading from the stratospheric levels of the past two years. What is clear is that sentiment has changed. Nobody is converting bulk carriers into boxships anymore, and how mad was that anyway? Supermarket chains are no longer eager to facilitate the continued flow of baked beans by becoming shipowners, and the release of large amounts of capacity from congestion has meant that spot rates have fallen sharply. Carriers are having to remove capacity and are even blanking sailings in a last-ditch attempt to maintain rates. And shippers have suddenly relinquished their apparent desperation to sign up to long-term contracts, realizing that spot rates are settling lower.
Meanwhile, Jefferies has this week issued its verdict on prospects for shipping right now and is expecting a “fairly healthy” third quarter. After a ropey first half, things are looking good for tanker owners, the investment bank contends. Crude tankers have at least the potential for outsize earnings this winter, thanks to the dislocation of trade that will result from ongoing sanctions against Russia. Results for liquefied petroleum gas and liquefied natural gas carriers are also set to be firm. The product tanker segment is well-starred, and operators can expect to surpass even previous peaks, it added.
Dry bulk is already feeling the pinch from slow demand for iron ore on the back of reduced steel output, itself often a harbinger of economic slowdown. But even these ships are seeing rates above the 10-year average to 2021. The elephant in the room remains what Jefferies euphemistically refers to as “an uncertain economic backdrop” in the year ahead. Growth in world trade is slowing, with the latest estimates from the IMF projecting a 3.2% increase this year, little more than half the 6.1% seen in 2020.
Covid-19 is thankfully in abeyance, but the threat has not gone away. And the bellicose rhetoric currently emanating from the Kremlin, up to and including a refusal to rule out resorting to nuclear weapons, means that peace in Ukraine may not come as soon as we all hope.
Nobody is suggesting that shipowners will be knocking at food bank doors anytime soon. But as the old joke goes, if something can’t go on forever, it won’t.