Container carrier profits are expected to fall 80% over the next two years due to overcapacity and declining demand

HSBC (HSBC) said in an analysis released Thursday that container shipping is entering a downward cycle due to excess capacity and falling demand, which will lead to a drop in carrier profits of more than 80 percent in the next two years.

In an industry research report, HSBC said the market downturn is "inevitable" and could bottom out in 2024, with profits falling more than 80 percent from their 2022 peak.

The bank said it will be interesting to see if shipping companies learn from history, noting that about a decade ago, shipping companies brought in severe overcapacity that led to price wars and huge losses.

"There are signs that spot freight rates could quickly fall to pre-epidemic levels as the supply-demand gap continues to widen." HSBC's head of research said.

However, contract rates will remain at higher levels than before the epidemic, and spot rates, which have been steadily declining for several months, will not break the bottom line. The reason is that container liner companies will impose constraints on capacity management, HSBC said.

"Overall, we expect the sector to remain profitable rather than the losses it was making before the epidemic."

The container shipping industry is enjoying its highest ever level of profitability after shipping companies made record profits in the first half of the year. Drury had forecast in the first half of the year that the container shipping industry's operating profit would reach $300 billion in 2022. But spot freight rates have fallen sharply since the start of the year from record highs in 2021.

In addition, HSBC expects global container volumes to fall by 2 percent in 2022 and 3 percent in 2023, before recovering by 2.5 percent in 2024. The bank expects active capacity to grow by 6.2%, 6.5% and 8% in 2022, 2023 and 2024, respectively, and liner operators' profits to bottom out.

At the end of June, containership orders accounted for nearly 27 percent of the global fleet, the highest level since 2009, with a total order capacity of 6.6 million TEU. Most of the vessels will be delivered in the next two years, despite the huge economic uncertainty facing major Western markets.

During the second quarter earnings call with analysts, shipping companies all pointed to a series of conflicting signals, including rising inflation and interest rates in Europe and the U.S., and the associated steady demand for imported goods in the U.S. These signals overshadowed the outlook for liner shipping.

However, the deterioration in demand was more pronounced in Europe than in the United States. EU inflation reached 9.8% in July, the highest level in 25 years, while falling consumer spending drove up inventories across the continent.

The slowdown in demand can be seen in container imports from China, Europe's largest trading partner, in the first half of this year. According to the latest data from the Container Trade Statistics (CTS), Europe's imports from China fell nearly 5% to 3.84 million TEUs in the first half of this year compared to the first half of 2021, with January 2022 being the last month to achieve year-on-year growth.