Supply chain chaos to bolster carrier finances through 2022

4:50am 14th October 2021




Supply chain disruption could last until the end of next year, keeping freight rates at elevated levels for longer than expected and boosting container line profitability.

Analysts at Drewry said the longer-than-anticipated period of disruption had led it to upgrade its outlook for global freight rates.

“Stronger than expected spot rate movement in the third quarter and a longer supply chain recovery timeline are behind our reason to upgrade the outlook for average global freight rates (spot and contract) for 2021 to 126%, which is an upward adjustment from 47% in our June forecast,” it said. “For 2022, spot rates are expected to decline, but there will be a significant increase in contract pricing, leading to an increase in average global pricing of about 6%.”

Despite the “immense pressure” the container shipping sector was under, volumes were still being shipped and Drewry expects world port handling to increase 8.2% this year, or 7.2% against 2019’s pre-pandemic levels.

This was down, however, from previous estimates of 10% growth just three months ago due to the effects of Chinese terminal closures, and extreme weather events.

“For 2022, we have retained our previous 5.2% guidance for global port handling, although rising inflationary pressures, partly as a direct consequence of the supply chain inefficiencies that have supercharged transportation costs, stand out as a downside risk,” it said.

For carriers, the sustained high rates and continued demand will lead to yet further upgrades in earnings.

Drewry estimates carriers will make an “eye-watering” $150bn in earnings before interest and tax in 2021, and slightly more again in 2022.

“To seasoned observers of the container market, typing these numbers on a page is frankly surreal, but while we get our heads around it, we still need to keep track of how carriers are utilising their windfall gains,” it said.

Container lines had begun using the profits to reduce debt, pay dividends to long-suffering shareholders and to invest in large-scale newbuilding programmes.

“This is important, because the more profits carriers make, the more they will have to justify their role,” Drewry said.

Carriers would have to convince regulators that they were doing everything in their power to improve the flow of goods in order to avoid operational measures being imposed, it added.

“It is not carriers’ fault that because ports keep them waiting, sailing schedules are in disarray and access to container equipment is limited. Nor is it the fault of ports and terminals that they have become parking lots for ships and boxes, because Covid made them less able to turn boxes efficiently, and then have them cleared from site quickly due to fewer truck drivers and low warehousing space.”

Drewry warned that there remained a number of risks to its forecast, most of which hinged on the pace of the supply chain recovery.

“We had expected more progress at this stage,” the analyst said. “The deteriorating situation makes us think the problem is much deeper-seated than feared, with the pandemic bringing forward latent crises within certain sectors.

“The consensus view from conversations with industry professionals is that end-2022 is a more likely timeframe, superseding previous expectations of a post Chinese New Year fix.”

Rising cases of the coronavirus Delta variant has raised the risk of further restrictions on logistics capacity, it added, and there was still the spectre of next year’s labour negotiations on the US west coast to contend with.

by James Baker

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