Analysts See Continued Profit Declines for Shipping in 2023

As the investment community prepares for the start of earnings season with the first of the reports scheduled to be released as early as next week, speculation focuses on what the outlook is for the shipping industry’s financial results. There has been extensive focus on the dramatic declines in container volumes and spot freight rates which changed the trend lines starting last summer. Industry executives in their outlooks all agreed that the bulb has passed, but the question remains how low will profits decline in 2023?

Profits began to decline with the third quarter of 2022 showing the first significant impact after seven quarters of consecutive net income growth. The fourth quarter was the second quarter of sequential declines. Well-known industry analyst John McCown of Blue Alpha Capital in his latest report issued on April 3 calculates that net income was down over 41 percent in the fourth quarter versus Q3 and down by a third versus the year-ago period.

Sea-Intelligence points out that 2022 was overall a very strong year for the industry but that the cracks began to show in profitability. From the public reports, they calculate earnings before taxes and interest (EBIT) was $95 billion. They further estimate when MSC, which is private, CMA CGM which does not report EBIT, and other carriers such as PIL which had not reported were added in, carriers’ EBIT for 2022 reached an estimated $138 billion.

“However, there is a weakness in the market that is highlighted by a sharp contraction in transported volumes, while freight rates, through higher year-over-year, also seem to have slowed down,” cautioned Alan Murphy, CEO of Sea-Intelligence.

They are using a measure of EBIT/TEU to illustrate the emerging disparities in the shipping industry and as a signal of what is to come. “While the larger shipping lines have close to doubled their EBIT/TEU, the smaller ones were only able to increase it by a relatively smaller margin,” notes Murphy.

Fourth quarter 2022 Sea-Intelligence believes illustrates the emerging differences by size of the carrier. Large carriers they note were able to maintain EBIT/TEU levels close to Q4 2021 while the smaller lines were not able to maintain their profitability levels. On average, Sea-Intelligence calculates, the carriers recorded EBIT/TEU of $843 per TEU in Q4 down by a third from the year ago. 

The declines in profitability per container they report contributed to an overall 46 percent decline in EBIT year-over-year for the industry. Sea-Intelligence says the fourth quarter shows “visible indications of a weakening market.” They note that all of the shipping lines have remained profitable but the disparity is growing between the larger and smaller carriers.

John McCown points to steps he expects the shipping companies will continue to take to slow the declines. To counter falling rates and volumes he expects the industry will continue to slash capacity primarily by blanking sailings. He points out it worked well at the beginning of the pandemic and is likely to be top of mind for executives as they work to counter current market forces.

Despite these steps, McCown still sees an 80 percent decline in net income for the coming year. “My current placeholder for sector net income in 2023 is $43.2 billion.” He estimates total revenues will come in at $327.6 billion giving the industry a margin of just over 13 percent for 2023. 

“The larger point is that earnings in the container shipping industry are on a different curve than what has occurred in the spot rates, as the large majority of loads move under contract rates,” writes McCown. “While 2023 net income will be down significantly from 2022, my analysis of the latest data suggests the industry will remain profitable.”

Yet, while he predicts the industry will remain profitable, McCown in his report shows the trend line over the last two quarters carrying forward into 2023. Net income he forecasts will be strongest in the first quarter of 2023 at $14.9 billion, sliding to $10.8 billion in the second quarter before it levels off at $8.7 billion for both the third and fourth quarters. He however notes the difficulties in predicting sector results, especially in the current fluid market conditions.