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Eroding fundamentals portend tough times for the industry
Alix Partners’ 2022 outlook for container shipping observed that “the current mismatch of supply and demand could reverse, perhaps from 2023”. It looks more and more like we got that forecast about right.
The container shipping market is cooling and some shippers are starting to take advantage of the change in temperature. Many more shippers, keeping a cautious eye on the uncertain medium-term outlook for rates, capacity and service, will likely follow suit before long.
The fundamentals of the container shipping industry looked very different in the middle of 2020, when limited vessel and infrastructure capacity collided with a sudden upsurge in demand. Shipping rates soared into the stratosphere, punctuality deteriorated, and container ship operators prospered mightily. But as our report pointed out, the imbalance could not last indefinitely.
In fact, it may be coming to an end. Maritime trade is down. New construction prices are falling. Contractualisation of container space on board cruise ships is slowing down. Rates fell sharply in the second half and may not have bottomed yet (see Figure 1). And the scarcity of container capacity gives way to a glut.
A prolonged inversion of supply and demand would have serious consequences for line operators. Their profitability is not in jeopardy — yet. Although rates are falling, they remain well above historical averages and rates in effect just before the onset of the COVID-19 pandemic. But the precarious economic outlook, a looming increase in capacity and rising interest rates and financing costs will put increasing pressure on ocean liners. If shipping rates continue to fall through 2023, the curtain may finally fall on the unprecedented prosperity of container operators.
The consequences of lower fares in the longer term would extend far beyond ocean liners to stakeholders around the world, from shipbuilders and port operators to shippers and consumers. Moderate demand could ease inflationary pressures, help restore some order to supply networks and enable carriers to raise their on-time performance from the historic depths to which it sank in 2021. Overall schedule reliability has been trending up since the start of 2022reflecting both the decongest the main port destinations and a decline in demand for space for container ships, which is reflected in lower spot shipping rates (see Figure 2).
The decline in demand may persist for some time. The dollar value of container space shipping contracts on ships still under construction has been trending downward since the start of 2022, indicating that shippers anticipate a slowdown in their own business that will moderate their need for container space (see Figure 3). Financial markets seem to share this view.
The slowdown in maritime activity is a bad sign for carriers, which have added nearly 6 million twenty-foot equivalent units (TEUs) of capacity in recent years. Carriers are now beginning to take delivery of these new builds, with more on the way (see Figure 4)
Prices for these new builds have fallen from their late 2021 peak, and industry insiders are reporting that shipyards have started offering discounts again (see Figure 5). Carriers, it seems, have their doubts about further capacity expansion.
As well they might. Maritime trade has been in decline since October 2021, and if the slowdown in global economic activity persists, carriers risk reverting to the bad old days of too much tonnage chasing too little cargo (see Figure 6).
Senior container carrier executives remember the bad times vividly, which helps explain why they fought such tough negotiations with shippers when they had the upper hand in price negotiations. Now the advantage may be shifting to the shippers’ side of the negotiating table. Shippers may soon have the chance to do good business themselves.
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