Wan Hai Lines Ltd. and Evergreen Marine Corp. climbed around 10% in the space of a week, heading back toward the lofty heights they enjoyed two years ago and joining a rebound already underway for regional peers including Cosco Shipping Holdings Co. and Nippon Yusen KK.
No other major sector on the planet benefited more from the pandemic than ocean carriers. But now that consumption is slowing and supply chains are diversifying away from China, the maritime sector must face a reckoning it avoided when the pandemic threw international trade and logistics into disarray. As a result, freight rates and stock prices may not accurately reflect what’s happening in the global economy.
In September 2021, at the height of the disruption when consumers and corporations rushed to buy cars, computers and camping gear, the average price to ship a 40-foot container climbed to $10,377, according to Drewry’s composite World Container Index. That figure, which is updated weekly, now sits at around $1,561.30.
Shipping stocks have tracked the drop in freight rates, but investors appear eager to seize on any signs that China’s economic malaise may be over. Not-so-terrible outbound Chinese trade data released earlier this month was one such example, despite a 9.1% decline.
Bloomberg“The improvement in US-China trade was notable — exports to the US, China’s single-largest export market” surpassed estimates in August and were significantly better than July’s plunge, Bloomberg Intelligence analysts Kenneth Loh and Lindsay Chen wrote. “Early signs from China’s August trade figures indicate the worst of its export slump could be over, suggesting global demand may be beginning to pick up with a possible recovery in 4Q.”
BloombergFor shipping companies, this single data point is little more than a head fake. More important is the fundamental change in global production that’s been underway for the past five years. China will no longer be the factory to the world. New manufacturing centers are opening up in India, Vietnam, Indonesia and Mexico, forcing the expansion of routes between a wider array of ports. Volumes might increase as each of those smaller hubs holds higher stockpiles and relies on greater trade to feed their factories instead of making everything locally. Yet these ports also have lower capacity, which will force carriers to adjust their schedules to compensate.Then there’s new regulations from the International Maritime Organization target a 40% cut in carbon emissions by 2030, compared to 2008 levels. Penalties may apply for those that don’t make the grade, which is forcing companies to retire old vessels and order new ones. This may disrupt capacity and boost prices temporarily, but the flipside could be a flood of even larger ships on the seas a few years from now. Thankfully, they are becoming more fuel efficient, so profits may be higher even if rates don’t improve.The major upshot of these adjustments is that while a rebound in Chinese exports would certainly help boost the fortunes of container carriers, it may not be enough to get us back to levels seen three or even 13 years ago. The Drewry WCI has dropped 85% from its pandemic peak, and is currently 42% lower than the 10-year average, yet it still remains higher than the average in the five years before Covid struck. Shipping rates are primarily determined by the balance between supply and demand, and a slew of new larger vessels since 2015 boosted capacity and forced prices down.
BloombergIn other words, a return to normal would mean further declines in freight rates until structural changes — supply chain shifts and cleaner vessels — start to have an impact. Outsized reactions to slivers of good news don’t tell us the worst is over for global shipping, they simply show that bulls may be reminiscing about a past that doesn’t exist.
