Shipping company profitability in 2024

04.26.2024

Will the economic and geopolitical situation allow shipping companies to make a profit in 2024?

Last year, it was predicted that the financial results of the top five operators would be markedly reduced but would nevertheless remain positive, despite the fact that the balance between supply and demand had turned in favour of shippers. This diagnosis was confirmed, even though the shipping companies did a little better than expected, thanks to an increase in freight rates at the end of the year, resulting from the attacks carried out on merchant ships by Houthi rebels in the Red Sea.

The increase in rates continued in January and February, enabling the shipping companies to make unexpected short-term gains. Most long-term contracts were suspended and have been either renegotiated or «corrected» to take account of the new situation. Now that rates seems to have reached a peak, let us consider whether the first quarter, which turned out more promising than the budget forecasts had predicted, will be enough to save shipping companies’ full-year results, taking account of the different factors influencing their activity.

1) The fuel factor

The Cape of Good Hope route between Asia and Europe, which has been widely adopted by the shipping companies as they seek to avoid the danger in the Red Sea, has become a sort of new normal, thanks to a return to classical market logic.

There remains the question of costs, particularly fuel prices. It is highly likely that oil prices will increase in 2024, even though they are already at high levels. The new routes taken to avoid the Red Sea involve a 40% increase in the normal distance between Asia and Europe. Once again, therefore, fuel has become a major factor to take into account in this forecast. Its impact on cost structure is likely to become a point of comparison between the different operators in the market.

2) Blank sailings

The fact that ships are making longer round trips between Asia and Europe means that operators automatically lose a certain number of trips and, by the same token, potential revenues, in a fiscal year which, by definition, cannot be extended. In this situation, continuing to delay or suspend ships’ departures in relation to their original schedules is a way for the shipping companies to bet that the resulting reduction in capacity will enable them to achieve higher year-end profits.

3) Exogenous factors

The market is showing itself to be increasingly at the mercy of exogenous factors, which we need to take more into account, therefore, in this forecast. In 2023 the Houthi rebel attacks in the Red Sea torpedoed the market forecasts drawn up at the start of the year, which had, until then, been in line with reality.

In 2024, the geopolitical situation is just as sensitive. The disruption in the Red Sea is continuing and there remains a real threat in the South China Sea, to mention only the main threat identified so far.

4) Chinese-American trade paradox

China and the United States continue to be the «best of enemies». Despite the real friction between them, however, the transpacific trade machine has clearly got back into gear, generating cargo volumes well above those of the Covid years, if the results of the main American ports in this early part of the year are to be believed. Freight rates are currently at a good level in the transpacific trades and are offering operators good returns.

5) Environment to lose out in 2024

Avoidance of the Suez Canal and to a lesser extent the Panama Canal in the first quarter has led to an increase in CO2 emissions from the shipping sector which is estimated at about 20%, compared to the first three months of 2023. With traffic growing faster than emissions, this is bad news for the sector’s environmental performance.

This deterioration in the industry’s environmental performance has come just as it has begun implementing the European Union’s emissions trading scheme (ETS), which came into force in the shipping sector on 1 January 2024. The event was relatively little noticed, given the increase in freight rates resulting from the crisis in the Red Sea, but ETS surcharges can be expected to increase.

Taking account of the information we have following the end of the first quarter, 2024 should normally be a more profitable year for the shipping companies than 2023, even though rates are unlikely to reach the levels seen in 2022. At this stage, it can be reasonably envisaged an average increase of around 10% in EBITDAs and net incomes.

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