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NMA reporter James Fitzgerald used to trade commodities, which involved negotiating with shipping providers. What happens at sea does not stay at sea, so he took a look a why costs are going up and who is profiting from it.

At Citywire New Model Adviser, we are always looking to add extra insight. So when we saw data on the money being made from shipping, our reporter James Fitzgerald, a former commodities trader, jumped at the chance to cover it. Spiralling shipping costs are a fast-emerging driver of inflation, but some fund managers have already been able to capitalise. Here is what is going on.

We have all changed our behaviours in the last 18 months, and nowhere is that more obvious than in how we buy stuff and how it is delivered.

One consequence is that shipping rates are hitting unprecedented levels, as land-based supply chains struggle to keep up with demand and space on ships is limited.

The impact on the ‘spot market’ –the phrase used to describe the forward market shipping rates – is now really rearing its head. 

Ocean freight is still the most cost-effective way of delivering goods worldwide, even though a standard shipment between, for example, China and Europe, can take upwards of three months from port to port.

The benefit of ocean shipping is that a standard sea-faring vessel can carry around 24,000 40ft chilled, frozen or dry containers.

Each container has between 18 and 29 metric tonnes of goods, meaning you can send a lot of goods from port to port for a competitive rate.

The working logic was the more you fit on a ship, the cheaper the rates will be. But Covid-19 has changed that.

According to German seafaring corporate Hapag-Lloyd, last May around 12% of all of the world’s ocean shipping fleet was suspended due to the pandemic.

Now, as parts of the world open up and shipping companies face huge demand, freight rates across the board have increased between 50% and 400%, according to Maritime research company Drewry.

Drewry’s World Container Index, published on 12 August, tracks the average cost of ocean freight across all shipping lanes. It shows that the average cost of shipping a 40ft container has reached $9,421.48 (£6,886) – a 358% increase on the same period last year.

The cost of moving a 40ft container from Shanghai to Rotterdam broke through the $10,000 mark in May and sat at $13,653 in the second week of August 2021. That was an increase of more than 500% from the mid-point of 2020.

Prices for the Shanghai to Genoa route soared by 2% to reach $12,993 per 40ft container this month, an increase of 556% year-on-year, while rates from Shanghai to Los Angeles hit $10,322 for a 40ft box, Drewry says. 

But now that ships are free to move again and are mostly unrestricted by Covid-19 lockdowns in the major ports, why are rates flying upwards still?

One of the larger shipping lines told NMA that the price inflation is being driven by a combination of multiple factors: a perfect storm, so to speak. 

The pandemic has made consumers rethink their buying habits, which has caused shipping rates to skyrocket.

‘Due to the coronavirus pandemic, there has been a massive shift from services. People do not travel that much anymore, do not have dinner in restaurants or do not go to the theatre,’ a spokesman for Hapag-Lloyd said.

‘Instead, they have purchased large amounts of consumer goods, such as furniture, electronics, home office and sports equipment.

‘Many consumer goods are produced in Asia and shipped by container. Hence, we are currently seeing extraordinarily high demand for consumer goods meeting limited transport capacities.’

Hapag-Lloyd’s average shipping rate for a 20ft chilled, frozen and dry container has increased 57% over the last 18 months.

The situation gets worse when those massive loads need to be disembarked and transported to their final destinations by truck or rail. Productivity in ports is fluctuating as lockdowns, a lack of equipment and illness stifles capacity.

Among the contributing factors is demand from the US.

‘There just isn’t enough land transport to deal with the huge increase in goods being shipped,’ the Hapag-Lloyd spokesperson said. 

‘The current situation results from exceptionally strong demand from US customers and, in particular, from bottlenecks in landside infrastructure, including ports, terminals, depots, chassis and rail. We are doing everything in our power to cope with this strong demand and to meet the needs of our customers,’ they said.

The company is coping with this by getting creative. When a container arrives at port, the shipping line has extended the period it can wait for goods to be collected without further charge. These are known as ‘detention-free days’.

‘We are maximising available capacity wherever possible and appropriate; skipping ports to make up for lost time, speeding up our ships, diverting them to other ports, and adjusting rotations,’ they said.

‘In many cases, we have extended detention-free days when terminals have no longer accepted empty containers.

‘The supply chains and available transport capacities, particularly on the land side, are not geared to such a strong demand.’

Hapag-Lloyd’s competitor, Danish shipping giant AP Møller Maersk, reported in its first-quarter 2021 financial report that its average freight rate increased by 35% to $2,662 compared to the same time last year.

This increase was due to demand surges for goods between China and the US, it said, as well as port congestion and land-based equipment and logistics shortages.

The shipping giant put its rate increases down to a renegotiation, and increase, of cheap shipping rates, agreed upon last year by its clients, as well as mass congestion at port terminals due to demand and the pandemic. 

‘The higher freight rates are driven by long-term contracts renewed at higher rates, as well as higher short-term rates are specifically driven by demand surge leading to equipment shortage and bottlenecks across global supply chains,’ they said.

Hapag-Lloyd said it did not hike its rates when the market shot upwards. Its average rate was therefore lower. 

What do shipping rate hikes mean for fund managers, investors and the end consumer? 

When shipping companies charge more due to port congestion, a lack of available shipping space and higher demand, they in turn record higher revenue.

This is good for shareholders and funds holding the companies, but not so much for goods suppliers and end consumers, who have to pay huge amounts to send and receive their stock.

In the second quarter of this year, Maersk’s revenue jumped 60% compared with the same period in 2020. It reported a profit of $3.7bn for the three-month period.

During the same period this year, Hapag-Lloyd’s earnings before tax rose significantly to €2.89bn, compared with the €511.3m it recorded during the corresponding quarter last year.

‘The sharp rise in transport volumes and the effects of the Covid-19 pandemic led to congestion of port and hinterland infrastructure in North America and, in some cases, in Asia and Europe as well,’ Hapag-Lloyd said in the results. 

Despite both companies increasing their freight rates to most destinations by around 50% compared to last year, Hapag-Lloyd’s results show that the cost of shipping barely increased compared to last year. 

Indeed, its transport expenses rose by 0.6% in the first six months of the 2021 financial year to €4.75bn (£4.06bn). That compares with costs of €4.73bn in the first half of 2020. 

Very few of the UK’s largest asset managers have exposure to the major shipping companies, as the companies themselves tend to be based in Europe and Scandinavia, and are listed on the New York Stock Exchange (NYSE) and the Nasdaq. 

US asset manager Vanguard holds Maersk in its US-domiciled Vanguard Total Intl Stock Index, Vanguard Developed Markets Index and its Ireland-domiciled Vanguard European Stock Index, according to Morningstar data.

However, the holdings are not substantial. Where it is held, Maersk represents just 0.69% of an average Vanguard fund.

Similarly, Blackrock’s iShares Core MSCI EAFE ETF and iShares MSCI EAFE ETF – only have respective holdings of 0.08% and 0.09% in the shipping giant.

Indeed, the asset manager holds total shares of around 10% in Maersk through BlackRock Advisors (UK), BlackRock Fund Advisors, BlackRock Institutional Trust Company and BlackRock Investment Management. 

UK fund managers have even less exposure to Hapag-Lloyd.

Of UK asset managers, only London-based WisdomTree investments has a 0.03% position in the company via its US-domiciled Europe Hedged Equity ETF, according to Morningstar.

Although most UK-based fund managers have little exposure to Maersk, plenty of Danish fund houses are backing the shipping giant.

Morningstar data shows that the eight funds with the most exposure at the end of June 2021 were all Danish registered. 

The Danish-based Maj Invest Danske Aktier fund, run by Citywire A-rated Keld Henriksen has the most exposure to Maersk. Company data to the end of June 2021 shows Maersk as the second-largest single position in the fund at 9.64%, narrowly behind healthcare giant Novo Nordisk.

However, Henriksen has reduced his fund’s exposure to the stock since May.

Another Danish fund is the Nykredit Invest Danske Aktier, which holds a 4.28% investment in Maersk as of June 2021. The fund has 4.28% exposure to A shares from Maersk and a separate exposure of 4.23% in B shares. This fund is overseen by chief portfolio manager Hans Kjaer and Karsten Trøstrup.

In its half-year results this year, Maersk said that its earnings in the third quarter are expected to exceed those of the second.

If that is the case, and if freight rates continue to climb, then shipping lines will continue to count their spoils, as consumers pay more for their stuff.

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