What can ocean shipping tell us about the global economy (28Sep2023)?

Global Economy

This is extracted from an article dated 13 Sep 2023 from Fitch:

We have raised our 2023 world growth forecast by 0.1pp to 2.5% reflecting surprising resilience so far this year in the US, Japan and emerging markets (EM) excluding China. We have revised up US growth by 0.8pp to 2.0%, Japan by 0.7pp to 2.0% and EM ex. China by 0.5pp to 3.4%. This has more than offset a 0.8pp cut to China – to 4.8% – and a 0.2pp cut to the eurozone, to 0.6%. But we have cut our 2024 world growth forecast by 0.2pp to 1.9% with widespread downward revisions. We have reduced our 2024 US forecast by 0.2pp to 0.3%, the eurozone by 0.3pp to 1.1%, and China and EM ex. China by 0.2pp to 4.6% and 3.0%, respectively. 

This is the outlook provided by the Organisation for Economic Co-operation and Development OECD's recent September post:

Global growth is expected to remain weak. The world economy is expected to grow by 3.0% in 2023, before slowing down to 2.7% in 2024. A disproportionate share of global growth in 2023-24 is expected to continue to come from Asia, despite the weaker-than-expected recovery in China.

How much of the global trade is done by ocean shipping worldwide?

From Statista's data above, ocean shipping accounts for about 80% of global trade. In a separate post, the OECD reported that the sea accounts for 90% of global goods movement. For this report, let us use the more prudent amount of 80%.

Thus, ocean shipping volume can be a good reference for the global economy. 

Who are the biggest shipping companies in the world?

Marinesight's website lists the above as the 10 largest container shipping companies in the world.

Let us look at some of the recent earnings of these bigger container shipping companies:

MAERSK

Comparing the performance of Q2/2023 with Q2/2022 (a year ago), we see a 40% drop in revenue and an 84% drop in underlying profits.  The Maersk executives were quoted saying that Q1 would be the best quarter for 2023 in their Q1 earnings. It is to be noted that it is largely a drop due to rates, as the drop in shipping volume is not that drastic.  

Ocean Network Express (ONE)

For Ocean Network Express (ONE) YoY performance, we note a 58% fall in revenue and a 91% drop in profits - comparing Q1/2023 with Q1/2022.

Hapag-Lloyd

Comparing Q2/2023 against Q2/2022 performance for Hapaq Lloyd, we note a drop in revenue (in million EUR) from 8,993 to 4,417 (a drop of 50.8%). Coming to group profits (in million EUR)  YoY, it fell from 4,483 to 1,006 (a decline of 77.5%).

From the 3 shipping shipping lines above, we note a YoY drop in revenue between 40 to 58%. Profits fell YoY in a range between 77% to 91%.

ING reports on the increase in shipping capacity with new vessels.

Over the course of the next 3 years, we are expecting new vessels to be launched. This will lead to an increase in supply (of shipping capacity). The shipping rate (price) is a function of demand meeting supply. Part of the fall in the shipping rates could be caused by this increase in shipping capacity. How much of the drop is caused by demand? 

Shipping rates

For shipping rates, there are 2 rates typically available.  With some volume commitment, some companies were able to secure a "contract rate" over a defined period with the shipping company. For the rest, they will need to depend on "spot rates" that are ad hoc based.  For some companies, a fixed rate removes the volatility in price changes and thus, allows for better costing and cost management. For those who buy on spot rates, it could fluctuate over a big range, but at a spot rate price is (usually) higher than a contractual rate.  

When the spot rate lingers around or falls below the contractual rate, this would be a concern that implies weak rates from the shipping lines.

To better manage the price, there are calls for some of the shipping lines to decommission or scrap some of the older vessels. At the same time, there are also shipping lines that will be using vessels powered by LNG and greener fuel. A 700 TEU electric carrier is expected to join in the action.

My investing muse

From the above data, we notice a good drop in revenue and net profits. The outlook for the rest of 2023 remains muted.  A drop in demand and an increase in shipping capacity will not be favourable for shipping rates. 

With the recent rise in crude oil prices, the burden of increasing fuel costs will need to be passed on to someone.  Would more of the tab be picked up by the shipping lines or the customer? If it is the latter, would it be inflationary in subsequent impacts?

Vessels waiting at Panama Canal 28 Sep 2023 from marine vessel traffic website

Now, we have a drought affecting operations at the Panama Canal.  This narrow passage accounts for approximately 40% of the global shipping volume.  This has led to limitations on vessel size/capacity. 

From the screenshot above, we can say that United States imports have been on a downtrend since October 2022.

This imbalance of import & export has led to an increase in exporting "empty containers" from the USA. In fact, only 39% of export containers leaving the USA are laden with cargo. This was reported by freightwaves.

From the individual shipping companies' earnings to the import of the USA, the data seems to point to some difficult months ahead based on the current trend. I think that there is a considerable correlation between ocean shipping and the global economy. 

For the year-end surge starting from Thanksgiving till Christmas, it would be a typical surge. As the voyages from Asia to the western coast of the USA last 45 to 60+ days, the goods required for the year-end sales must be sailing towards the US now.  This means that we would get a sense of the year-end peak by looking at the ocean shipping bookings made by early October 2023. 

Monitoring the shipping volume could be helpful to give us a sense of global consumption and economy. For now, I do recommend caution, prudence and hedging.