Container shipping equities have started recovering after significant declines in 2Q23, anticipating an uptick in demand with the peak season’s arrival, albeit later than historical standards. The Drewry Container Equity Index increased 10.4% in July (as of 21 July 2023), but due to the 24.0% decline in 2Q23 (vs 1Q23: +11.3%), the index fell 6.7% YTD (ending 21 July 2023). The S&P 500 posted an 13.6% growth during the same period.
The Drewry Container Equity Index trades at a P/B of 0.6x, a 38.7% discount to its pre-pandemic average (2013-18). Plunging spot rates should translate into weaker earnings in 2H23 despite higher volumes than in 1H23.
The Drewry World Container Index (WCI) at USD 1536.90 per day per 40ft container as of 20 July 2023 (-28.0% in YTD 2023) was nearly half its 10-year average, indicating that overcapacity is dragging down the earnings of the industry. However, the index remained stable (+0.1%) in June, suggesting that the rate of decline is reducing.
With effective capacity forecast to grow 26.2% in 2023, supply should outpace demand significantly. Thus, any uptick in demand will unlikely prevent carriers from making a net loss in full-year 2023. Nonetheless, carriers continue to expand their orderbooks, placing 304 kteu on order in June (+57.7% YoY). However, in 1H23, the new orders placed were down 39.7% YoY to 898 kteu
While we wait for the announcement of 2Q23 results by the carriers, we focus on the liquidity of the container shipping industry. The operating cash flow for the industry decreased 75.7% YoY to USD 11.0bn in 1Q23, driven by the 80.9% YoY decline in the net income to USD 4.8bn.
In 1Q23 the operating cash flow declined 52.7% QoQ (vs 4Q22: -32.5%). While cargo volumes are forecast to rise 6.0% in 2Q23, the WCI marked a decline of 13.4% in 2Q23. We thus expect further reduction in net income and in turn the operating cash flow in 2Q23.
Amid the downturn, carriers reduced their capex in 1Q23 by 62.8% YoY to USD 1.3bn. On a quarterly basis, the reduction was even sharper at 86.4% QoQ (vs 4Q22: 54.0%). While the outflow on acquisitions was 3.5x higher YoY, it marked an 88.0% decline QoQ in 1Q23 (vs 4Q22: -2.6% QoQ).
The cash and cash equivalent for the industry grew 0.1% YoY as well as QoQ, totalling USD 108.6bn. In 2Q23, there will be a significant outflow in the form of massive 2022 dividends to be paid to the investors, thus, possibly marking a QoQ decline in cash.
The industry’s gross debt reduced 3.2% QoQ at end 1Q23 to USD 51.3bn, which coupled with stable cash, led to the net gearing improving to -30.5% in 1Q23 (vs 4Q22: -28.5%).
Source: Drewry Maritime Financial Research
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