While forecasting 2023 profits, carriers banked heavily on market conditions improving in 2H23 on the back of increased demand stemming from inventory restocking by major retailers and positive seasonality in 3Q23. However, it seems far from materialising as inventory continues moving slowly and retailers focus on depleting the existing stock.
Muted demand prospects and sticky inflation have started weighing on container equities. This reduced the variance between the Drewry Container Equity Index vis-à-vis the S&P 500 Index. The Drewry Container Equity Index returned -11.9% in YTD 2023, ending 07 June 2023 (vs S&P 500 Index’s gain of 11.6%).
The market rewarded Hapag-Lloyd (HLAG) in 1Q23 on its terminal acquisitions to diversify its revenue stream. However, the stock dipped 4.5% in YTD 2023 (vs 1Q23: +72.2), as investors collected the huge 2022 dividends. ZIM Integrated Shipping Services Ltd (ZIM) reported a net loss of USD 59.5mn due to high spot exposure and Wan Hai Lines Ltd (Wan Hai) reported a net loss for the second successive quarter (1Q23: -USD 65.1mn and 4Q22: -USD 1.2mn). Accordingly, Wan Hai and ZIM stocks declined -27.7% and -17.5% in YTD 2023.
Looking at 1Q23 profits for container shipping companies we see significantly reduced profits on a YoY basis albeit still higher than pre-pandemic levels. Considering a representative sample of companies, the topline for 1Q23 totaled USD 27.0bn down by 43.2% YoY, but 49.9% higher than its 1Q19 counterpart. Similarly, 1Q23 EBIT for the sample totaled USD 4.9bn marking a 78.8% YoY decline. However, 1Q19 EBIT was much lower at USD 382.3mn.
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• Analysing sequentially (QoQ), the quantum of decline has increased successively marking a 29.6% decline in revenue (vs 4Q22: -26.3%) and a 58.6% decline in EBIT (vs 4Q22: -52.6%). Thus, we don’t see any inflexion point in the upcoming quarters. In fact, 1Q23 profits were supported by the tailwinds of 2022 contracts. As the last of these contracts expired in May, we will see a sharp dip in profitability from hereon. ZIM’s 1Q23 net loss is a testament to the impact of renegotiation of contracts, where the company renegotiated its contracts earlier in the year and thus reported net losses in 1Q23.
• Furthermore, carriers operating under low contract coverage will see losses earlier as opposed to carriers transporting volumes under term contracts. However, as contract rates trend to spot levels in due time all players will feel the heat, which will be exacerbated by delays in inventory restocking translating into a very short positive seasonal effect.
• The general decline in share prices in the container shipping industry since 2H22 has significantly brought down the P/B of the industry to its long-term lows.
Source: Drewry Maritime Financial Research