作者｜Eastland
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On March 29, 2024, COSCO SHIPPING Holdings (SH:601919) released its 2023 Annual Report. Due to changes in supply and demand, the global container shipping market has entered a trough. The annual average value of CCFI (China Export Container Freight Composite Index), which is closely related to COSCO Shipping Holdings, fell by 66.4% year-on-year to 938 points.
However, in 2023, COSCO Shipping Holdings did not fall into a loss as some investors expected, and the non-net profit still reached 23.75 billion.
Since October 2023, the situation in the Middle East has continued to be tense, the capacity of relevant routes has tightened, and freight rates have begun to recover. As of April 19, 2024, CCFI has recovered to 1,186.5 points, 26.5% higher than the 2023 average. The situation in the Middle East is still deteriorating, the global supply chain is facing greater challenges, and freight rates are entering a new upward cycle.
In the past five years (2019~2023), COSCO SHIPPING Holdings has an average annual net profit of 47.94 billion, with a peak of 109.7 billion in 2022 and a trough of 6.76 billion in 2019. During the period (2023 vs. 2019), the CCFI index differed by 13.8%, while the net profit differed by 253%.
As the "king of the cycle", COSCO SHIPPING Holdings' performance is not "where it comes from and where it goes", but spiraling, and the bottom is constantly rising.
The volume fluctuations are not as large as expected
In 2023, the global economy will show high inflation and low growth, but the decline in demand for container shipping is far less than imagined.
Taking COSCO Shipping Holdings as an example, the cargo volume in 2023 will be 23.555 million TEUs, a year-on-year decrease of 3.5%. Thereinto:
The Transpacific Route, which connects China with the Americas, transported 4.26 million TEUs, accounting for 18.1% of total traffic (compared to the average of the past five years: 18.4%).
The Asia-Europe route, which connects China and Europe, transported 4.36 million TEUs, accounting for 18.5% of the total traffic (18.8% average over the past five years);
The "intra-Asia route" connecting China with the Asia-Pacific region (including Australia) transported 7.99 million TEUs, accounting for 33.9% of the total traffic (compared to the average of the past five years: 34.2%).
Chinese mainland routes transported 4.32 million TEUs, accounting for 18.4% of total traffic (average of 20.1% over the past five years).
Overall, the share of cargo traffic between China and Europe and the United States remained at 37%, while the proportion of cargo traffic between the Asia-Pacific region increased by 3 percentage points.
In 2023, the largest decline in traffic was on the transpacific route, which fell by 5.5% year-on-year, the Asia-Europe route saw the second largest decline by 4.0%, and the intra-Asia route saw a decline of only 2.3%.
In fact, COSCO SHIPPING Holdings' subsidiary, OOCL, has seen a 1~8 percentage point increase in traffic on all routes, and the decline in consolidated volume is entirely due to COSCO SHIPPING.
When freight rates fell, the demand suppressed by high freight rates was released, so the decline in freight volume was far less than expected.
The price elasticity of consolidation is very large
The decline of several percentage points in freight volume has magnified the impact on freight rates by one or twenty times, and shipping companies have been on a roller coaster!
Let's take COSCO Shipping Holdings as an example:
The revenue of the "transpacific route" was 40.4 billion yuan (down 64.9% year-on-year), accounting for 26.2% of the total revenue (the average of the past five years was 19.3%);
The revenue of "Asia-Europe routes" was 32.9 billion yuan (down 66.1% year-on-year), accounting for 21.3% of the total revenue (the average of the past five years was 24.3%);
Intra-Asia route revenue was RMB43.8 billion (down 51% year-on-year), accounting for 28.4% of total revenue (average of 25.5% over the past five years);
The revenue of "Chinese mainland routes" was 11.4 billion yuan (down 11.5% year-on-year), accounting for 7.4% of the total revenue (the average of the past five years was 6.4%).
In 2022, the single-container freight rate of the transpacific route will reach $3,790, and in 2023, it will drop to $1,350, a decrease of 65%;
In 2022, the freight rate of a single container on the Asia-Europe route will be 3,180 US dollars, and in 2023, it will drop to 1,070 US dollars, a decrease of 66%;
In 2022, the single-container freight rate of intra-Asian routes will be US$1,630, and in 2023, it will drop to US$780, a decrease of 52%;
In 2022, the freight rate per container on the Atlantic route (operated by OOCL) was US$2,850, but in 2023, it will drop to US$1,400, a decrease of 51%;
In 2023, except for Chinese mainland routes, the volume of COSCO SHIPPING Holdings' operated routes will drop by 3.5%, and the average freight rate will drop by 41.6% year-on-year, which is almost 12 times the volume reduction!
The price of container transportation is impressive: the demand increases, the capacity is insufficient, the freight rate will soar several times in a short period of time, and the demand will drop a few percentage points, and the freight rate will immediately plummet. This is called "four or two dialing a thousand pounds"!
Consolidation index, freight rate and gross profit margin
In 2018, the average value of CCFI (China Container Freight Index) was 816 points, and COSCO Shipping held a non-net profit of 190 million.
In 2018, the average freight rate of COSCO SHIPPING Holdings was US$730/container, and the gross profit margin of container shipping and related businesses was 6.84%;
In 2021, the freight rate soared to US$1,797 per container, an increase of 146% compared with 2018 (CCFI increased by 220%), and the gross profit margin of container shipping and related businesses was 42.34%;
In 2023, the freight rate will drop to US$931 per container, a decrease of 48.2% compared with 2021 (CCFI will decrease by 64.1%), and the gross profit margin of container transportation and related businesses will be 15.2%;
Since 2018, COSCO SHIPPING Holdings' container shipping business has two characteristics:
First, the "long-term agreement" signed with the customer plays a role in peak shaving and valley filling, and the fluctuation of freight rate is significantly smaller than that of CCFI.
Second, the rise and fall of freight rates has a great impact on gross profit, especially in the upward phase. For example, in 2021, the freight rate increased by 108.5% year-on-year, and the gross profit increased by 513.6% (about 4.7 times the freight rate increase), and in 2023, the freight rate fell by 58.3%, and the gross profit decreased by 85% (about 1.5 times the freight rate decrease).
The cause of the above situation should be found in the cost structure of container shipping.
Cost dances with price
For all industries, the relationship between cost and price is the most important industry characteristic. For example, in liquor brewing, it can be said that the cost is the cost and the price is the price. Moutai will raise the ex-factory price of 53 degrees Feitian by 20%, which will not have a direct impact on production costs. The cost of oil and coal mining is determined by geological conditions, equipment and technology, and is not directly related to the price.
Container transportation is different, the cost of a single container transportation is linked to the price:
From 2019 to 2021, the price of container transportation increased significantly. During this period, COSCO SHIPPING Holdings' transportation volume increased by less than 5%, but shipping revenue increased by 126.5%, and shipping costs also increased by 44%.
From 2022 to 2023, the price of container transportation has dropped significantly. During this period, COSCO SHIPPING Holdings' transportation volume fell by less than 4%, while shipping revenue fell by 56.2%, and shipping costs decreased by 33.4%.
Break down the cost of consolidation and transportation: including "transportation cost", "voyage cost", "ship cost" and other three major costs.
The transportation cost mainly includes container costs, cargo costs and other related expenses, the voyage cost is mainly fuel costs, port fees and other related expenses, and the ship cost is mainly ship depreciation, ship rental and other related expenses.
In 2019, the three major costs were $388/box, $174/box, and $131/box. They accounted for 56%, 25.1% and 18.9% of the cost per container, respectively.
In 2021, the cost of transportation increased to $646/box, 66.4% higher than in 2019, the cost of voyage increased to $187/box, 7.4% higher than 2019, and the cost of ships increased to $167/box, 27.5% higher than in 2019. Compared to 2019, the cost of shipping per container increased by $307, 84% of which came from transportation costs (mainly container fees).
In 2023, transportation costs fell to $786/box, 47.8% lower than in 2022, voyage costs fell to $231/box, 15.9% lower than 2022, and ship costs fell to $190/box, 18.3% lower than 2022. Compared to 2022, the cost of shipping per container decreased by $420, of which 79.4% came from transportation costs.
Consolidation costs fluctuate with prices, and about 80% of them come from changes in transportation costs. When demand grows, all links in the container transportation industry chain are under pressure at the same time, and the price is confidently raised. Container rents have risen, land transport prices have increased, port stacking fees have increased, and cleaning/maintenance charges have increased. When demand falls, all links are "underfed......
Studying the financial report of COSCO Shipping Holdings, it was found that it could eat the largest cake in the entire industrial chain when the freight rate rose. For example, in 2019~2021, the price will increase by 120% and the cost will increase by 40%; In 2022~2023, the price will drop by 60% and the cost will only drop by 30%.
In 2019, the freight rate and cost of a single container were US$761 and US$693, respectively, earning US$68 per box, with a gross profit margin of 8.9%, and in 2021, the freight rate and cost of a single container were US$1,797 and US$1,000, respectively, earning US$797 per box, with a gross profit margin of 44.4%;
The single-container freight rate in 2023 will be $931, which is $1,301 less than in 2022. In 2022, the cost of a single container will be as high as $1,205, and if the cost does not decrease with the freight rate (similar to liquor and other industries), it will cost $274 per container shipped in 2023.
In 2019, the total volume was 25.47 million TEUs, and the unit revenue and cost were US$761 and US$693, respectively, earning US$68 per container and a gross profit margin of 9%.
In 2021, the total volume will be 26.91 million TEUs, with unit revenue and cost of US$1,797 and US$1,000 respectively, earning US$797 per box and a gross profit margin of 44%.
In 2022, the total volume will drop to 22.41 million TEUs, and the unit revenue and cost will increase to $2,232 and $1,205 respectively, earning $1,027 per box and a gross profit margin of 46%.
In 2023, total volume fell further to 23.56 million TEUs, unit revenue decreased 58.3% to $931, unit cost decreased by 34.8% to $786, and gross margin was 16%.
Comparing 2019 before the collapse of freight rates and 2023 after the collapse of freight rates, the data in two aspects prove that the king of the cycle is not "where to go":
One is the freight rate. Compared to 2019, the volume in 2023 decreased by 8.5%. If "where to go", the freight rate should be lower. In fact, the unit freight rate in 2023 is 22.3% higher than that in 2019;
The second is cost. Compared to 2019, the cost in 2023 is 13.3% higher, but the increase is much lower than the freight rate, so the gross profit margin has increased by nearly 7 percentage points.
*The above analysis is for reference only and does not constitute any investment advice
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