Cargo ship depart from the port

Although the container shipping industry was hit hard by the pandemic in the first half of 2020, the industry managed to stage a turnaround to become one of the best performing nonfinancial corporate sectors globally last year. There were three main reasons for this: disciplined capacity management by carriers which supported freight rates, low fuel costs and a quick rebound in demand in the latter part of the year. We believe that high demand and elevated freight rates will persist for at least the next six months and possibly throughout 2021.
Demand for container shipping services fell sharply at the start of 2020 as the coronavirus outbreak in China hit manufacturing output. Further, measures introduced by countries to contain the virus as it spread globally reduced demand for containerized goods in the second quarter. In response, carriers canceled an unprecedented amount of sailings, which acted as a stabilizer for freight rates. The coronavirus-induced collapse in global oil prices also helped support the financial performance of carriers by reducing their fuel expenses because bunker prices are tied to crude oil prices. In addition, demand for goods globally returned to pre-crisis levels in the second half of 2020. In fact, demand in the US was even stronger than before, supported by the benefits of unprecedented government and central bank support to stabilize economic activity. In November 2020, we changed our outlook for the global shipping industry to stable from negative, in part because of a stronger-thanexpected performance by the container segment. As for 2021, the strong momentum for the industry is continuing with high freight rates, strong container demand and ongoing favorable supply and demand characteristics.
We believe the somewhat decoupled relationship between bunker prices and freight rates as well as the very strong demand is of a short-term nature caused by coronavirus-induced supply and demand imbalances. That said, we think there is a paradigm shift in the making as reduced capacity in the industry will support pricing and margins going forward. From the early 1990s up until 2008, globalization drove increasing demand for container shipping, with volumes growing by a compound annual growth rate (CAGR) well above 10%, practically three times the CAGR of world GDP. Following the initial recovery from the sharp decline in 2009 (see Exhibit), the industry has instead faced a slowdown in demand more in line with actual GDP growth.

On the supply side, it has taken time for the industry to adapt to this new market environment, but new ship orders have been shrinking in relation to the global fleet. In addition, container shipping companies have joined forces through M&A and alliances to drive economies of scale. Against this backdrop, we believe the very disciplined capacity management during the first half of 2020 was a key step toward adjusting supply more toward the structurally lower demand growth. This development is in contrast to the downturn in 2009, when the industry was faced with a structural overcapacity situation. If the industry continues on this course, we believe that the prerequisites are in place for a more long-term equilibrium between supply and demand. This in turn should lead to more stable EBIT margins and benefit carriers’ credit quality over time. However, even with supply and demand in balance, risks associated with competition (pricing wars) could be a possible source of resumed earnings volatility, even though the industry’s consolidation over the past few years has reduced this risk.

Source: Moody’s