On April 25, the Shanghai Containerized Freight Index (SCFI) reached the highest record since October 2009: 2,979.76. SCFI is an estimated index that shows the freight rates for container transport from the main ports of China.
Baltic Dry Index (BDI), which indicates prices of transporting major raw materials by sea, also has been on a constant rise since February. As of June 18, BDI reached 3,218, which is a 1,915-point increase from the record of February 10.
Reports say because of these record high rates, South Korean shipping and shipbuilding companies are earning the highest profits ever this year. But there are some concerns that this winning streak is not sustainable. So, what are the reasons behind the market boom and how long will this last?
Five-year plan to rebuild shipping industry
One factor behind the boom is the government’s Five-Year Plan to Rebuild the Shipping Industry launched in April 2018. This plan was initiated shortly after Hanjin Shipping, once the seventh biggest shipbuilder in the world, went bankrupt.
The plan provides governmental aids to secure consistent cargo volumes and run a system that can mutually benefit shipping companies and shippers. It also promises to have more “low-cost” and “high-efficiency” ships and support shipping companies for sustainable growth.
The Ministry of Oceans and Fisheries say that the overall sales in the shipping industry have increased since the launch of the plan. According to the Korea Maritime Institute’s latest report, the industry’s overall sales were about 29 trillion won (US$23 billion) in 2016 and is estimated to reach 40 trillion won (US$35 billion) this year.
Although battered by the COVID-19 pandemic, the container traffic volume only decreased by 0.5 percent point in 2020, said the Ministry of Oceans and Fisheries in January. The ministry explained that this was due to increased demand in the American continent and the government’s active and continued support of the plan.
Improved global market conditions
The consistent increase in freight prices is also one of the factors that pushed the market boom.
HMM Co. Ltd. and SM Line Corp., two giant shipbuilders in South Korea, for example, gained more than what they earned the whole of last year within the first quarter of this year. HMM’s last year’s profit was 980 billion won (US$869 million), while their profit in 2021’s first quarter is expected to range from a minimum of 750 billion to 1.2 trillion won (US$665 million to US$1 billion).
The sharp increase in the cargo transport volume and freight rates is from the rising demand in goods, rather than service, since the outbreak of COVID-19, said Bae Jae-hoon, CEO of HMM, at the Korea Shipping and Maritime Industry CEO Forum held on April 23.
Bae said that even the Suez Canal crisis worked as a business opportunity for the Korean shipping and shipbuilding companies.
“The freight prices for European routes had been dropping earlier this year,” Bae said. “But the prices climbed back up as the passage at the Suez Canal was blocked. The prices then stayed around at the same level as that for American routes.”
However, small- and middle-sized export companies point out that higher freight rates are not always good news. This is because higher freight rates mean higher shipping costs and lower profits.
According to a survey conducted by the Korea Federation of SMEs in April, 20.1 percent of the respondents replied that the rising shipping cost cut into their profit by more than 20 percent. Also, 24.9 percent of the respondents said their profit decreased by five to 10 percent due to the higher freight rates.
The boom will stop soon
An official from the Ministry of Oceans and Fisheries, who wished to be anonymous due to the sensitivity of the issue, told Maritime Fairtrade that he thinks the boom in the shipping market will continue until later this year.
“The demand for new container ships is still high and shipbuilding companies are still receiving many orders,” he said. “I think the market situation will remain the same throughout this year.”
“The current boom would last at least for the first half of this year,” Bae from HMM said. “Some experts expect the market conditions to last until the third or even fourth quarter, but that’s just what they hope for.”
Um Kyung-a, an analyst at Shinyoung Securities Co. Ltd., said that the freight rates could drop from 2023 when the new ships ordered this year are all delivered.
“The demand (for new ships) will not drop quickly,” she said. “So, it will depend on how much can the supply meet the demand.”