Container Market Outlook Webinar Q&A

Note: we have edited and grouped similar questions for clarity. Some questions on container equipment and the reefer market were not answered as they were outside the scope of the presentation.

Freight rates

Q: What is driving the container freight rates down 2023-2024?

SH: The mismatch between weak demand growth and significantly higher supply growth. Effective capacity is expected to surge by around 25% this year due to increases to the cellular fleet at the same time as an improvement in port productivity. For 2024, new deliveries will be the driving factor. 

Q: As demand is going to be low and supply is high, how it’s going to impact the buyer and the carriers?

SH: Logically, that scenario means that the market is becoming more imbalanced and will result in lower freight rates. There can be side-effects when this tips too far as carriers resort to capacity reduction measures (blank sailings, service suspension and idling) that can see shippers get a lower quality of service.

Q: Service levels have improved, but still around 60+%. Do you believe it will continue to improve or should we plan to this level of services?

SH: The end of the demand upsurge has helped improve port congestion and subsequently liner networks. So long as there is no other unforeseen disruptive event, this trend should continue, although it should be remembered that schedule reliability was far from perfect even before the pandemic. 

However, as mentioned in the answer above, liner service quality can be often be sacrificed as part of capacity management actions undertaken by carriers to prop up rates. 

Ultimately, I would plan for some improvement, but be wary of shocks. We have previously advised shippers to include service quality metrics within contractual agreements with carriers.

Q: If the new capacity begins to come online in Q3, will this flatten the small peak I am hearing about for August/September?

SH: I don’t know which trade you are referring to, but large deliveries will come well before Q3 and will exceed any demand quarterly growth. Much will depend on how carriers can hide fleet growth by slow steaming, blanking etc.  

Q: What is the container freight price/cost prediction beyond 2024? / What is your expectation further 2025 and 2026?

SH: In the Container Forecaster we only forecast average rates (i.e. a blend of spot and contracts) for aggregate East-West and Global markets, for a duration of current year + one year, so our first forecast for 2025 will not be published until the 1Q24 edition next year.

Q: What is the possibility of rates going up into Asian market?

SH: Drewry’s Benchmarking Club for shipper clients can provide contract forecasts for specific lanes. Please contact supplychains@drewry.co.uk for more information. 

Q: Your rate forecast chart appears to suggest that rates will still be slightly above pre-pandemic by end 2024 - is that mainly to do with increased fuel costs? or anything else?

SH: Yes, higher fuel and related environmental costs such as ETS in Europe are a factor, as is inflation. 

Q: What is % split of contract and spot in the global/east west index?

SH: It is currently about 60% contract and 40% spot. The latter has increased recently. 

Demand

Q: What are your expectations for the peak season volumes? Will we see a significant pick-up compared to current volumes?

SH: At a global level we estimate that port throughput declined by 3.1% YoY in 1Q23, based on available port stats (for January and February) and AIS nowcasting (for March).  

Barring any unforeseen disruptive event, in our view quarterly throughput has bottomed out and should return to positive territory from the current quarter and continue in that vein throughout our forecast horizon that stretches out to 2027. The 3Q is expected to be the peak for 2023, with about 10% more port handling compared to 1Q23, or +1.5% YoY.

Q: What are the key drivers of rising demand in port container throughput in the coming years? There are also many challenging factors, including trade wars and economic crisis.

SH: The global economy is expected to keep growing despite all of the risks you mention. Growth will not match what was seen in 2021, but that was an outlier year boosted by large inventory stocking and goods spending at the expense of services.

Q: With global economy slowing down why is your demand forecast revised upward?

SH: We don’t use the IMF, simply because it is not refreshed as frequently as we need, but I think its downgrade is more a sign of it joining the emerging consensus – it remains on the optimistic side compared to other analysts but its latest downgrade brings it closer to the pack. Oxford Economics, who we use, actually upgraded in April, but remain below the IMF for 2023.   Where they all agree is that growth will be slower among advanced economies. Hence why we’re down on North America and Europe.

Q: Do you think all the smaller markets (i.e. - Latin America) will follow the same trend as the larger Asia/US Asia/Europe?

SH: As mentioned in the presentation, North America and Europe are expected to be the “sick dogs” when it comes to container demand this year. Hence, we are more bullish about prospects for other regions / trades.

Supply

Q: Could you pls give details of Cellular Fleet and Effective Capacity? / Can you explain the difference between Cellular fleet growth and effective capacity growth?

SH: Cellular capacity is simply the nominal TEU sum of the fleet, with growth based on net additions via newbuild deliveries minus scrapping. 

Effective capacity looks at how useable those cellular slots are, factoring in port productivity and ship speed among others.  Using the same ship, there would be more effective capacity when it sails faster and port conditions are clear, resulting in more round voyages per year.  

Q: What is holding back scrapping? / Is the slow demolition rate caused by uncertainty on environmental regulations and new fuels? / Why is scrapping so low? Higher than expected charter rates?

SH: To be honest, this is slightly confounding given the scale of the overcapacity challenge. We can only think that owners / operators are reluctant to let go while assets can still make some money. It seems a short-sighted position in our view and will place heavy pressure on freight rates and assets values. 

Uncertainty over which size ships might face shortages following introduction of CII may well also be a factor. 

Q: Considering the new regulation coming in place, especially ETS in 2024, do you see a higher levels of scrap of vessels?

SH: New environmental regulations will clearly favour younger fuel-efficient units, but the main reason we believe there will be an increase in scrapping is to help balance the market.

The passing of time, combined with a scarcity of demolitions, has seen the average age of the total fleet jump from 11.9 years at the start of 2018 to 14.3 years in March 2023. Typically, the containership fleet is in early middle-age and not yet ready for retirement, but the average figures hide the fact that there are a lot of much older ships that have been allowed to continue well past their prime.

Based on the fleet as of 1 March 2023, there were 570 containerships, with an aggregate capacity of 717,000 teu, aged 25 years or older, all of them residing in the four lowest size classes. That is about 2.8% of the current fleet that could be immediately trimmed to assist with the balancing of the market.

The situation is most acute in the Small Feeder group of up to 2,000 teu, which has seen the proportion of 25+yo units surge from 5.8% in January 2018 to 12.6% as of March 2023.

Q: Is it reasonable to expect orderly pace of demolitions vs a major cliff of demolitions?

SH: I agree. Now that freight and charter rates are close to bottoming out it does seem more likely that demolitions will occur at a steady pace. If there was still room for a sudden collapse in prices the chances of a stampede would be higher. 

Q: Judging by new ship orders, what is the leading alternative green fuel for the global containership fleet?

SH: LNG remains the biggest alternative dual-fuel in the orderbook, but recent contracts have favoured methanol.

Quality over quantity seems to be the prevailing mindset of owners. While fewer orders were placed last year, a far greater proportion were for ships that will be able to run on greener fuels. 

Drewry estimates that about 81% of all ships contracted since the start of last year through to mid-March will be capable, or ready to use, alternative fuels such as LNG and methanol. This is a big leap from about 35% of orders placed in 2021 offering alternative fuel capability.

Q: Is the risk of global recession a factor for growth in capacity?

SH: Not in the short-term. It takes around 2 years to build containerships so what’s on the orderbook for 2023-24 deliveries will come no matter what, although perhaps a bit later than planned. 

However, a recession now could slow down contracting for future delivery years.  

Q: Have you revised your forecast on timing of newbuilds being pushed back to future years?

SH: No, we have maintained our delivery rates (aka slippage) for the entire forecast horizon. We anticipate that only 60% of scheduled newbuild deliveries for this year, as of 1 January 2023, will arrive as planned. 

Q: Do you see increasing vessel idling as one lever carriers will pull on to maintain capacity?

SH: Yes. We are predicting that the idle fleet will average about 7% across 2023. After 4 months, the average is only 4.5% so we expect an increase in the remainder of the year.

Q: In retrospect, why do you think the carriers were not able to make the transition to a more sensible discipline? / What if all the carriers continue their capacity control upon capacity surge later?

SH: Carrier behaviour is one of the biggest X factors and risks to our forecast. We can only speculate, but it seems that old habits die hard (i.e. prioritising market share over profitability) and the anticipated benefits of market consolidation and alliance restructuring simply didn’t materialise. 

If they were to suddenly prove us wrong again and do belatedly take sufficient action, it would be too-little, too late as the damage to spot and contract rates has already occurred.  

Profitability

Q: Do we expect EBIT margins for the larger carriers to better than average shown?

SH: We haven’t noticed much of a correlation between carrier size and margins of late, and we don’t expect it to emerge. Variance in profitability will be decided by a range of factors, including customer mix, spot/contract ratios, trade exposures and cost control. 

Q: How do the applications of charges for greener fuels impact on the freight rates profitability? Can shipping lines see it as an opportunity to make some profit?  

SH: There will undoubtedly be additional costs for shippers relating to new fuels and shipping’s inclusion in Europe’s Emissions Trading System. 

We trust that carriers will not seek to benefit, but to protect themselves from that risk, Drewry advises all shippers to always question the sums and get validation from trusted independent sources.

Drewry has developed a carbon tax and new fuel cost forecaster to assist companies in planning and forecasting these extra costs. For more details, contact carbonfuture@drewry.co.uk 

Other

Q: Which kind of risks do you considering under “regulatory/ESG” i.e Antitrust, Fiscal, Greener policies…and in EU o USA or elsewhere?

SH: One example is the potential operational risk from politicians seeking to block vessel sharing agreements, see the Ocean Shipping Antitrust Enforcement Act of 2023 – a bipartisan bill introduced to the US House of Representatives in March. Meanwhile, Europe is reviewing block exemption.

Anything that upsets the status-quo could be disruptive. The outcome is highly uncertain, particularly as it doesn’t always appear that politicians have a full grasp of how the industry works and are using it to pursue other agendas.

Q: Can you comment on how carries are doing with their strategy to move into logistics, will it be able to counterbalance their lower income from ocean?

SH: The leading proponents such as Maersk and CMA CGM continue to go full-on with plenty of bolt-on acquisitions. They hope to supplement revenues and profits, but it is too early to judge whether this strategy was the right one, or not.

Q: Which is your insights about future of the shipping container alliances?

SH: If Maersk is right – that being an integrator within an alliance is unworkable – then companies with similar aspirations and in a similar situation, most obviously CMA CGM in the Ocean Alliance, will have to consider a break up of their own.

This marks a significant change to the consensus view that the future of container shipping will involve dominating alliances. Instead, it seems increasingly likely that the big-hitters will pursue single life, with the medium size operators remaining together out of necessity.

Q: How would the market react after the split of Maersk and MSC? 

SH: What that will mean for freight rates in the long run is uncertain, but initially at least, it wouldn’t be a surprise if pricing was squeezed down as newly independent carriers and potentially restructured alliances fight to win customer loyalties. Beyond that, it is likely that individual lines will cluster in a more limited range of port corridors, reducing options for shippers.

Q: Do you see shippers now ’breaking’ open running agreements, even when carriers honoured their agreements in Covid times?

SH: We don’t see this happening in the current market. Drewry Supply Chain Advisors helps shippers with their bids and the overwhelming intention of nearly all of our clients is to achieve sustainable rates for both parties. They acknowledge the cost savings, but want to ensure supply chain integrity.

There is a threshold where the gap between contract and spot becomes unsustainable and procurement teams come under significant pressure from the business to break contract – as a rule of thumb a 40% gap. With 2023 contracts now far lower than 2022 positions, it is far less likely that that threshold will be reached.

Q: Some carriers are now using the Cape - what’s Drewry’s view on these actions?

SH: It saves on Canal fees and requires additional ships to maintain weekly sailing frequencies so helps absorb effective capacity. It is likely to grow in popularity as overcapacity becomes a bigger factor.