Recently, the signals in container transportation have been strangely blinking green. Spot rates have risen. Charter prices and times have increased. Sales of used ships are brisk, and asset values are increasing. There is less idle tonnage. Fewer older ships are being sent by carriers for destruction, as reported by Freight Waves.
Volumes weak despite increases
Drewry, a leading container shipping consultancy, has warned that despite recent increases in spot rates and charter-hire prices, the foundations for recovery in the container shipping industry are not in place and volumes remain weak. They expect the large orderbook for this year and next to begin landing soon, coinciding with a slump in volume and creating pressure on both the freight and chartering markets. This could result in low rates for US importers through 2024. Drewry does not believe that demand will be sufficient to offset the capacity surge and is unconvinced that freight rates have bottomed out.
Failure to scrap
Drewry has warned that despite low global throughput growth, net fleet capacity growth (including the effect of ship demolitions) is expected to increase by 4.7%, and effective capacity could increase by 25% year on year if port congestion eases. The lack of scrapping of older vessels has exacerbated the supply-demand balance and Drewry has drastically lowered its forecast for container-ship capacity to be recycled in 2023 from 900,000 TEUs to 300,000 TEUs. Drewry estimates that only 28,000 TEUs were scrapped during the rate boom, with 31,000 TEUs scrapped in Q1 2023, still short of their current target.
Fuel-efficient ships in, non-fuel-efficient ships still in
According to Simon Heaney of Drewry, while there is a growing trend towards ordering dual-fuel vessels to make shipping more fuel-efficient and less harmful to the environment, owners are not scrapping enough of their older, more heavily polluting ships. This is causing an oversupply of vessels, which is putting pressure on charter rates and asset values in the long term. Heaney argues that owners are not looking at the bigger picture and ignoring the problem, which will only exacerbate the problem in the future.
‘We got it wrong’
Drewry had previously predicted that carriers would make the right choices to ensure a “soft landing” in terms of capacity management. However, in a mea culpa, Drewry’s Simon Heaney stated that they had misjudged the situation as carriers prioritized short-term gains over long-term market balance. Heaney admitted that it is difficult to predict carrier behaviour and called it a lesson that the market does not learn much.
Forecast for weak rates through 2024
Carriers have not cancelled enough sailings to manage capacity downward in line with demand to support freight rates, resulting in suboptimal capacity management. Drewry projects that freight rates will fall significantly year on year in 2023 on a global basis and by an average of 68.4% on mainline east-west trades. The firm expects carriers to replace expiring contracts with new ones at much lower rates. Drewry estimates that average freight rates including contract and spot will fall globally in 2024, and on the east-west trades, rates will be below pre-COVID 2019 levels.
Shipping lines projected to sink into red
Drewry predicts reduced earnings for the ocean carrier industry in 2023 and losses in 2024. The industry earned a staggering sum of $296 billion in 2022, up 37% versus 2021, and the operating EBIT margin was 49% last year. However, Drewry expects the industry to earn EBIT of $16.5 billion in 2023, a decline of 94% YoY, and an industry-wide EBIT loss of $10 billion in 2024. Carriers have not scrapped enough older ships or cancelled enough sailings to manage capacity downward in line with demand to support freight rates, and Drewry predicts that freight rates will fall significantly in 2023 and 2024.
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Source: Freight Waves