Supply chains generally aren’t something most people think about a lot. In the past, these complex global networks — which consist of shipping companies, trucking businesses, logistics services organizations, last-mile delivery companies, and more — allowed companies to move goods around the world quickly and easily. Buying a product from an e-commerce retailer and seeing it arrive the next day was very much the norm.
Since the start of the COVID-19 pandemic, however, the world has been experiencing a major global supply chain crisis. With Covid having an impact on both consumer spending patterns and transportation availability, supply chains have broken down, resulting in worldwide product shortages. You may have noticed this yourself. If you’ve tried to buy a Playstation 5 or a new vehicle recently, for example, you’ve probably found that retailers have little to no inventory.
While the global supply chain crisis has created huge challenges for many businesses, there’s one group of companies that has actually benefited from the disruption and that’s the world’s shipping companies . At present, many shipping businesses are generating record profits. Here’s a look at why shipping is booming right now, and what that might mean for your portfolio.
Shipping is the backbone of the global economy
Shipping companies play a major role in the world’s supply chains. As the backbone of the global economy, ships transport food, medicine, electronics, and much more around the world on a daily basis. Ultimately, much of what we consume or use in our everyday lives has been transported by ships at some stage, either in the form of raw materials, components, or finished products.
While the shipping industry has been around for thousands of years, it was revolutionized in the mid-1950s with the invention of standard-sized, corrugated steel shipping containers. These containers have dramatically lowered the cost and time needed to transport goods internationally and enabled businesses to shift production to lower-cost destinations overseas. This is due to the fact that the goods can be loaded and unloaded, stacked, transported efficiently over long distances, and transferred from one mode of transport to another (e.g., from container ships to rail transport flatcars) easily — all without being opened and while being stored securely. Thanks to their advantages, many companies have been able to adopt “Just-in-Time” (JIT) manufacturing — a lean production system in which materials and parts from suppliers are timed to arrive just before they’re needed for production.
However, there’s still a problem: There’s a limited supply of these standardized shipping containers. Globally, there are only around 25 million containers and 6,000 ships that can transport them. This means that it’s crucial for the network of ships and containers to stay synchronized with other parts of the supply chain such as ports, trucking companies, railroad operators, and warehouses, in order to avoid supply chain disruption.
Now, since the start of COVID-19, this network of ships and their containers has been thrown into chaos. Early on in the pandemic, many shipping companies reduced capacity in response to lower levels of demand. With companies all over the world laying off workers and stores closing due to lockdowns, shipping companies assumed that demand for their services would fall sharply.
This caused major logistical problems when demand for consumer goods (i.e., laptops for working at home) picked up sharply several months later. With less ships available and shipping containers stranded in all the wrong places, the global logistics network broke down, creating massive backlogs — which are still in place today.
Bottlenecks at US ports due to staff shortages compounded the problem. In January of this year, for example, a record 1091 cargo ships were forced to queue outside America’s largest two ports because terminal staff didn’t have the capacity to process the cargo. Before the pandemic, it was unusual for more than one to wait for a berth.
As a result of this supply and demand mismatch, demand for shipping containers is currently at record levels, and shipping businesses are profiting. Like oil and gas companies, which are benefitting from sky-high energy prices, shipping firms are seeing their revenues and profits explode on the back of high ocean freight rates.
Massive profits in 2022
Take Danish shipping giant AP Moeller-Maersk, for example. Recently, it posted revenue of $19.3 billion for the first quarter of 2022, up 56% year-on-year, along with a 175% increase in underlying profit2. On the back of these strong results, the group increased its guidance for the year.
Danaos, which is one of the world’s largest independent owners of container ships, is another good example. For the first quarter of 2022, it posted operating revenue of $230 million, up 74% year-on-year, along with a 306% increase in earnings per share3.
Overall, the combined profit of the world’s shipping companies is projected to hit $300 billion this year4, according to maritime consultancy Drewry. That would represent a 40% revenue uplift on the $214 billion made in 2021. And these elevated profits could persist for a while. Many logistics experts believe that soaring shipping costs will extend through much of 2022 due to supply and demand imbalances.
What this means for investors
Supply chain issues won’t be resolved simply or easily — and they’re impacting many different corners of the market. They’ve contributed to inflation, caused massive stocking issues for some big box retailers, and of course, are helping produce record profits for these shipping companies.
While the global supply chain may not be the first thing that comes to mind when you think about building a portfolio, it’s an influential force on the economy. After all, supply and demand is one of the first basic economic principles you might learn in school.
If you’re thinking about updating your portfolio, looking into how these supply chain troubles impact your assets (or potential assets) could be another piece of knowledge that helps guide you toward your financial goals.
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