In 2021 the shipping industry saw record profits due to the dramatic increase in container charges. In the same year, costs also grew at a much slower rate, allowing shipping companies to generate huge earnings and dividends. Similar growth is not forecast for the future, as economies are beginning to slow their growth and consumer demand for goods falls as inflation reaches record highs.
With that in mind, let's take a look at two companies who benefited massively from last year's shipping boom and see if they still warrant investment today.
ZIM (NYSE: ZIM) provides container shipping and related services internationally with a fleet of 118 vessels, of which 114 are chartered. Its services include door-to-door and port-to-port transportation and a cargo tracking service. The company's earnings before interest and tax (EBIT) grew 228% year-over-year (YoY) to $2.243 billion, with full-year guidance raised to between $6.3 billion and $6.7 billion. The company generates one of the highest profit margins in the industry due to its asset-light structure. By chartering most of its vessels, ZIM has more flexibility when expanding to new trade routes.
While the bulk of the company's revenue growth came from higher container prices, some growth came from a boost in traded volume. YoY volume grew by 5% in Q1 2022 compared with an average market decline of 1.8%. It is forecast that the supply and demand for container ships will converge in 2023, significantly lowering the prices these companies can charge. This will considerably hurt ZIM's profit margins as its revenue growth came predominantly from the 100% increase in freight rates over the past year. The company's planned expansion will raise costs while revenues fall, thus damaging its financial position and prospects.
Star Bulk Carriers (NASDAQ: SBLK) is engaged in the worldwide transportation of dry bulk cargo such as iron ore, coal, and grain. It has the largest bulk fleet amongst its U.S. and EU-listed peers at 128 vessels, with an average age of 10.1 years. The company's revenue is up 80% YoY to $360.88 million, and net income over the same period is up 376% to $170.36 million. This income growth allowed the company to cut its debt which has fallen by 43% since 2020. It also allowed the company to boost its dividend payment which reached a yield of 21.31%
China's zero covid policy has significantly decreased industrial output, while other Asian countries have banned exports of certain foods. These policies will hurt the dry bulk trade as demand for energy and materials falls in China and food exports decrease. The company predicts that the dry bulk sector will only grow by 0.3% in 2022 but will increase in 2023 by 1.7%. This slowing growth, along with the expected increase in newly built ships in 2023, will put downward pressure on prices for shipping companies which may lead to lower dividends.
The industry had an incredible year in 2021 in terms of profits, debt reduction, dividend payments, and share buybacks. However, that growth will not continue in the future, as economic conditions reduce the demand for traded goods and the supply of vessels increases, putting downward pressure on prices. Although many of these companies have utilized the pandemic to repair their balance sheets, there are many headwinds facing the sector which will cause a lot of damage in the short to medium term.
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