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In the past month, France's CMA CGM group has twice announced a reduction in freight rates and an expansion of the scope of price cuts. At the same time, its chairman also objected to the French legislation proposing a 25% windfall tax. This approach has made the outside world notice that shipping companies are in an embarrassing situation of high income.
Mr. Zhou, a person in charge of a freight forwarding company who has been engaged in the industry for more than a decade, told Interface News that the price of the US-West route soared from $800-1,000 to $17,000 last year, and the price of some routes exceeded $20,000 at one time, and the entire industry experienced an unprecedented boom, and even the freight forwarding companies that were going bankrupt also took advantage of this opportunity to make a lot of money.
Shipping companies are making a lot of money, but at the same time this profit is also criticized. After all, behind the soaring freight rates and performance, consumers have to pay the final bill.
However, the shipping industry is a strong cyclical industry, the high freight rate is not sustainable, and the soaring performance of shipping companies may only be short-lived.
CMA CGM chose to cut the price, Maersk said no
At a time when route prices have fallen across the board, shipping giants such as CMA CGM have also begun to face government pressure to help the country survive the inflation crisis by reducing freight rates.
On July 1, CMA CGM, the world's third-largest shipping company, posted a notice on its official website to reduce freight rates, saying that it would reduce freight rates by 500 euros (about $520) per 40-foot container for all goods imported by major French retailers, and up to 500 euros for 40-foot containers imported into French overseas territories. Taken together, the above measures are equivalent to a 10%-20% reduction in freight rates.
With the policy scheduled to be implemented in August, but with only a week to go until the date of implementation, CMA CGM announced for the second time that it had reduced its freight rates and extended the 14 major retailers in mainland France that had originally applied to the reduced freight policy to all customers in France.
Specifically, this policy includes a reduction of €750 per 40-foot container freight for all goods imported from Asia by French customers; Reduced freight costs per 40-foot container for all imported goods destined for France by €750; For all French exports, freight costs per 40 feet container are reduced by 100 euros. CMA CGM says the measures mean a drop in freight rates of up to 25 percent.
CMA CGM group made the above decision, the purpose of which is to cope with the problems of inflation and consumer price increases in France, and at the same time, the freight concessions given to export enterprises can also enhance the competitiveness of these enterprises to a certain extent.
At a time when CMA CGM achieved two compromises, Maersk, the world's second-largest shipping company, showed a very different attitude. According to China Aviation Weekly, Maersk has also recently been under political pressure from the Danish government to "follow CMA CGM's example and provide freight discounts for domestic import and export enterprises to support their development", but Maersk did not respond.
Maersk believes that "all customers are important, no matter what industry they are in or what country they come from. Therefore, we do not consider shipping discounts for customers in fixed areas based on the location of our headquarters. ”
In fact, before CMA CGM's wide range of tariff reductions and Maersk's non-reductions, shipping companies have repeatedly maintained current tariffs by reducing flights in response to the decline in freight rates. But in Mr. Zhou's view, these measures have not had a clear effect. "Without cargo, it is useless for you to reduce the number of voyages."
Mr. Zhou, who has been working in the shipping sector for 12 years, believes that the freight rate will fall further in the future, based on the fact that it is currently in the traditional peak shipping season, but there are almost no signs of peak season. Mr. Liu, the head of a Christmas decoration factory in Jinhua, also described the same reality, "June this year was the best month in the first half of the year, but the order volume fell by 30% in that month, and the entire half year lost one or two million yuan." ”
After the stormy profits, it is criticized
Since the middle of 2020, the surge in global shipping demand, coupled with the epidemic caused by port closures, container shortages, port congestion, freight rates have soared, which has brought rich returns to shipping companies, and the performance of the past two years has shown historic growth.
According to shipping consultancy Sea-Intelligence, global consolidation companies achieved staggering profits of more than $110 billion in 2021, not including the financial data of both Mediterranean Shipping and Pacific Shipping, which is twice as high as the combined operating profit of $37.54 billion for all years from 2010 to 2020.
In the case of CMA CGM, for example, with its full year-on-year 2021 freight volume up 5% year-on-year, the company's revenue increased by 78% year-on-year to $56 billion, and net income increased 9 times year-on-year to $17.9 billion, achieving the best performance in history.
Maersk's revenue rose 55% to $61.8 billion in 2021 and profit after tax was about $18 billion. This is not only the highest profit in Maersk's history, but also the highest profit in the Danish business world to date.
The reason why these shipping companies have achieved such amazing results is not only due to the booming prosperity of the entire industry, but also closely related to the business model they have adopted. In recent years, shipping companies have joined forces to form shipping alliances. Some people believe that integration may be the gripper of taming the shipping cycle, and the alliance form has a greater voice, coordinating measures such as reducing capacity on blank routes, controlling the supply of transportation capacity and ultimately affecting freight.
At the same time, shipping companies are maintaining currently high freight rates by reducing capacity and stabilizing performance by increasing the proportion and price of long-term contract agreements. Maersk also pointed out in its earnings report that it really doesn't matter how many ships there are in the world, what matters is how many ships are deployed.
The profits of shipping companies are bound to be paid for by others, and the increase in the cost of consumption is one of them. At the same time, freight rates continue to rise due to continued tight capacity, and shipping companies seem to be making a lot of money, but the fragility of the entire supply chain is clear. In response to the adverse impact of supply chains, some large retailers have also begun to join in. In 2021, Walmart, the world's largest retailer, began chartering its own ships, and large U.S. shippers such as Home Depot and Amazon have similar initiatives.
Therefore, the government department also intervened in the supervision, and the investigation direction was mainly whether there was unreasonable behavior behind the high freight price and whether the demurrage fee and demurrage fee charged were reasonable.
Recently, the U.S. Federal Maritime Commission (FMC) investigation into liner company fees has made new progress. FMC Chairman Daniel Maffe said a few days ago that FMC is already investigating the situation when shippers or truck drivers can't return containers in time due to terminal congestion, liner companies still charge them. He also said the FMC will expand the scope of its investigations and strengthen them to include shippers and truck drivers who are forced to store or move containers without adequate compensation.
The FMC has stepped up its investigations into shipping companies since last year, including whether there are price gouging and retention fees between shipping alliances. In June, Hapag-Lloyd was asked by FMC to pay a $2 million civil fine for violating demurrage and port detention fee regulations.
In addition to FMC, the relevant government departments in different countries such as South Korea and Japan have also repeatedly investigated and punished some shipping companies. In January, South Korea's Fair Trade Commission (KFTC) decided to issue corrective orders against 23 container liner companies for inflating freight rates on export routes from South Korea to Southeast Asia, imposing fines totaling up to 96.2 billion won (about 500 million yuan).
Once nearly closed
While CMA CGM twice offered to reduce freight rates, its chairman, Rodolphe Saadé, expressed his opposition to the introduction of a windfall tax. He questioned that when the freight rate fell to $350 before, was anyone asked? CMA CGM nearly went out of business in 2009 due to financial difficulties.
CMA CGM's chairman's question pointed out the cyclical nature of shipping. In the case of CMA CGM, making money is not the norm, and bursting money is even rarer. While CMA CGM had revenues of $56 billion and net profit of about $17.9 billion in 2021, it had a net profit of only $1.755 billion in 2020 and even a loss of $229 million in 2019.
In addition, in the "difficult 2009" mentioned by Rudolf Sade, CMA CGM was unable to repay the company's huge arrears, and under the pressure of the consortium, founder Jacques Sade resigned as the ceo of CMA CGM Group in exchange for the capital injection of the consortium, and finally was able to save the crisis.
In those years, CMA CGM was not alone. The shipping cycle that began in 2003 peaked in 2008 and then entered a period of recession and depression, and the performance of shipping companies has also fluctuated in these years.
According to media reports at the time, the US subprime mortgage crisis caused a decline in consumption in Europe and the United States, resulting in a surplus of manufacturing in Asia, a slowdown in global trade, and spread to the shipping market through trade, causing a decline in maritime demand, an imbalance between supply and demand in the market, and a significant decline in market traffic and freight rates. In less than half a year in 2008, the shipping industry fell as rapidly as the world economy, and what is even more exaggerated is that in October 2008, the Asia-Europe route even had zero freight rates and only surcharges.
This has been going on for years. In the case of COSCO Offshore Holdings, the company lost 7.54 billion yuan in 2009. On the whole, in the seven years from 2009 to 2016, COSCO Haikong experienced the most severe challenges in the 21st century, with a total loss of nearly 30 billion yuan.
Almost all shipping companies can't get rid of this big cycle. Mr. Zhou also said that now that the industry has shown signs of downturn, freight rates may continue to decline on the basis of a continuous decline.
"Our U.S. line is now losing money, and the market has a freight inversion, that is, we calculate that the cost should be 13 yuan per kilogram, but now the market price is only 11 yuan, so we have to lose 2 yuan per kilogram." Mr. Zhou said that last year they also achieved very good results with the industry environment, but this year, in this case, they can only post money to do, but at the same time, considering that other routes make money, perhaps they can also guarantee profits as a whole.
Mr. Zhou also admitted that the situation of making money last year was actually not reasonable, but this situation was only a flash in the pan. However, this cyclical development is also quite regular, and accurately understanding and understanding the law of the shipping cycle can make reasonable decisions in this change.
During this period of shipping boom, the shipping giants who made a lot of money spent heavily on ships. As of May, more than 500 vessels had been ordered by container shipowners worldwide, equivalent to more than a quarter of the capacity of their existing fleet in March, according to a set of data.
These companies have not put all their bets on shipping, and Maersk, CMA CGM, etc. are also increasing their layout of the entire logistics field in order to achieve a healthier and more comprehensive business model through the development of integrated business. From the perspective of various layouts, the next cycle, the cards in the hands of shipping companies may be very different, and the ability to resist the risk of cyclical changes also needs to be re-evaluated.