Facebook Pinterest Search Icon SourcingJournal_horiz Tumbler Twitter Shape photo-camera graph-trend Shape latest-news icon / user

How Long Will Port Congestion Last?

Container shipping company profits are likely to have another very strong year in 2022 as freight rates remain high despite moderate reduction in the last three months, according to a new report from Fitch Ratings.

The benchmark Drewry composite World Container Index (WCI) decreased 0.6 percent to $7,578.65 per 40-foot container or equivalent unit (FEU) for the week ended June 9, but was still 13 percent higher than a year earlier. The WCI’s average composite index was $8,569 per FEU, which was $5,146 higher than the five-year average of $3,423.

High freight rates along with buoyant demand have led to an increase in orders for new vessels, which make up about 26 percent of the existing global fleet compared to less than 10 percent at the beginning of the pandemic, the report noted. Fitch said the industry could encounter a turning point in 2023, when growth in vessel capacity is likely to exceed container demand.

The capacity deployment discipline during the peak periods of pandemic-related lockdowns in 2020 was partly the result of industrywide consolidation in the previous decade, as it reduced the need to gain market share. However, whether this discipline holds with the arrival of new fleet remains to be seen, the report said.

“Some of the excess cash from the ongoing bumper profits has gone to debt reduction, but increased CAPEX, shareholder returns and bolt-on acquisitions have been the other uses across the industry,” Fitch’s “Global Container Shipping Update” said. “Acquisitions have been mostly to increase door-to-door logistics capability, which will be good for the longer-term growth and stability of the industry.”

Most of the freight rate increases over the past two years were driven by increased port congestion as a result of pandemic-related operational bottlenecks and higher demand due to consumer spending shifts to non-perishable goods and away from services, Fitch noted. Port congestion remains an issue in U.S. and European ports, and Chinese lockdowns, although leading to lower container volumes for the February-to-April period, have not been sufficient to ease the congestion.

Drewry’s outlook for the industry, discussed in an April webinar, detailed how the only aspect of the sector that has benefitted from the turmoil has been carrier profitability. Drewry estimated that carrier earnings before interest and taxes (EBIT) reached $214 billion in 2021. Drewry’s forecast was that more disruption-driven freight rates should more than compensate for rising costs and deliver as high as $300 billion in EBIT profit this year.

Labor negotiations at West Coast ports on a new dockworkers contract set to expire at the end of June and the arrival of peak season for container volumes mean congestion issues are unlikely to resolve in the near term, Fitch said.

“If port congestion continues into 2023, it could partly absorb the new vessel capacity due to be delivered in 2023,” the report added.

More from our brands