Shipping industry charts course for profit after Covid container crisis

Maritime freight is in high demand but the industry is trying to avoid a return to boom and bust as it shifts to cleaner fuels.

When coronavirus first emerged in China, it seemed likely to sink parts of the shipping industry - the vast and complex network that transports 90pc of international trade.

Giant container ships that take goods from China and the Far East to western consumers faced delays at ports as staff succumbed to the virus and lockdowns shut factories.

Although the flow of goods is weighted from East to West, ships on the return leg from Europe and North America were also affected as blockages built up in global trade lines.

As Covid spread, the shipping industry was hit with new problems, such as seafarers being stranded on ships because of controls aimed at halting transmission of the virus between countries. Sailing schedules were thrown into chaos as well, leaving vessels out of place.

Giants of the industry such as Maersk, MSC and COSCO warned of “significantly lowered visibility” and “uncertain starts” to their financial years as they waited to see how the pandemic played out.

Tough measures to control coronavirus meant China’s economy was one of the first to get back in gear, but by then the virus had gone global, throwing up new challenges.

It wasn’t just ships and sailors that were in the wrong place, but also shipping containers - Twenty-Foot Equivalent Units (TEUs) as they are called in the industry - which were in the wrong places.

An invention that revolutionised international trade, TEUs are the lifeblood of global shipping. But with the West going into lockdowns, these containers piled up in Europe and North America, with little return trade to the East.

Containing the problem

What had looked like a huge problem for the shipping industry became a tailwind. The scarcity of containers pushed up shipping prices to near record highs.

According to data from shipbroker Braemar, the cost of shipping goods from China to Northern Europe - one of the most popular trade routes - by the end of 2020 quadrupled from levels at the start of the year, with the index measuring it touching 8,500, compared with an average over the previous years of 3,000.


Instead of sinking container trade, coronavirus has lifted it, as locked-down populations in the West unable to spend money going out look to ease the boredom with online shopping.

That confidence has driven a mini-boom on orders of container ships, according to Jonathan Roach, container shipping analyst at Braemar. “Ordering has kicked off and the 880,000 TEU of vessels, close to what was ordered for the whole of last year,” he says.

The cargo carrying capacity ordered so far in 2021 equates to about 90 ships, though very few of them are the very largest vessels capable of carrying more than 20,000 shipping containers.

The number of ships on order is at a three-year high and equal to 14pc of the existing fleet of so-called “box ships”, while the 3.3m TEU is the strongest level in five years and a rebound from near 30-year lows 12 months ago.


This is a rate not seen since the high-profile collapse of Hanjin Shipping, one of biggest operators in the industry.

Hanjin’s failure was caused by a flood of new vessels entering the market - ships on order were equivalent to between 20pc and 40pc of the fleet in service in the preceding decade as shipowners assumed that accelerating globalisation would fuel demand. This drove down prices to a level that 2016’s economic stumble caused a shock to the system as freight demand stalled, sending Hanjin under.

Since then, it has been harder for shipowners to land the financing for vessels than can cost as much as $200m (£144m). However, that seems to be changing, with the monthly rate at which ship construction contracts are being struck above a 10-year high, according to data from shipbroker Clarksons.

“There is a sentiment in the market that this will be a year of surge for shipping lines,” adds Roach. “Charter periods have gone up from six or seven months a year ago and now they are for two or three years.”

However, before shipyards start celebrating, the analyst injects a note of caution: “The ordering has been very disciplined and there is supply management going on.


"Maybe they have learnt their lessons from the past of boom and bust - back in 2005 the peak of ships on order was 60pc of what was on-the-water trading.”

Steadying the ship


Maersk is one company taking a cautious approach. Despite posting its best profits in five years in 2020, with Ebitda of $8.2bn, up 44pc on the previous year on revenues that were flat at $39bn, chief executive Soren Skou is not waving his cheque book.

“We’re going to order ships to replace our fleet and to make sure that we can broadly maintain our market share, but nothing more than that,” he told investors, but admitted 2020 had been an “extraordinary” year, and forecast 2021 would be even stronger.

Instead Skou said he would cut debt, and work out how do deal with tough new regulations that limit the amount of pollution ships can emit - rules likely to make them more expensive. He added: “We are figuring out what is the best fuel for us for the future. The alternatives that we are looking at are fuels like alcohols, ammonia, which can be used in a combustion engine.”

Equally cautious about the potential for a boom is Paul Stott, senior lecturer in ship production at Newcastle University. “The bounceback from Covid has been extraordinary but one swallow does not make a summer,” he says.

The container ship fleet is now reaching maturity after a few slow years for orders meaning it’s natural for orders to step up, especially after the extraordinary events of 2020, he says. Controls on pollution could also mean that companies that held off are now being forced to sign contracts to replenish their fleets.

No plain sailing


“Greener ships may also be a driver,” Stott says, referring to those powered by liquefied natural gas (LNG), among other fuel sources being considered.

However, he warns that LNG vessels may not be the long-term answer. “Calling them clean ships is a red herring. They may not produce the black soot you used to see from ships but they are still generating carbon.”

Shipping faces challenges when it comes to cutting pollution. The International Maritime Organisation has a 2030 target of cutting emissions to 60pc of their 2008 levels, and halving all emissions by 2050.

Yet there is no agreed way or feasible technology of meeting these goals. At current levels it is estimated that hydrogen power for shipping would consume more than half the world’s supply of the gas created from renewables, while electric batteries would be so heavy and bulky as to be impractical without a major breakthrough.

With an ageing fleet and opportunities to cash in on the current high prices, captains of the global shipping industry face tough decisions. Do they move now and make money, potentially getting ahead of more conservative rivals, but risk being left with ships in their fleets that could be hit with pollution levies? Or do they hold off in hope of new technology and faith they can compete in a market that could again be swamped with supply?

In an industry worth $14 trillion a year and set to post long-term annual growth of 3pc as the population rises, the cost of plotting the wrong course is likely to be enormous.