Date: Tuesday, December 5th, 2023
Source: Sourcing Journal
Container shipping expert John McCown, non-resident senior fellow at the Center for Maritime Strategy, evoked iconic author Charles Dickens in describing the current state of container shipping: “It was the best of times, it was the worst of times.”
2023 has been considered a slow year for the container shipping industry amid collapsing freight rates and similarly falling profits, largely due to weak consumer demand. But in what could be described as “the best of times,” there has been a leveling out of sorts in the supply chain compared to pandemic-era congestion, McCown said, which consisted of elevated freight rates and long lead times that plagued shippers.
According to data from Container Trade Statistics, worldwide container volume during September increased 12.8 percent, in was the strongest year-over-year growth rate in 29 months, and the fourth straight month of an upward trend. McCown cited that data in his quarterly container shipping report, illustrating that the supply chain is experiencing more normalization.
McCown noted that while U.S. container volume showed a 6.1 percent decline in the third quarter due to the volume spikes of 2022, it is still 2.8 percent above fourth-quarter 2019 levels.
“The worst of times” would be reserved for the ocean carriers that have seen profits dry up in 2023 after reeling in record gains throughout 2021 and 2022. Accounting for 11 major container shipping firms except for Mediterranean Shipping Company (MSC), the industry generated total net income of $2.6 billion in the third quarter, down 95.6 percent from year-over-year totals of $59.6 billion.
This marks the fifth straight quarterly downturn for the container shipping industry, McCown observed, but is still well above pre-pandemic performance from 2016 to 2019—a period where the sector saw a cumulative loss of $8.5 billion.
McCown also expects aggregate freight rates to continue their decline in the fourth quarter, namely due to the resetting of many contract rates from the year prior.
“The Walmarts, the Home Depots, the Targets, move all of their freight on contract rates, so they’re not in the business of playing the spot market,” McCown said, suggesting that 80 percent of loads on the Asia-to-U.S. move on a contract basis. McCown is critical of many of the metrics used to measure spot freight rates in particular, noting that they “apply to much less freight than people think.”
He also told Sourcing Journal that contracts are renewed at rates that have little relationship with spot rates, and are often instead based on prior contracts and the history between the parties.
The extraordinary profit levels for container shipping companies throughout the pandemic resulted in unprecedented new vessel orders, McCown observed, noting that total order books are now at a “record level” of 30 percent of total current TEU capacity. Given the varying sizes in ships built, such a jump would likely be no more than a 15 percent increase in total new vessels.
McCown expects ocean carriers to be more aggressive with their blank sailings in 2024 in an effort to keep down costs. He also expects more ship retirements as more environmentally friendly transports like methanol-powered vessels come online.
The container shipping expert has long held the view that the U.S. needs to build more infrastructure to handle the excess capacity of containers coming online.
“The thing everybody should be worried about, at least in the U.S., is we’re starting to move into capacity limits in our ports,” said McCown. “It’s a big mistake for people to think of Covid as a once-in-a-century event. The gridlock is signaling to us that our ports are starting to reach their limits, particularly on the West Coast. If you go back to 25 years ago, the inbound volume to the U.S. is up almost by a factor of four, and it’s amazing, that’s with the same set of ports.”
In a positive for the container shipping industry, global schedule reliability for ocean freight is nearing pre-pandemic levels, with 64.4 percent of October sailings being on time, 12.6 percentage points higher than year-ago totals of 52.3 percent, according to data from Sea-Intelligence. Aside from the 2023 peak of 66.8 percent reliability rates in May, this is the closest monthly figure to the 75.3 percent on-time rates seen in July 2020, ahead of the supply chain congestion that dominated throughout the Covid-19 pandemic.