Withdrawal of ships! Delivery of ships! The container shipping market is turbulent

After experiencing a boom in the past two years with soaring freight rates, the global container shipping market in 2023 is expected to face a drastically different situation. With a significant contraction in market demand and rapid growth in capacity, freight rates and charter rates have continued to plummet, leading to the emergence of renewed long-term contracts, reduced sailings and capacity, early vessel returns, and early delivery of vessels.

Freight rates have plummeted by 77%, and the downward trend continues.

The World Container Index (WCI), compiled by shipping consultancy Drewry, shows that as of December 30, 2022, spot container shipping rates have plummeted by 77%, and further declines are possible, signaling the end of record profits for shipping companies.

Drewry estimates that unless there are delivery delays, global new capacity will reach approximately 2.5 million TEU this year, setting a record high. At the same time, shipping companies also have to contend with the economic downturn caused by US inflation, multiple interest rate hikes, and the European energy crisis, facing the dual challenges of reduced global trade and a surge in vessel supply.

Alexia Doagani, an analyst at Barclays, believes that shipping rates will not stabilize until the global economy improves, the current destocking cycle ends, and consumer behavior returns to normal. Until then, shipping companies will still need to work hard to negotiate with customers to maintain the value of long-term contracts. Factors favorable to shipping companies include the unpredictable impact of China's reopening and the possibility that geopolitical developments such as the Russo-Ukrainian war could further disrupt the market.

However, negotiations between shipping companies and customers may be very difficult, and as spot rates fall, contract prices are expected to follow suit. Christian Roeloffs, CEO of Container xChange, an online platform for container logistics, believes that freight forwarders will remain on the sidelines this year, especially at the beginning of the year.

Regarding the outlook for the Asian and Chinese markets, some institutions believe that the market is striving to achieve diversification of supply chain procurement and manufacturing outside of China; this is a long-term process that requires companies to develop strategies to seek more resilient supply chains. It is expected that cargo volume in the Asian regional market will continue to grow, and countries such as Vietnam and India will become potential replacements for Chinese manufacturing.

Sea-Intelligence warns: "Shipping companies currently have a large amount of cash and are highly profitable, and may fall into a new round of price wars."

                                  Renewed long-term contracts, reduced sailings and capacity, early vessel returns, and delayed delivery.

Currently, negotiations for new long-term contracts on the Europe route scheduled to take effect in January are still deadlocked. Industry insiders revealed that many shipping companies have quoted US$2,000 for new long-term contracts this year, mainly because they are optimistic about the expected recovery in demand in the second half of the year; however, the current spot freight rate on the Europe route is only around US$1,700, so cargo owners are not in a hurry to sign long-term contracts. Both shippers and carriers want to gamble, and marathon-style negotiations may drag on until before the Spring Festival.

Last year, long-term contract prices on the Europe route were mostly between US$6,000 and US$9,000, but spot freight rates plummeted in the fourth quarter, and long-term contract prices have been adjusted. If the long-term contract price starts at US$2,000 this year, it would be half or one-third of the previous price, but it is still better than before the outbreak of the epidemic. Therefore, shipping companies are under pressure to boost spot prices, first maintaining the long-term contract price on the Europe route, and then negotiating the long-term contract for the US route starting in May after the Spring Festival. For Asian shipping companies, the US route long-term contract accounts for a higher proportion, and the impact will be greater.

In order to stabilize freight rates, shipping companies are continuously tightening capacity. It is estimated that the current rate of reduced sailings exceeds 30%, and the rate may increase to 50% after the Spring Festival. Container xChange pointed out in a recent report that container shipping rates fell sharply in 2022 and will continue to fall in 2023, and because the market faces a serious oversupply, shipping companies can only continue to reduce capacity and suspend voyages, and the market faces huge fluctuations.

At the same time, after the sharp drop in freight rates, shipowners who chartered vessels have begun to assess the cancellation fees and return vessels early, and the container shipping industry has begun to see a "wave of vessel returns." The latest data shows that some lessees and cargo owners who entered the market at high prices in the past two years are massively returning some container ships previously chartered at high prices. This wave of returns is unprecedented since the epidemic.

Some industry insiders said that there are rumors that COSCO SHIPPING and Wan Hai have plans to return chartered vessels. The epidemic in the past two years caused a boom in freight transport, and many operators chartered vessels at high prices. With the sharp drop in both freight rates and charter rates, more operators may return vessels early in the future, which will also accelerate the speed at which vessels exit the market.

In addition, during the epidemic, due to the surge in consumer spending, coupled with bottlenecks in key supply chain nodes such as ports and railways, leading to delays in cargo transportation and product shortages, US importers scrambled to use chartered vessels to ensure product supply. Now, with shipping costs plummeting and ample container ship capacity, manufacturers including Costco Wholesale, Home Depot, and Party City have all withdrawn from the chartered vessel business.

Some shipowners said they are not optimistic about the outlook for the container shipping industry in 2023, but with the double decline in charter rates and charter fees, they predict that there will be a significant increase in the number of returned vessels next year, and global capacity will continue to decrease. The industry believes that this will bring new opportunities for capacity restructuring in the shipping industry, which will have a positive impact on freight rates.

Another shipping consultancy, Sea-Intelligence, pointed out that although shipping companies are drastically cutting capacity, due to the excessive capacity invested in the early stage, compared with the same period in 2019 before the epidemic, the market capacity during the 2023 Spring Festival will be significantly oversupplied. Among them, the capacity of the Asia-US West Coast route increased by 37.8% compared with the same period in 2019, and increased by 35.8% compared with the average capacity level from 2016 to 2019. The capacity increase on the Asia-US East Coast route was as high as 57% to 59%, the capacity increase on the Asia-Northern Europe route was 28% to 42%, and only the capacity on the Asia-Mediterranean route was close to the pre-epidemic level.

Alphaliner said that some container shipping companies are already negotiating with shipyards to postpone the delivery of some large vessels from the end of 2022 to 2023. It is reported that many large container ships of Mediterranean Shipping are currently idle in Chinese waters, and it is expected that the company will postpone the delivery of more ultra-large container ships to 2023.

The global shipping industry faces the risk of economic downturn.

A report by the United Nations Conference on Trade and Development (UNCTAD) points out that due to the impact of factors such as war, epidemics, and economic turmoil, the slowdown in global trade growth may continue into 2023.

In addition, global major investment banks pointed out that after a year disrupted by the Russo-Ukrainian war and soaring inflation, global economic growth will further slow down in 2023, which will affect shipping. More than 80% of global trade relies on shipping, and global shipping activities are expected to decrease accordingly.

According to the UNCTAD's "2022 Review of Maritime Transport" report, global seaborne trade growth is expected to slow to 1.4% this year and remain at that level in 2023. Global seaborne trade grew by 3.2% in 2021, reaching a total volume of 11 billion tons, reversing the 3.8% decline in 2020. The average annual growth rate from 2023 to 2027 is expected to be 2.1%, significantly lower than the average growth rate of 3.3% over the previous 30 years.

The report also points out that the Russo-Ukrainian war, the continued spread of the COVID-19 pandemic, supply chain pressures, the slowdown of the Chinese mainland economy and its zero-COVID policy, global inflation and cost of living pressures, and increased risks of port strikes, all pose significant risks to the recovery of logistics and maritime transport.

UNCTAD calls for investment in maritime supply chains to better prepare port, fleet, and hinterland connectivity for future global crises, climate change, and the low-carbon energy transition.

Data shows that cargo volume from the Far East to Europe decreased by about 8% and to the United States by about 4% in the first ten months of last year. For shipping companies, facing this economic situation, if the Russo-Ukrainian war ends sooner, European countries will be able to buy more goods, and the post-war reconstruction needs of Ukraine and Russia will surge. Both bulk shipping and container shipping will benefit, but everything is uncertain.

Experts point out that shipping companies may face even stronger headwinds this year. Although some shipping companies can still use geopolitical uncertainty as leverage in negotiations with customers, the most prosperous period for the market is undoubtedly over.