Chart showing seaborne trade annual growth (%) since 2000. Global container trade is forecast to contract sharply this year

Lex Letter from London: trade tides buoy shipping

Dear readers, 

Stranded crews, empty containers and idle ships: seaborne trade has been hit hard by the pandemic. That makes the results unveiled by the world’s largest shipping company AP Moller-Maersk on Wednesday all the more impressive.

The Danish group is heavily exposed to the slump in global trade. It handles one in every five containers shipped by sea. Even so, its second quarter ebitda increased 25 per cent on the previous year. The share price, up 4 per cent on Wednesday morning, is now back to where it was at the start of the year.

Such buoyancy is at odds with the industry’s reputation. In 2018, McKinsey estimated the container shipping industry had destroyed $100bn in shareholder value over the previous 20 years. It reckoned the industry would continue to struggle with overcapacity. Container shipping brought significant value to the world, yet delivered little to its investors, it said.

The problems exposed by the last big downturn — after the financial crisis — were discouraging, to put it mildly. As demand slumped, the shipping companies competed for market share. A price war ensured widespread losses. The problems were exacerbated by oversupply, as companies invested in bigger, more efficient vessels. Orders for new ships were equivalent to 50 per cent of the existing fleet.

This time round, demand may not be so badly hit. London-based Clarkson, the world’s largest shipbroker, no longer expects this year’s seaborne container trade contraction to exceed that of the global financial crisis. After better than expected volumes since April, its latest 2020 forecast is a decline in seaborne trade of 5.5 per cent.

The supply figures are also encouraging. Order books are just 9 per cent of the fleet. That is the lowest figure for 20 years.

Also significant is the ease with which the industry can now adjust supply to demand by cancelling voyages. These “blank sailings” occurred in unprecedented numbers after the pandemic hit. Maersk cites this “agile capacity deployment” alongside lower fuel prices and higher freight rates as the cause of the resilience of its “ocean” business, which accounted for three-quarters of last year’s revenue. 

These cuts to capacity are facilitated by a system of alliances, which allow shipping companies to share vessels. They have become a lot more powerful in recent years. In 2011, there were three alliances that accounted for 29 per cent of global ship capacity. By 2018 their market share had risen to 80 per cent, according to the International Transport Forum, part of the Paris-based OECD. 

These tie-ups are controversial. Shippers say they distort competition and reduce the frequency of sailings. But the European Commission recently extended the carve-out from antitrust rules to 2024. It argued that the shipping companies’ efficiency gains were being shared with customers. Unit prices and costs had fallen by about 30 per cent in recent years. 

The agreement is a reminder that the shipping industry is used to getting special treatment. The ITF complains the fleet masters get a lot of support from the public purse, while often receiving a free pass when it comes to matters of tax, employment or the environment. There is a history of government bailouts even for businesses that register their ships in other countries to avoid taxation or labour regulations.

Such support encourages risk-taking. There are obvious dangers in investing in an industry with such an unconventional playbook. Still, for now at least, the performance of companies such as Maersk is proving the sceptics wrong.

Enjoy the rest of the week,

Vanessa Houlder
Lex writer