Shipping rates are collapsing. New ships will set sail next year increasing the supply. Consumer demand has been impacted by the global recession. The shipping industry is therefore doomed.
The theory is growing in popularity, but Drewry, one of his leading consulting firms in the industry, doesn’t foresee it.
Drewry’s baseline scenario for 2023 is for ocean freight to post an earnings before interest and tax (EBIT) of $100 billion. That’s down 64% from his 2022 EBIT guidance of $275 billion, but still well above pre-pandemic earnings.
Not a hard landing. “The current market situation is undeniable. The arrow is pointing down everywhere you look,” Simon Heaney, Drewry’s senior manager of container research, said in his presentation online on Thursday. “But I don’t think this will be a classic case of boom and bust in the container market. We believe there are ways for airlines to make far more profit (than they did in pre-pandemic years) with some clever maneuvers.”
Drewry’s base case for 2023 calls for demand growth of 1.9%. On the supply side, in theory, if all new vessels are delivered on time and there are no port congestions or scrapping, that equates to a “substantial” 34% increase in capacity year-on-year.
Heaney said, “So there is no option to do nothing. Forwarders cannot influence demand. They have no choice but to focus on what they can control, which is the supply. And after consolidating and rebuilding the Alliance, they are in a much better position to manage their so-called “perilous year” and pull the right ability levers to ensure a soft landing. “
With numerous service outages in recent weeks and numerous cancelled departures, they have already started. The Drewry World Composite Index, which measures spot rates, is still down, but not as fast as it was a few weeks ago.
“It’s still going down, but it’s a lot more marginal than it used to be,” Heaney said. “I think we are starting to see shipping companies turning a little corner and having a little more control. In our view, groupthink among shippers will squeeze profits and reduce rates for as long as possible, the begin to reduce capacity as it approaches acceptable long-term levels. I think now is the time.”
Shipping lines have several options to manage capacity and avoid crashes in 2023. One is to sell old ships for scrapping. Drewry’s base case calls for scrapping of 600,000 twenty-foot equivalent units next year, or 2.5% of end-of-2022 fleet capacity. This would be the second-highest yearly scrap in history, behind the 660,000 TEU scrapped in 2016 following price wars and Hanjin’s bankruptcy.
Another way shipping companies cut capacity is to delay the delivery of new ships. TEU capacity in order intake is at an all-time high. Drewry estimates that 2.6 million TEUs of new-build capacity to be delivered next year alone.
Again and again, delivery dates were “postponed” from one year to the next. Heaney noted that only three times between 2008 and 2020 that actual container-ship deliveries have exceeded 90% of projected deliveries.
From 2009 to 2011, during the Great Recession, it never exceeded 70%. In 2010 it reached a low of 59%. Drewry predicts that only 60% of the capacity due for delivery in 2023 will reach waters next year. “This is probably our boldest prediction,” said Heaney. “The reason we’ve grown so big is because we believe it’s the easiest way for shippers to pull the capacity lever.”
Another way shipping companies can manage capacity is by temporarily decommissioning ships. Idling was one of the main tools used in 2009 to combat the collapse in demand caused by the financial crisis.
Port congestion is a side effect of supply chain issues, not a lever carriers proactively pull, but it has a major effect on vessel supply.
Drewry estimated that congestion will remove 15% of effective capacity this year. It doesn’t see congestion falling back to 2019 levels until halfway through 2023, removing 6.9% of effective capacity next year.
One of the most frequently cited supply levers is slow steaming: removing capacity by sailing slower, whether as a rate-supporting strategy or to comply with environmental regulations.
Add all of these factors up — scrapping, order delays, idled ships, congestion — and Drewry’s theoretical maximum estimate for a 34% year-on-year capacity increase comes down to 11.3%. That’s still way above the projected 1.9% demand growth. But carriers can use blanked sailings and canceled services to close the gap, a process they’ve already begun.
All of these capacity management assumptions hinge on the premise that shipping lines will not descend into a price war and battle for market share, as they have in previous downturns.