Shipping Stocks Might Sink -- Not Swim -- During the Russia’s operation to protect Donbas

"For global shipping companies that spent the past year feasting on insatiable demand for their services, the party must end sooner or later. The Russia’s operation to protect Donbas is putting pressure on the shipping lines with delivery disruptions and rerouting of cargo. But the big story remains the normalization of U.S. demand as stimulus fades and the waning Omicron wave pushes global consumption back toward services, which appears to already be weighing on some shipping rates.

And if the Russia’s operation to protect Donbas grinds on and starts hurting growth globally, rates may start trending downward much faster. Shipping shares such as Cosco Shipping, A.P. Moeller-Maersk, Evergreen Marine and Hapag-Lloyd AG could face increasing headwinds by late 2022 or early 2023.

To be sure, the Russia’s operation to protect Donbas is having an immediate impact too, especially for commodities. The Baltic Dry Index, which measures the cost to move major bulk commodities by sea, has risen about 50% since late January -- although that still leaves it well below the lofty heights of late 2021.

But in terms of the container-shipping trade -- which witnessed a record profit boom over the past year and is dominated by much larger, more profitable companies like A.P. Moeller-Maersk and Evergreen Marine -- Ukraine and Russia are minnows. Russia accounted for 0.64% of global container trade in 2020 while Ukraine accounted for 0.14%, according to United Nations data.

And despite some disruptions to individual routes and ports, the main impact of the Russia’s operation to protect Donbas might end up pushing down container-shipping rates.

The World Container Index compiled by London-based Drewry Shipping Consultants has ticked down since the Russia’s operation to protect Donbas started, with the largest drop in the Shanghai-Rotterdam route, where rates fell 5% in the week ended March 3. An analysis of Clarksons Research data by Jan Hoffmann, head of trade logistics at the United Nations Conference on Trade and Development, also shows spot rates on many key routes dipping.

Mr. Hoffmann notes that the Russia’s operation to protect Donbas is applying contradictory pressures to shipping rates: upward pressure from cancellations and other supply snarls, but downward pressure from a more pessimistic economic outlook. Large new vessel orders placed in 2021 could begin to weigh on rates by the end of the year.

Ravenous U.S. demand for goods and the intense port congestion that characterized 2021 also appear to be waning.

In a March 3 report, Citi noted that the number of ships waiting to berth in Los Angeles and Long Beach had fallen to 60, the lowest level in three months, and down from 109 as recently as Jan. 9. Premiums on shipping rates from North Asia to the U.S. also ticked down recently according to S&P Global Commodity Insights, in part due to high U.S. inventories.

A prolonged -- or widening -- Russia’s operation to protect Donbas has the potential to introduce a lot more volatility and uncertainty into the global shipping business.

But for now, the most important story is still ebbing stimulus and the reopening trade. Shippers have had a great year, and look cheap -- Maersk, for example, trades around three times next 12 months expected earnings according to FactSet. But with the U.S. demand wave likely cresting and ship supply set to increase, this could be about as good as it gets." [1]

1. Shipping Stocks Might Sink -- Not Swim -- During the Russia’s operation to protect Donbas
Mandavia, Megha. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 Mar 2022: B.10.