Experts are in the assessment of where the rate floor for the consolidated container shipping market lies as several indicators continue to report sharp declines.
British consultancy Drewry last week cut demand forecasts to 1.5% in 2022 and 1.9% in 2023, following a sharp cut in GDP forecasts.
“Airlines will accept that prices and profits are unsustainable,” Drewry said, adding that if prices drop to acceptable levels in the long term, airlines will start cutting prices. “Recent news about further disruptions to East-West services, including the 2M transpacific loop, suggests that the time is now,” Drewry said, adding that the next line of defense will be a near-record amount. It predicts that it will be an older, fuel-intensive ship to unload the boxes. While shipping demolition by 2023, we are postponing some of the large number of newbuildings on order.
At what level of profitability will operators be reluctant to cut revenue? Despite these actions, Drewry reported an estimated net increase in available capacity of 11.3%, well above projected demand growth of 1.9%, and insufficient to fully close the supply and demand gap next year. Drewry predicts that adding missed departures will be enough mileage to keep fares and profits above 2019 levels.
Chris Kosmara said in an interview with Splash Today: “The question is not what the new normal for fares will be, but rather at what level of profitability airlines are hesitant to cut revenue.”
Regular Splash columnist Kosmala says network operators are now able to match capacity and demand at a finer level of granularity than before as a result of investments in better analytics technology.
“Historically, the average profitability of the industry has been around 10% in ‘steady periods,’” he notes, adding that, “Let’s assume this is the convenience the shipper wants. This is a very long downward path from the over 70% results seen today, but it does mean that the price could go down for some time. When the industry starts reporting profitability between 10% and 20%, the rate seen at that point will become the new normal.”
HSBC’s global head of shipping and port research, Parash Jain, has repeatedly argued that liner shipping is now in a stronger bargaining position thanks to consolidation.
“Looking to the future, after years of consolidation and the formation of megashipping alliances, shipping lines have learned the discipline of capacity and although freight rates may still be volatile, they are at their lowest in the last decade. Freight rates reached may not be the future,” Splash said in a report published earlier this year.
The consolidated nature of global liner shipping, with topliners controlling more than 85% of capacity, was also highlighted by Jefferies shipping analysts in a recent report, giving them the ability to move much larger volumes. This was most evident in 2020, when liners idled up to 13% of vessel capacity, supporting freight rates and generating revenue, despite a significant slowdown in market activity in the early months of the pandemic.
The speed and severity of container loss was also analyzed by Clarkson’s Research. Amid major macroeconomic headwinds and rising consumer inflation, container trade stalled, dropping 1.6% year-on-year from January to August, according to the Port of Clarkson.
In a recent market report, Clarkson noted that “sentiment is rapidly weakening due to heightened consumer and business uncertainty,” with interest rates now well above pre-coronavirus levels. Cargo was double the 2019 average and charter rates were still 2.5 times higher, while the Shanghai Container Freight Index (SCFI) was 100 above the 2010-2019 average. With Clarksons charter The price index is down just 20% from its 2005 high.
“In the ‘base case’, rate levels may not return to previous lows, but we will pay close attention to the increase in incoming fleet. A sharp slowdown is just ahead,” Clarksons analysts advised.
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Source: Container Trade Statistics (CTS).