There have been three recent stages of evolution. Pre-pandemic, pandemic, and post- pandemic. Container shipping has seemingly been battered, embraced, and — going forward — something in between!
The liner companies are coming off immense and record profits in 2021 and 2022, with 2022 being in excess of $275 billion — significantly higher than even 2021 and well above the pre-pandemic levels.
Whilst there are doomsayers out there predicting a huge drop off for 2023 and a return to the more traditional doldrum days of liner shipping and profitability, there is much to be considered and is quite a reasonable expectation for container shipping to see a very slow and gradual return to normality in spite of the massive orderbook for new ships.
What can we expect going forward? First off, the orderbook for new containerships stands at record levels. The number of anticipated TEU capacity to be delivered in 2023 and 2024 at about 2.4 million for 2023 and 2.8 million for 2024 is more than double the deliveries in the two years prior. The total orderbook as of now is over 7 million TEU, the highest it has ever been in raw numbers. Although, to give proper statistical balance, it accounts for only 30% of the existing fleet. (In 2008 the orderbook represented over 60 percent of the existing fleet.)
So how can and how will the carriers deal with this huge influx of tonnage and avoid the boom/bust cycles that have previously been the bane of the industry?
We see numerous ways for the liner companies to mitigate the potential damage and to keep profitability at what, for many, will be surprisingly high levels.
Demand is predicted to grow at a rate that is far below supply. Leading consultancy firm Drewry’s calls for a base case demand growth in 2023 of 1.9 percent which is well below the annual TEU capacity growth for the next two years of over 30 percent, so managing the capacity will be a key to the ultimate results.
We do not foresee a great deal of scrapping. When the market was in a dramatic oversupply situation in 2014-15, vessels predominantly owned by independent third-party owners were being scrapped on expiration of their charters. Several as young as ten years of age were sent to the breakers and, for a while, fifteen years of age became the norm. With freight rates (and charter rates) at record levels in 2021 and 2022, there was virtually no scrapping. Do not expect scrapping to dramatically impact the supply.
Slow steaming might help. Driven to a large extent by the need to reduce emissions under the growing list of regulations emanating from the alphabet soup of regulatory bodies and by the high level of fuel costs, it has been suggested by no less an authority than Søren Skou, the head of Maersk, that such slow steaming could reduce capacity by an effective 5 to 15 percent.
There are two further capacity reduction factors in play. One controlled by the liner companies and one not. Port congestion having eased somewhat is still a capacity reducing factor. The extensive port congestion of 2021 spread throughout 2022, and Drewry estimated that 15 percent of effective capacity was lost this past year due to congestion. There will be a continuing impact of port congestion but likely not as high in 2023.
Blank sailings are a significant capacity-reducing tool that the liner companies can employ, albeit the regulators will be looking hard at any price manipulation activity. At the beginning of the year, as many as 30 sailings a month in the major trade lanes were being cancelled. As of now, it is down to about 20 per month.
Liner company behavior is often both undisciplined and unpredictable, but there is an expectation that there will be enough momentum in the carrier community to try to keep freight rates at relatively high levels. With, for example, trans-Pacific utilization hovering at about 85 percent, that is significantly below the level that would be needed to prevent a drop off in freight rates.
As I said at the beginning, we are hovering between boom and bust.