Freight rates fell in the first week! Is the container shipping market entering a 'Great Depression'?

After finally recovering from its decline in the last week of 2022, container shipping rates saw another significant drop in the first week of the new year. Faced with the dual pressures of weak demand and increased capacity, the container shipping market in 2023 may enter a prolonged recession, a "Great Depression."

Container freight rates index turned downward in the first week of the new year, with market uncertainty in the first half of the year.

According to the latest data released by the Shanghai Shipping Exchange on January 6, the Shanghai Containerized Freight Index (SCFI) fell 46.41 points last week to 1061.14 points, turning from a slight increase of 0.04% in the last week of last year to a decrease, and the decline widened to 4.19%, exceeding market expectations. Except for the Mediterranean route, freight rates on major ocean routes all fell.

Last week, the Far East to Europe route saw a decrease of US\$28 per TEU to US\$1050, a weekly drop of 2.5%. The Far East to Mediterranean route saw an increase of US\$5 per TEU to US\$1855, a weekly increase of 0.27%. The Far East to US West Coast route saw a decrease of US\$9 per FEU to US\$1414, a weekly drop of 0.63%. The Far East to US East Coast route saw a weekly drop of US\$222 per FEU to US\$2845, a decrease of 7.2%.

Analysts said that the SCFI index reported 1107.55 points on the eve of New Year's Day, with a weekly increase of 0.04%, ending 27 consecutive weeks of decline. However, it fell again in the first week of the new year, with the US East Coast route experiencing the largest drop of 7.2%. The US West Coast route is already losing money, and the continued sharp decline in the US East Coast route has had a significant impact on the May contract renewal for the US routes. On the other hand, the European route, where long-term contract negotiations are currently underway, saw a 2.5% drop in freight rates, indicating that shipping companies' attempts to raise spot freight rates to secure higher contract renewals have failed.

Meanwhile, the World Container Index (WCI), compiled by Drewry, a shipping consultancy, shows that the WCI index ended 42 consecutive weeks of decline as of January 5, rising 0.7%, but down 77% year-on-year. The increase in the WCI index last week was mainly due to a 10% increase in freight rates from Shanghai to Rotterdam and a 2% increase from Shanghai to Genoa; freight rates from Shanghai to the US West Coast still fell slightly by 1%, and freight rates from Shanghai to the US East Coast fell by 3%. Nevertheless, Drewry expects freight rates to decline slightly in the coming weeks.

Industry insiders point out that weak international economic conditions, the ongoing US-China trade war, the Russia-Ukraine war, and the time needed for manufacturers to reduce inventories have led to weak international shipping demand, with a significant drop in cargo volume from the Far East to the rest of the world. Many shipping companies are starting to accumulate ballast cargo and slash prices to grab cargo and dispose of containers in preparation for the Lunar New Year holiday and the post-holiday off-season.

The US East Coast route remains profitable, attracting continued investment from shipping companies. In addition, with freight rates on the US West Coast having fallen sharply, many ships that had previously switched from the US West Coast to the US East Coast route have recently begun to return, which is one of the reasons for the sharp decline on the US East Coast route; on routes such as the Persian Gulf, Australia/New Zealand, West Africa, and South America, where non-alliance vessels are more numerous, price wars are even more intense.

Currently, a large number of container ships are being idled. The latest statistics show that due to reduced cargo volume, the proportion of inactive container ships globally reached 5.5% by the end of 2022, totaling 261 ships, including 93 idle ships. The world's largest shipping company, Mediterranean Shipping Company, has as many as 23 idle vessels. This situation will be more pronounced in the first quarter of this year, with more slowdowns and service reductions.

Due to high market uncertainty, the market outlook for the first half of this year is unclear. Many shipping companies predict that the market may be relatively quiet in the first quarter. As US inventories are depleted, inflation and energy prices ease, and major countries' economic policies are expected to be adjusted, demand may gradually improve in the second quarter, with expectations for a recovery in price and volume in the third quarter.

The container shipping market will likely remain sluggish in 2023, possibly extending into 2024.

Drewry's latest container forecast report indicates that the fleet growth rate in 2023 will be relatively low, at 1.9%. The easing of supply chain congestion will increase effective capacity by 19%, returning the market to a state of oversupply. Current capacity reduction measures have yet to be implemented, the proportion of idle vessels is only slightly higher than three months ago, and scrapping has only just begun.

The severe supply chain disruptions and container shipping congestion during the pandemic have recently changed. Due to excess inventory and pressure on consumer disposable income, the outlook for trade growth will be extremely challenging, at least in the first half of 2023.

In the second half of 2022, spot freight rates fell sharply and are now well below contract rates. Data from Xeneta shows that contract rates are also starting to decline. A major problem currently facing shipping companies is the impact of falling freight rates on profitability.

Drewry points out that although the profitability of the Asia-US West Coast and Asia-Northern Europe routes is rapidly declining, carriers are still profitable, resulting in insufficient motivation for capacity reduction. However, if capacity management is not strengthened, the cost of the routes will soon exceed revenue. The revenue of the transatlantic round-trip route is still much higher than the cost, making it the most profitable east-west route.

As different routes will perform differently in the coming quarters, the Asia-US routes may face pressure more quickly. It is expected that by mid-year, the overall outlook should become more optimistic, and profitability will return to normal levels, without falling to the ultra-low profit levels before the pandemic.

For shipping companies, the quickest way to defend freight rates is to voluntarily reduce capacity. The delivery of new vessels will surge in the next two years, with an additional 2.4 million TEU in 2023 and 2.8 million TEU in 2024. Oversupply will be the norm. The global container ship fleet currently has a capacity of 26.4 million TEU, but the proportion of old ships over 25 years old that can be scrapped is only 3%, so the container shipping industry will continue to experience severe oversupply in the next two years. Global shipping companies' expansion of slow steaming, service reductions, and scrapping will effectively reduce capacity.

Ryan Petersen, founder of Flexport, a maritime logistics technology company, said that the average load factor for container shipping is currently only 70%. A large number of ships have begun to slow down, reducing capacity by 4%-6%. However, in the medium term, this capacity reduction is merely a drop in the bucket. Stimulated by the post-pandemic shipping boom, shipping companies have ordered a large number of vessels. With the commissioning of new ships, container shipping capacity will increase by 25% in the next three years, which will lead to severe overcapacity. Coupled with the slowdown in cargo demand due to slower economic growth, the entire shipping industry is in a "recession."

Petersen believes that the length and depth of this shipping industry downturn will depend on various factors, including the financial health of US consumers and the direction of the Chinese economy.

Alexia Doagani, an analyst at Barclays, believes that container 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.

Maritime Strategies International (MSI), a shipping consultancy, points out that three factors are crucial to the outlook for container shipping in 2023: trade growth, the speed and scale of fleet growth, and the management of congestion and capacity. MSI predicts that container ship fleet capacity will increase by 7% year-on-year in 2023 and 2024, exceeding the average growth rate in 2025. If scrapping rates remain low, the annual growth rate could reach 10%.

MSI's latest quarterly report on the shipping market suggests that the entire container shipping sector may experience a downturn in 2023, potentially lasting into 2024.