Trade: shipbuilding shortfall will keep rates high and dry

A following wind of exceptional strength is propelling the shipping industry. There will be little let up until next year, according to industry barometer Clarksons, which reported strong interim results on Monday.

Congestion is a big factor. The proportion of the world cargo fleet in port was up 7 percentage points to 38 per cent in July compared with the pre-pandemic average. That is unlikely to ease much until China relaxes its Covid-19 restrictions.

Clarksons, a FTSE 250 company and the world’s largest ship broker by headcount, said container rates have dropped just 5 per cent from April’s all-time record.

Sky-high rates mean strong profits for companies such as AP Møller-Maersk which has lifted its forecasts three times this year. Hard-pressed customers are questioning the let-outs from competition law that allow nine big shipping companies consolidated into three alliances to control most ocean shipping.

Supply chain businesses have urged the European Commission to mount an immediate review. US president Joe Biden has accused “foreign-owned” shipping companies of raking in profits. He recently signed the Ocean Shipping Reform Act, which aims to address some grievances.

There can be no quick fix. The root problem is an imbalance between supply and demand, according to the Federal Maritime Commission, the US regulator. It recently concluded after a two-year investigation that ocean carrier competition was “vigorous”.

Customers can expect supply and demand to move towards greater balance medium term. The expectation of weakening shipping rates means Clarksons trades on a price/earnings ratio of 18, a discount of nearly a quarter to the five-year average. The economic downturn will crimp demand. New container ships coming into service will expand fleet capacity by 8.2 per cent next year and a further 6 to 7 per cent in 2024.

Order books are not high by historic standards. That reflects shipyard closures and uncertainty over which low-carbon fuel will become the standard for an industry under pressure to decarbonise.

That is good news for the shipping sector which may escape a value-destroying glut. For customers, the limited supply on new ships will ensure any decline in rates is unspectacular.