Shipping companies: After the prices, the profits are exploding – economy

Suppose the holidays are just around the corner and people in Bavaria all get the idea to use their free time for a train trip to Berlin this time. Stations and trains would be hopelessly overcrowded, the timetable would get mixed up and the ICEs would queue for hours in front of the Berlin Südkreuz because the tracks in the direction of the city center would be blocked. And as if that wasn’t trouble enough, the ticket prices suddenly rose tenfold because Deutsche Bahn took the opportunity to cash in properly.

Absurd thought? no way. Rather, the scenario corresponds fairly closely to the situation that those involved in global freight traffic are currently dealing with. Because Europeans and Americans in particular have only been able to spend their money to a very limited extent in restaurants, at the masseur or on vacation for almost two years now, they order cars and kitchens, lawn mowers and game consoles that are made entirely or partly in Asia and from there to the be shipped world.

The main beneficiaries are the big shipping companies: They send so many of their huge freighters on their journey every day that the ships sometimes lie at anchor on the coasts for weeks because the port workers and truck drivers, who are plagued by Corona, are loading and unloading, loading and unloading simply not being able to transport the goods away. The result is waiting times, production losses – and massive price increases: Two years ago, it cost less than $2,000 to send a 13-meter container from Shanghai to Los Angeles. Recently it was $14,000, and even $20,000 at peak times.

At Hapag-Lloyd, almost every second euro earned stays in the till as profit

Parallel to the prices, the profits of an industry that in the past often had to struggle with sloppy earnings or even red numbers are exploding. According to estimates, the pandemic year 2021 of all times brought the equivalent of around 130 billion euros into the coffers of the shipping companies, nine times as much as in 2020. The Hamburg Hapag-Lloyd Group, for example, the fifth largest shipping company in the world, increased its operating result sevenfold to an incredible 9.4 billion euros – and that with group sales of just over 22 billion euros. The Danish Møller-Mærsk Group, number two in the industry behind the Mediterranean Shipping Co. (MSC), earned as much money in twelve months as in the previous nine years combined.

Part of the blessing will flow to the lucky shareholders in the form of dividends, and the shipping companies are also investing on a scale they haven’t seen in a long time. Hapag-Lloyd alone has ordered twelve new giant ships that can transport more than 23,000 standard containers, plus ten smaller ones with a capacity of between 10,000 and 12,000 steel boxes. The order books of the shipyards in China and South Korea are full, hundreds of freighters are to be delivered in the coming years. In addition, the transport groups participate in port terminals, some even go a step further and are also involved in the air freight business. Market leader MSC, for example, wants to join the Italian airline ITA together with Lufthansa.

Diversification, new ships, additional business areas: In view of the boom in demand, these are understandable steps – but are they also logical? Finally, quite a few economists predict that after the pandemic is over, consumer spending will shift more towards services again: fewer game consoles, but more vacations and visits to the hairdresser, so to speak. The high inflation rates in many countries, to which the shipping companies themselves contribute with their prices, could dampen people’s mood to buy. In addition, there is usually a period of at least two to three years between ordering and delivery of a large freighter. The new ships could therefore be launched exactly when Corona has been overcome and the order frenzy of the citizens has subsided a little. Increasing supply, falling demand – this is a cocktail that can plunge any industry into a real depression.

Just a few years ago, the corporations didn’t even cover the fuel costs

Ironically, the shipping companies know this horror scenario all too well. After the global financial crisis that plunged Western countries into deep recessions in 2008, fleets were far too large for the dwindling demand. The ships had to operate at low capacity, the freight rates were so low that they didn’t even cover the fuel costs. A number of shipping companies went bankrupt or were swallowed up by competitors. At the end of 2016, ships belonging to the insolvent Hanjin shipping company from South Korea were drifting on the seven seas like abandoned suitcases. Nobody wanted to refuel them or let them pass through for fear of being left with the costs. A scenario that is now threatening again?

That is not foreseeable, says Carlos Jahn from the Institute for Maritime Logistics at the Technical University of Hamburg-Harburg, after all “the shipping companies always have the leverage to get rid of older ships”. In fact, container shipping had already recovered before Corona, one of the ways out of the overcapacities was simply clearing out: In 2016 and 2017 alone, ships with a total capacity of 1.1 million containers were scrapped – exactly as many as the market leader MSC has just ordered for new ships . Scrapping continues to be a way of bringing fleets into line with the market as shipping becomes more eco-friendly. “The new ships are generally more fuel-efficient,” says Jahn. Hapag-Lloyd also believes that demand will stabilize at a higher level than in the past. “In China, for example, medium-sized companies are growing in the tens of millions every year,” says company spokesman Nils Haupt. “This means that consumer needs are also growing – and thus also the transport of goods.”

In general, Hapag-Lloyd strives to counteract the impression that the German industry leader is ordering so many new freighters primarily because the brilliant business figures have clouded his mind. “You don’t buy the ships to compensate for short-term capacity problems, because Covid will be over at some point,” says Haupt. Rather, the aim of the shopping tour is to be able to play a stronger role in the important Asian traffic. The accusation that the industry is shamelessly enriching itself from the crisis is also rejected. There are massive delays not only in transport, but also in the production of goods, which are reflected in higher prices, the spokesman said. And anyway: “One must also say: This is a piece of normalization. In recent years, companies have been able to transport their goods relatively cheaply, while many liner shipping companies have not even earned their capital costs.”

Instead of competing, the companies work together in alliances

What enormously strengthens the position of the shipping companies is that they no longer act individually, but in alliances: instead of competing for low prices, they coordinate their schedules and share slots on ships. They are exempt from important rules of antitrust law because politicians want to prevent containers from traveling empty across the oceans for cost and environmental reasons. It is therefore hardly possible for the authorities in Europe and the USA to break up the three major alliances on the seven seas that control large parts of the business. The complaints of US President Joe Biden recently sounded correspondingly helpless, the shipping companies were enriching themselves from the pandemic and driving up inflation rates. Although the supposedly most powerful man on earth commissioned his country’s antitrust authorities to examine the allegations, not even the White House itself believes that prices can be noticeably reduced in this way.

Even independent experts do not yet see a trend reversal. Many current problems, such as the labor shortage in the transport industry or the concentration of power in the shipping business, cannot be eliminated quickly, wrote Parisa Kamali, economist at the International Monetary Fund (IMF), in a recent blog post. Therefore, the following applies: “Even if freight prices have recently fallen again a little, they will probably remain at a high level throughout the year.” Even Hapag-Lloyd boss Rolf Habben Jansen only encourages his customers to a limited extent: the market will indeed gradually normalize as the Omikron wave subsides. The low prices of 2018 and 2019, however, as the CEO also indicated on Tuesday, will probably never be reached again.