Analysis: Shipping line profitability raises eyebrows

An assessment of earnings reports by Denmark-based consultancy Sea Intelligence shows 11 of the largest ocean shipping lines combined to yield more than $16 billion in earnings before interest and taxes (EBIT) in the first quarter of 2021.

According to Sea Intelligence, the same 11 shipping lines “saw unprecedented levels of operating profits” in the second half of 2020, “to the tune of a combined $13.3 billion in operating profit.”

While the first quarter of the calendar year “is traditionally considered a slack season for container shipping,” says the consultancy, “revenues have soared to unprecedented levels” in early 2021. Of the 11 carriers that report their figures, “only three carriers recorded a year-on-year increase in revenue in the first quarter of under 50 percent, with three carriers more than doubling their revenue year-on-year.”

For the first time in 10 years, says Sea Intelligence, “All major carriers recorded a positive first-quarter EBIT, with seven carriers recording an EBIT of more than $1 billion, and three carriers recording an EBIT of more than $2 billion.”

According to the Danish firm, from 2010 to 2020, only twice did any carrier record a positive EBIT of more than $500 million. The combined EBIT in the first quarter of 2021 of the reporting carriers “was a staggering $16.19 billion. For all 11 carriers, their EBIT in the first quarter of 2021 was their highest across all previous first quarters [from 2010 to 2020] and was greater than the sum of the first quarter EBITs of all of the previous 10 years combined.”

The enormous profits come at the same time recyclers and most other long-distance shippers have a litany of complaints about high pricing, a lack of available containers, and difficulty in making bookings that actually come off as scheduled.

The same first quarter that witnessed the enormous profits lined up with rising freight rates and difficulty for exporters in the United States—including scrap recyclers—in obtaining containers and bookings. In February, the Washington-based Institute of Scrap Recycling Industries (ISRI) requested a dialog with the Federal Maritime Commission (FMC) regarding the legal obligation of shipping lines to give exporters access to containers rather than having shipping lines send them back to Asia empty.

The situation on either side of the Pacific Ocean seems little better as of mid-June. Shanghai-based financial advisor and trader John Browning of BANDS Financial, in a mid-June e-mail to his customers, comments, “China’s imports and exports remain highly vulnerable to dockside logistics and COVID lockdowns. Ships being delayed up to 16 days to unload/reload are not unknown, causing huge ripple effects in shipping timetables. Perhaps, for this reason, the cost of moving a 40-foot container by sea from China to Northern Europe has exploded from $2,800 [at] pre-pandemic levels to $20,000 currently.”

Some China-based exporters are deciding to withdraw from shipping altogether, says Browning, only exacerbating the container availability problem. “Exporters and their importing partners are having to make very fine calculations as to the ‘profit content’ of each container. The knock-on effect has been if the contents of the container are low value, for example, assembled wooden furniture, it is no longer economic to ship the container at all, and it will remain dockside in China, adding to port congestion.”

At the online Plastics Committee meeting of the Brussels-based Bureau of International Recycling (BIR) in early June, Theo van Ravesteyn, nonexecutive chairman with Mediterranean Shipping Co. (MSC), portrayed the shipping lines as overdue for some good fortune.

He said after three decades of “boom and bust” cycles and overly optimistic investments made in the container shipping industry, consolidation and alliances have created a sector that has “completely changed.”

Carriers have “managed capacity” throughout the post-COVID-19 shipping rebound, said van Ravesteyn. “Basically, prices are going up in all markets every day. All available ships are deployed currently [and] shippers are finally making a profit.”

The MSC board member said shipping lines would rather maintain their discipline and not reengage in “optimistically ordering ships and bigger ships” and “falling into a race to the bottom.” Concluded van Ravestyn, “We won’t go back to the days [where] shipping rates were zero” to ship scrap to China. “Those days are over.”

The Sea Intelligence report refers to 11 different shipping lines that reported their financial figures. Skeptics of the current scenario may wish to point out that eight of those 11 companies are part of three “alliances” that have leeway to work together on routes and bookings.

The major alliances are 2M (Maersk Line and MSC), THE Alliance (Ocean Network Express, Hapag-Lloyd and Yang Ming), and OCEAN (CMA CGM/APL, Cosco Shipping and Evergreen Line). In late 2020, the FMC in the United States indicated it was “reviewing data pertaining to the trans-Pacific and trans-Atlantic trades” of those three alliances, according to an online Journal of Commerce article.

“The three major global carrier alliances are the top (regulatory) priority and receive the highest scrutiny,” the FMC vowed last November. “These three agreements have the greatest potential to cause or facilitate adverse market effects based on the agreement’s authority and geographic scope in combination with underlying market conditions.”

The shipping lines are certainly entitled to be profitable and to share those profits with shareholders. However, their customers, recyclers and secondary commodity traders included, would likely prefer the profitability was combined with the adequate provision of service.