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History is full of cautionary rise-and-fall narratives. This week’s Chart Room is about global shipping costs since the start of the pandemic and the potential damage their own rise and fall may do to longer-term plans for greener container fleets. 

The first chapter is well-known: the effective shutdown of ports in China, Europe, and the United States led to a logjam which took years to clear. The subsequent mismatch between supply and demand drove prices through the roof. As the chart shows, the cost of booking a shipping container from Shanghai to Rotterdam rose tenfold in just over a year. 

That put global shippers in an odd position: suddenly they were spectacularly profitable businesses, with a huge glut of free cash to spend. There were voices crying caution, but for most that supply mismatch proved too much to resist and the sector’s big players all ordered a raft of new, greener vessels, with an eye on advancing their extremely challenging path to net zero. 

Then came the fall. The capacity of new ships on order represents close to 30 per cent[1] of the size of the current fleet. The resulting oversupply has driven prices per container back down to rates not seen since 2016. In the meantime, costs have risen, and shippers are feeling the squeeze. They also warn that prices may be stuck at similar levels for an extended period. 

The drop-off in shipping costs is good news for central banks in the battle with inflation and helps companies elsewhere struggling with their own pressures. In the longer term, however, it will have an impact on shippers’ ability to pay for their environmental transition plans. 

Diesel burning ships are a substantial chunk of humanity’s carbon budget. Getting emissions down to net zero will require a complete renewal of fleets and the development of alternative fuel sources such as green methanol, LNG, and eventually hydrogen and electric technology along the way. Morgan Stanley analysts estimated recently that fuel costs could more than double and that freight rates would need to rise by 20-40 per cent to compensate.

Put more plainly, without profit, or at least free cash flow, the task becomes extremely difficult. Falling prices feel like a good thing - but there is a cost. 

 [1] Clarksons and Morgan Stanley

Jonathan Neve

Jonathan Neve

Senior Credit Analyst

Patrick Graham

Patrick Graham

Senior Investment Writer