Container Market Outlook Webinar Q&A

Drewry annual freight rate forecast is until the current date or end of 2021?

• SH: These are average forecasts for the year. The Container Forecaster includes freight rate and carrier forecasts for current year + 1. Our supply and demand forecast stretch to five years.

Are you able to give a brief information about the current development of the ocean freight routes from Europe to Mexico?

• SH: For more granular tradelane and port-to-port freight rate trends please see Drewry’s Container Freight Rate Insight 

In Maersk’s updated guidance from this morning, they continue to assume a normalisation of container freight rates from early H2/22. How realistic do you think that assumption is?

• SH: The answer really depends on your definition of “normal”. We are already seeing spot rates drift, partly for seasonal reasons but also as a reaction to events. There is a reasonable likelihood that prices will continue to soften while these events play out, but a much lower probability that rates will return to pre-pandemic averages, in our view.

What would motivate carriers to reduce rates after port congestion reduces?

• SH: Carriers will always want the highest prices they can get out of the market. For the past two years congestion has been the pillar for extreme rates, but once that is kicked away more typical supply-demand factors will return and they will certainly not be as supportive of high rates as they are currently. 

What does the supply/demand balance for containers look like for the next few years?

• SH: We expect the market to remain very tight until 2H23 when the effects of port congestion will recede and release a lot of latent capacity. This will coincide with significant newbuild deliveries and tip the market towards being over-supplied, which we think lines will try to mitigate via blank sailings, idling and scrapping. 

Why would carriers not limit the amount of sailings to reduce capacity so they can artificially keep rates at current levels?

• SH: We do expect that carriers will respond to the prevailing supply-demand conditions in a post-congestion market through capacity management. However, we do not think they will be able to replicate the amount of capacity reductions caused by supply chain inefficiencies. So, there is a limit to what they can achieve on that front, especially given the extra regulatory scrutiny, that we think will only partially mitigate the freight erosion.

When will the freight rate go back to normal in 2023? / With the productivity improving in 2023 would you expect the rates to decrease as a result?

• SH: Unfortunately, that is impossible to answer as it is linked to the timing of the liner supply chain recovery that is highly unpredictable. The quicker it happens, the sooner rates will recede. Our working position is that port congestion will be fixed around the mid-point of next year. Subsequently, we think average annual freight rates are likely to decrease by around 44% in 2023. As this follows two years of very high increases, the dollar values will still be much higher than they were pre-pandemic.

Please can you tell us about the outlook for the container fleet?

• SH: I purposely didn’t include any comment on the supply outlook for this year as I don’t think it will have any bearing on price developments. Pouring in new ships won’t solve the logjams. In any case, fleet growth is expected to fall slightly below that of demand in 2022, rising by 3.5% compared to that of 4.1% for port throughput. Growth of the fleet will swell beyond that of demand in 2023 when it is predicted to rise by 7.7% following the start of delivery of the record newbuilds orders from last year. Interestingly, the newbuild contracting sparked back into hyper-drive mode in the first quarter with new orders approaching 1 million teu with many more imminent. This can be seen as confidence in the sector on the part of owners, but it could also reflect a motivation by carriers to reduce exposure to the increasing expensive charter and S&P markets. There is also a need to renew the fleet with more fuel-efficient vessels, but I also think there is a fear of missing out at play as the ticking clock of fast-rising newbuild prices and shrinking yard space is forcing some previously ‘on-the-fence’ owners into action.  

Will new market entrants stick around?

• SH: Extremely high freight rates have enabled new players in the Asia-Europe and Transpacific routes to co-exist with the alliance carriers, despite their slot costs being around 5 time higher due to having to use smaller chartered tonnage. We do think these moves are largely opportunistic and that many of the new entrants will depart when profit margins decline, as happened after the 2010 market boom, but even then, we think some, such as the Alibaba-backed Transfar Shipping, will stick around as they will be able to offer capacity at more stable, predictable costs to owners.     

You have shown a downtrend in terms of demand, but an increase in freight (East-West). What is the main reason for having this unbalanced situation? 

• SH: I’m not 100% sure I understand this question so I will provide two answers to hopefully cover it.  If you mean “freight (East-West)” as in loaded volumes: We have downgraded our forecast for global port handling, but we are not predicting any downturn and expect world port throughput (inclusive of loaded, transhipment and empties) to grow by 4.1% this year. Our 2022 forecast for two-way East-West loaded traffic (Transpacific, Asia-North Europe/Med and North Europe-North America) combines for growth of 4.2%.  If you mean “freight (East-West)” as in freight rates: the reason why freight rates are soaring well above demand growth is entirely due to the congestion issues that have plagued the industry during the pandemic. This is what is driving the market today, not supply-demand.

Does your forecast take into consideration vessel scrapped and new buildings?

• SH: Yes, our 5-year supply forecast includes projections for demolitions and newbuild contracts.

Slide 5, disruptions, congestions for 2023, have you already factored in possible implications by regulations (CII)? / For 2023 did you consider the IMO 23 regulation?

• SH: Yes, the latest edition of the Container Forecaster included analysis of the number of containerships that will and won’t be EEXI compliant as of 1 January 2023. Our findings were that non-compliance is only really a problem in the smaller vessel classes and that in most cases a small reduction of operational sailing speed will suffice. We think the new ruling will spark demolitions back into life after having been virtually non-existant in 2021. 

Is 2023 the right time to run Ocean Tender or rate extension with the existing suppliers will work? / Is it recommended to go out to market to tender ocean freight at this point in time? or just wait to normalize?

• SH: For assistance and advice please contact Drewry’s advisory service in charge of outsourced bid management via supplychains@drewry.co.uk

What is the main reason why you forecasted freight downwards in the coming Q4?

• SH: Actually, our forecast for world port handling in 4Q22 is for a year-on-year increase of 5.1%. It is expected to slightly lower than the 3Q22 peak season due to seasonality.

How do you see the evolution of large shippers starting their own shipping lines? / What about shippers like Amazon, P&G creating their own fleets?

• SH: I think this is something only the richest shippers can even consider. We understand the motivation to secure capacity and try to avoid volatile cost swings, but investing in container assets and support networks is a very expensive response to a short-term problem that we do not think will become a widespread trend.

Do you measure the blank sailings carriers are imposing? If they reduce capacity the rates naturally increase again. Is this monitored?

• SH: Yes, Drewry tracks blank sailings both in the Container Forecaster, but more regularly in the weekly Container Capacity Insight. 

Do you have any specifics for reefers trades?

• SH: I’m afraid that is outside of the scope of this presentation, but we do cover the reefer market via our Reefer Shipping Forecaster, see www.drewry.co.uk/maritime-research-products/reefer-shipping-forecaster-annual-subscription 

What are your vision and outlook on north south trade chiefly Africa?

• SH: We do not forecast North-South trade volumes (only East-West markets) but our latest projection for Africa’s total port handling in 2022 is for an increase of 2% i.e. below the global average.  

Hi Simon, thank you for the overview! Can you share your view on potential additional short term congestion issues on the US side once covid restrictions in China disappear? / Do you expect a significant increase in delays at LA/LB port complex once SHA returns to normal operations. / Do you have an insight on Port congestion in the US?

• SH: There is a major risk that a sudden surge in demand caused by backlogged orders in China will overwhelm ports in the US and elsewhere. This would be particularly damaging if it were to coincide with any USWC labour dispute. Likely additional delays in LA/LB should factor into all shippers’ planning, in our view. 

When should we expect to see the impact of China COVID lockdowns & congestion to reach U.S. ports on the West Coast, and how severe will its impact be?

• SH: I cannot give a timeline as much will depend on how widespread and the duration of lockdowns in China, neither of which I can predict. We have to hope that manufacturing production and port/terminal operations in China are not too severely impacted, but as mentioned previously there is a big risk of significant turmoil ahead. 

We are seeing limited space in ships in Latin America, what is the cause for that? Is it going to improve or get worse? I mean, in terms of space availability. / Is the availability of containers from the Middle East to India likely to improve this FY?

• SH: Capacity and equipment is being prioritised for the most lucrative, high-volume trades so “secondary” trades are the unfortunate casualties. We do not think this situation is likely to change in 2022.  

We are hearing of substantial slowing of retail sales in the US across most channels - have you taken this into consideration?

• SH: Yes, our demand model accounts for expected changes in consumption habits. Part of the rationale for the slower growth outlook is that the surge in demand for durable goods is now tapering as most social restrictions around the world are being lifted. 

You forecast low growth. Why do you not think that the low growth will reduce congestion quicker?

• SH: Because any growth means more volumes that the system has shown cannot be handled as efficiently as required. We think a contraction in volumes is the quickest way to fix congestion issues.

Your view on decrease in volumes - from Maersk Q1 down 7 percent, OOCL decrease in volumes and Kuehne+Nagel also decreasing in volumes?

• SH: The momentum in volume growth is very clearly slowing, but we have seen very varied growth rates between carriers so it is important not to read too much into individual company performances. What I will say is that, as things stand today, I expect our next Container Forecaster in June to include further downgrades for demand.   

Charter Market normally follows the freight rate index which seems not to be the norm now. Why?

• SH: We are now seeing a very slight softening in charter rates, but certainly not to the extent that freight rates are sliding. This is probably because there are very few open fixtures available and because fixtures are being locking-in for longer durations so the market is much more sticky.

For the high-medium-low volume ports, what is the breakdown for each range? # of TEUs per year?

• SH: To categorise the ports in our congestion index we based it on how much they differed to the 2019 volume average. High-volume ports are those with a minimum of 2 standard deviations above the mean, medium-volume ports between 0 and 2 standard deviations, and low-volume ports anything below 0.

May I ask for your opinion on the effective role of Regulators (mainly EU and US) to investigate/act on congestion causes in the supply chain?

• SH: I think it is a good thing that politicians are listening to the challenges facing importers/exporters and it is right that carriers should explain why the market is the way it is (even if it not their fault). I am personally sceptical that governments can expedite the supply chain recovery, because, in the US in particular, they seem more intent on scapegoating “foreign” carriers for quick point scoring success rather than addressing the fundamental problems. We should certainly be looking at ways to build more resilience and minimise the disruption of any future shocks, but at some point we have to accept that there was nothing that could have been done to shield the supply chain from such a set of extraordinary events. 

Has your reporting found any reaction to the US DOJ/FMC effort to investigate international shipping lines, which is an effort by "Five Eyes" nations that don’t have domestic ocean carriers?

• SH: As far as I am aware the “Five Eyes” working group on potential carrier price fixing has only just begun work. Drewry has no special intelligence to be able to pre-judge the findings of the investigations, other than to say that pricing developments over the past couple of years, as unpalatable as they have been for cargo owners, are in keeping with what could have been expected from a free-market experiencing sudden, deep and protracted supply shocks. 

Does Drewry have a perspective on how the ILWU negotiations may impact congestion on the US West Coast? / What is the potential impact of the USA west coast strike risk on container movement and economic activity? / How will the threat of the West Coast Labor Strike impact Freight and Rates in the near term? / Does the model consider a work slowdown or stoppage in US WC ports due to ILWU negotiations?  What is the potential impact on pricing? / What assumption are you using for port productivity looking forward in 2022 and 2023 regarding the USWC labor negotiations?  Are you assuming any improvement or degradation for productivity and, if so, due to what changes?  Thank you.

• SH: In our view it is a high level risk, but we don’t expect a repeat of 2015 and I would say there is less than a 50% probability for port lock downs or labour strikes on the US West Coast this summer.  It seems unlikely that a deal will be signed before the old contract expires, but from what we’ve been told all parties are fully committed and aware of the importance of reaching a satisfactory deal swiftly with US government watching closely.  Fortunately, there is always an alternative in the US and we are already seeing something of a shift in liner capacity away from the West Coast to the USEC, although that is causing its own congestion pressures there.

Do you think that shipping companies will change calling ports with main shipping routes due to port congestion of large hub container ports such as Shanghai’s situation?

• SH: Carriers are telling us that terminal operations in Shanghai are working well. The main issue appears to be warehousing and trucking availability. As the world’s largest container port it will be difficult to spread the load, but there is likely to be some scheduling adjustment. 

Can you say more on the 39% incremental increase in 2022? Is the market continuing to inflate or you mentioned certain indexes softening... / We noticed that the The Shanghai Containerized Freight Index just declined for the 14th consecutive week. Does this indicate rate softening on particular lanes?

• SH: The spot market has continued to decline since the Container Forecaster report was published. It has been a broad trend across trades. 

Good morning, Any forecast in terms of container pricing?

• SH: Information of container equipment is available via our Container Census & Leasing and Equipment Forecaster