Container shipping market has definitely changed, but quick normalization is not about, latest report clarifies Container Forecaster de Drewry. It appears that we are at the beginning of the end of the bull run for the sector. The drop in spot rates has taken hold and has dragged on for four months, with declines increasing week after week. Shipping volumes along most sea lanes also fell to the same point a year ago, with high inflation eroding confidence that they will pick up again.

Shipping lines have shown they can still make staggering profits even when moving fewer containers, posting record EBIT figures in 1Q22 despite lower volumes, but the shine is starting to fade and investors are getting nervous about the value of shipping stocks that are down around 22% since the beginning of the year.

Extreme freight rates were always known to be unsustainable, the only questions were; when would the market change? and how fast?

An ace up his sleeve

In the last Container Forecaster, Drewry He states that the container market has definitely changed, but the reduction of the high rates and the profits of the shipping lines will continue for some time.

Confidence has faded with the world currently mired in a “polycrisis”, but shipping lines still have an ace: supply chain congestion. Once this point is resolved, it would be expected to see a very rapid normalization of the market.

However, there are no signs yet that port bottlenecks are going to disappear. AIS ship tracking data reveals that the number of container ships waiting outside major ports is growing, while customer feedback from Drewry they have changed little from the previous edition, i.e. a solution is not expected before 2023.

When asked when port congestion issues in North America would be resolved, the majority of respondents said in 1H23 (48%) and another 40% were even more pessimistic, saying it would take until 2H23 or later. No improvement in US logistics infrastructure was cited as one of the reasons this region is expected to be the last to emerge from the operational chokehold.

Expectations for European congestion were more in line with Asia than North America, but again around 73% of those surveyed opted for no solutions to be seen before 2023.

Capacity will not improve 

Drewry It also has no changes to its supply chain recovery schedule and estimates that effective containership capacity will be about 15% below potential this year, after a 17% reduction in 2021.

Things that could extend the supply chain recovery include China's refusal to budge on its Zero-Covid policy which has been proven to create disruptions at any time, and ongoing port labor contract negotiations in USWC.

A world plagued by inflation

Living in a world with high inflation increases the risk of labor shortages stemming from possible strikes as new wage demands pile up. The logistics sector has already suffered strikes (or threats) in German ports, on the railways in the United Kingdom and from South Korean truckers.

However, while congestion issues remain a challenge around the world, they clearly do not have the same influence on rates as they used to, as evidenced by the drop in spot rates in recent months. The situation remains bad enough to prevent its precipitous collapse, but it seems that the feeling of concern about the global economy and container demand is reasserting itself as a determining factor in the assessment of rates.

As things stand, Drewry still expects the market to grow (although it has lowered its global port throughput growth forecast in 2022 to 2,3%, from 4,1% previously), but that is certainly not a given, especially with the speed at which that economists are downgrading GDP projections. A more severe-than-expected slowdown in volumes, or a contraction, would accelerate the decline in spot rates and reduce the time it would take to clear port bottlenecks.

Projections

In perspective, Drewry forecasts a significant easing of the container shipping market from the second half of 2023, when supply chain congestion is expected to have cleared. Which will also coincide with a significant influx of new container ships.

Furthermore, the consultancy estimates that the jams will last long enough for shipping lines to secure decent contract renewals next year, though much will depend on the speed of the spot market downturn and how airtight existing contracts are.

For Drewry, logic indicates that the shipping lines will take the necessary measures to maintain an advantageous position. In a survey, about three-quarters of those asked said they expect shipping lines to continue to prioritize profits over market share with strict capacity discipline.

Therefore, one can expect to see more blank sailing on the agenda next year, this time motivated by the need to shore up spot rates rather than an operational need.

Ultimately, according to the consultancy, the end of the container boom cycle will require a paradigm shift from all stakeholders. Shipping lines must address the looming environmental and overcapacity risks by scrapping their older, less environmentally friendly vessels, while shipping lines should wait for the market to come back to them before committing to lengthy contracts.