Is the container ship market's once-in-a-century '狂欢' over? Shipping giants speak out

From a sky-high price of US\$20,000 to now falling below US\$5,000, and with weakening demand, freight rates will decline across the board. Undoubtedly, this once-in-a-century "狂欢" (celebration) in the container shipping industry is coming to an end.

On August 26, Rodolphe Saade, CEO of CMA CGM, stated that freight rates in almost all regions have been declining in recent weeks, and "we expect this downward trend to continue, but it won't be drastic; it will be a soft landing."

CMA CGM's prediction aligns with the World Trade Organization's (WTO) observations. The WTO recently pointed out that the flow of goods trade slowed down last quarter and may remain weak in the second half of the year. This means the bubble period for the container shipping industry is about to end.

Saade said: "At the height of the pandemic, our container freight rates on the China-to-Northern Europe route reached US\$14,000/FEU, now it's down to about US\$9,000, and it's still falling."

He stated that some obstacles still exist in the global supply chain network, such as severe congestion in the US and Europe. However, as demand is decreasing, this has a certain mitigating effect on port congestion.

CMA CGM is currently the world's third-largest container shipping company, second only to Mediterranean Shipping and Maersk. According to the latest data from Alphaliner, CMA CGM currently operates a fleet of 584 vessels with a total capacity of 3.316 million TEU, accounting for 12.9% of the market share.

Last week, with double-digit declines on the US West Coast, the Shanghai Containerized Freight Index (SCFI) fell 8.03% to 3154.26 points, marking not only an 11-week decline but also the largest drop since the pandemic, with the US West Coast falling by as much as 11%. Meanwhile, the Ningbo Containerized Freight Index (NCFI) also dropped 7.3% to 2400.3 points, with freight rates on all 21 routes declining, indicating a continued downturn in the market and a difficult-to-stop downward trend.

Saade's views also echo those of the World Trade Organization (WTO) this week, which stated that the flow of goods trade slowed in the last quarter and that the weakness is likely to continue into the second half of the year.

Lars Jensen, CEO of Vespucci Maritime, a well-known Danish container shipping consultancy, believes that the accelerating decline in spot rates for container shipping is clear evidence of a market downturn. Lars Jensen refers to the Asia-to-US West Coast and Asia-to-Northern Europe routes; before this wave of decline, the US West Coast rate fell only 10% in five weeks, while the Northern Europe rate took eight weeks to fall 10%.

The Drewry World Container Index (WCI) shows that as of August 25, the spot freight rates for 40-foot standard containers (FEU) from Shanghai to Los Angeles and Shanghai to Rotterdam fell by 6% and 5% respectively to US\$6127 and US\$8010, down 46% and 42% year-on-year.

According to reports, New York freight forwarder Shifl predicts that transpacific freight rates to the US West Coast in September will fall to US\$4900/FEU, a 72% drop from the peak in September 2021 (US\$17,500/FEU).

However, there are also different opinions in the market. Some experts have analyzed that with the addition of new ships, post-pandemic freight rates may return to pre-pandemic levels; however, other experts believe that even if freight rates are adjusted, under the support of high oil prices, freight rates are unlikely to return to pre-pandemic levels, but the profitability of the container shipping industry is unlikely to return to the high point of the year before last.

Industry insiders say that there is an unspoken consensus among major shipping companies and alliances that there cannot be cheap freight rates again. In particular, shipping companies have many ways to control freight rates, such as reducing sailings, slowing speeds, and phasing out old ships, all of which can effectively control capacity and prevent oversupply.

Since the outbreak of the pandemic, the global container shipping market has experienced a once-in-a-century boom. From the second half of last year to the beginning of this year, container freight rates soared. At the most exaggerated time, the market price for a container from Asia to the US West Coast (FEU) reached as high as US\$20,000, compared to the recent drop below US\$5,000, which is a significant decline.

Some experts say that the suppressed demand for goods during the pandemic erupted as countries gradually reopened, leading to a surge in transportation demand and plunging the world into a predicament of high freight rates and labor shortages for about two years. Now, with the slowdown in trade, the bubble in the shipping industry is expected to come to an end.

Data from research firm IHS Markit shows that the US manufacturing, services, and composite Purchasing Managers' Index (PMI) in August hit a more than two-year low, with services and PMI contracting for two consecutive months, indicating a significant economic deterioration. With inflation remaining high, the future economic outlook is grim.