Back to the future for container shipping

THE immediate past couple of years have been good for the big container shipping lines, unlike almost the entire period since the “box” came on the scene to replace the slings and pallets of the conventional cargo liner age.

The Big Question has been: “Could this last?”

My answer has been: “Probably not.”

Views among the experts have been mixed; some expect a significant decline in rates, but not a return to the bad old days.

Freight-rate benchmarking and market analytics platform Xeneta said: “The year ended in somewhat anti-climactic fashion for long-term ocean freight rates, with the latest data showing a decline of just 0.1 per cent.”

Just before Christmas, Xeneta had observed that, following on from a steep 5.7 per cent month-on-month fall in November and with weak spot rates defining the market, that slight dip was a “largely positive one for ocean carriers”. It warned, however, that “far worse is set to come in 2023” for container shipping lines.

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It noted that December was the fourth consecutive month that long-term ocean freight rates had dipped, with spot rates having fallen – and in dramatic fashion – since early summer.

Despite this negative trend, the Xeneta Shipping Index (XSI) has stayed 70 per cent up year on year, after a strong start to 2022, as port congestion and other disruptions clogged up supply chains and drove up costs.

However, Xeneta’s chief executive officer (CEO) Patrik Berglund cautioned that the narrative for the beginning of 2023 looks to be “very different”: “At first glance, this month’s data appears to stall the negative curve, but this is a little misleading. Firstly, this is due to fewer long-term contracts being signed at this time of year, rather than new agreements coming in with the same rates. When we do see contracts being signed, across all trades, we’re seeing them agreed at below the current average for all valid rates.”

He added: “So, this is really just the calm before the storm. As more and more long-term contracts expire in the new year, expect the industry to post far greater month-on-month declines. All indicators point towards considerable rate drops from today’s levels, with several of the major Far East trades pointing towards new long-term contracts that are much closer to the currently-far-lower, spot-rate benchmarks.”

Berglund, returning to the Big Question, said: “We’ve seen a golden age for the carriers since the beginning of the pandemic, but those days are all but gone now.”

He qualified this assessment – gloomy for the shipping lines but cheerful for shippers – by pointing to the highly unstable global economic and political situation, saying: “There are so many uncertainties heading into the new year that it’d be unwise to make clear-cut forecasts. We’ve all seen how quickly unpredictable global events can develop and influence the markets.

“However, the fundamentals look weak for the immediate future and the spot rates have cleared a path for long-term rates to head south.”

Berglund listed the unknowns that make predicting the container shipping fraught with difficulty: Will the rolling back of the most stringent zero-Covid measures in China prompt a slight recovery? What will happen geopolitically? And how will the cost-of-living crisis evolve in the months to come?

These uncertainties have led to one of the shipping industry’s best analysts admitting it has got its predictions wrong until very recently.

Drewry, a London-based maritime research consultancy, had been among those who thought the shipping lines would be able to maintain relatively high rates. But, in a statement announcing its latest Container Forecaster report, it said: “We gave carriers too much credit by thinking they would proactively manage capacity. A deep-seated instinct to preserve volumes kicked in, leaving carriers without control of the market.”

It added: “Up until a few months ago, Drewry was fairly confident that shipping lines would take the necessary steps to reduce capacity before the market got completely out of hand. We were wrong (although we have always said carrier behaviour was a major risk to our forecasts).”

Drewry added: “Over the course of this extraordinary phase in container shipping’s history, we convinced ourselves – after much dialogue with various stakeholders – that a structural change had occurred in the industry, that consolidation and more efficient carrier alliances would help change old habits. That was wrong too.

“Belatedly, it is now clear to us that carriers have lost control of the container market, have failed to pro-actively manage capacity, and will act on capacity only when they are forced to do so by heavy losses.”

So what happened? Drewry had this response: “When the market first started showing signs of weakness early last year, the deep-seated instinct to preserve volumes and lower rates to secure short-term bookings, rather than to control capacity, kicked in.

“In hindsight, that was the moment when carriers needed to take action, but failure to act then has made them now powerless and completely exposed to external market forces. That is not to say that carriers have done nothing, but despite the various service suspensions and raft of blank sailings, nothing has worked. Spot rates have continued to fall on a weekly basis, rapidly closing in on five-year 2015-19 averages.”

In other words, the over-capacity that has plagued container shipping since its inception has returned with a vengeance. Drewry said: “Now that the container bubble has burst, the record container ship new-building order frenzy of 2021-22 – when some 6.7 million TEUs (20-foot equivalent units) were contracted – now appears even more excessive than it did at the time.”

Drewry said there will be no “managed decline” – that is, effective and timely matching of capacity with demand – as it had predicted previously. It still thinks there will be major capacity reconstruction, but this will be carried out “to prevent freight rates from falling below break-even, not to gently ease profit margins above historical averages”.

Drewry admitted: “We were wrong to believe that increased market concentration and new-found market power would stop shipping lines from repeating the mistakes of the past.”

So it looks like it is back to the future with container shipping lines making, at best, extremely thin returns. Probably it will also mean they will have to return to their boards to face that existential question: “Why are we still in the box ship business?”