Date: Wednesday, February 22, 2023
What does the future hold for container shipping alliances and price competition among ocean carriers? How low will spot and long-term freight rates go in the Asia-U.S. trade? And what happens when a massive wave of new container vessels starts hitting the water in the months ahead?
These are just some of the issues addressed by Vespucci Maritime CEO Lars Jensen and Xeneta CEO Patrik Berglund during FreightWaves’ Global Supply Chain Week (GSCW) virtual forum on Tuesday.
The future of alliances
The decision to terminate the 2M shipping alliance between the world’s two largest carriers, MSC and Maersk, “is just the first domino to fall,” predicted Jensen, one of the world’s top experts on container shipping.
While 2M is scheduled to continue until January 2025, he expects the breakup to be apparent sooner.
“To me, it’s like you have two parties who have agreed to divorce who say, ‘By the way, we’re going to divorce, but not until two years down the line.’ They’re going to go out and find other friends in 2023.
“I don’t see 2M effectively operating as 2M until January 2025 and then suddenly dissolving. It’s going to be a gradual dissolution, basically starting now.”
Jensen believes 2M’s decision will “cascade over to the other two alliances [Ocean Alliance and THE Alliance], where the carriers will be sitting in their headquarters right now, contemplating, ‘Am I in the right alliance or is this the time to shake things up?’ I think the answer is going to be: This is time to shake things up.”
But an alliance shakeup does not guarantee lower rates for cargo shippers, he maintained. “I would caution shippers not to focus on alliances versus nonalliances as a link to whether rates are high or low. I don’t see very much of a link between those two.
“The extremely high rates we saw [during the pandemic] had nothing to do with alliances or nonalliances and everything to do with physical unavailability of vessels due to congestion.” The boom in 2021-22 was a “historical aberration we are unlikely to see again,” said Jensen.
Blank sailings and price war
During the second quarter of 2020, when COVID lockdowns in the U.S. and Europe peaked, container alliances proved very adept at “blanking” (canceling) sailings to artificially reduce supply to match demand, limiting rate reductions.
Some analysts predicted carriers would be able to prevent a severe collapse in rates after the COVID boom by following the same playbook, but they have not.
“In 2020, I wonder whether it was a move based on fear, when COVID hit and we all expected consumption to drop significantly,” said Berglund, whose company compiles data on short- and long-term freight rates.
“What happened was they pulled out as much [capacity] as they could because they were scared that the volume wouldn’t be there, but it turned out that there was significantly more volume than in a normal market. That’s what created the squeeze, rather than necessarily shrewd business behavior.”
“This time around, it’s almost the opposite, because now it’s less volume than anybody anticipated and they can’t pull out capacity quickly enough, even though they know that’s the recipe to turn this around. We are seeing significant blankings, but we do not see enough.”
Jensen maintained that today’s price war among carriers does not mean they haven’t learned their lesson on capacity management.
Blanking sailings is “a tool that carriers have become much better at using,” said Jensen. “In the aftermath of Chinese New Year, we have seen a dramatic increase in the amount of blank sailings, although likely not quite enough given just how much the market has collapsed.”
Carriers learned their big lesson before the pandemic, not because of it, said Jensen. That earlier lesson was, “You need a reasonable degree of consolidation so you can use blank sailings … to create a more stable environment for the carriers.” However, “that doesn’t mean you can avoid price wars,” he explained.
“Prior to consolidation of the market, the normal state of affairs was a price war most of the time.” Following consolidation, “there will still always be a carrier that finds it to its own advantage to grow [market share] and of course it will pursue that, so [consolidation and capacity management] doesn’t mean you will never see price wars. It just means the chance you have price wars [will be less] and the duration of them will likely be shorter than in the past.”
How low will rates go?
The current price war has led to a nose-dive in rates, particularly in the trans-Pacific market.
“It’s hard to argue that we’re at least not close to the bottom,” said Berglund. According to Xeneta’s data (as of Feb. 8), average Asia-West Coast spot rates were around $1,400-$1,500 per forty-foot equivalent unit, “but if you look at the lower end of the market, it’s closing in on around $1,000 — so there’s not a lot more here for carriers to give. We’re getting into a painful area in the spot market.”
Carrier profits remained exceptionally high in the fourth quarter despite the spot-rate free fall due to continued support from annual contract rates. Most Asia-Europe annual rates reset on Jan. 1, most trans-Pacific annual rates on May 1. The plunge in spot rates means the next round of contract rates will reset much lower.
“I expect [long-term rates] to drop down to the short-term market average, but from there, the big-volume BCOs [beneficial cargo owners] will not be satisfied,” said Berglund. He pointed out that despite the crash in spot rates, “the lower end of the long-term market [paid by the big-volume U.S. importers] still sits below the short-term average.”
He continued: “If the spot market stays where it is, they [big-volume importers] will require a discount versus the small-volume importers. That is something carriers have historically agreed to, because they [larger BCOs] move more volume and they have a bigger spend with them.
“So, the biggest concern the carriers should have now is how they can jack up the short-term market to avoid massive losses on those long-term contracts that will be forced upon them.”
Last year, many shippers negotiated Asia-U.S. contracts well before May 1, given the ongoing supply chain crisis at that time. This year, the timing will be different.
“It’s going to be a late negotiation,” Jensen affirmed. “There is not a great deal of urgency on the side of customers to sign contracts as rates are continuing to go down in an extremely weak market. Why would you want to sign in a market that is still going down and you’re getting to levels where spot rates are now below pre-pandemic levels?
“What we should also not forget is that there’s not just a rational side but more of an emotional side. There is clearly a sentiment of payback on the side of a lot of the shippers out there, looking at what they went through in the last two years.”
Orderbook and shipping cycle
A key factor weighing on current market sentiment is the looming tidal wave new container ships poised to hit the market. More container-ship tonnage is on order than at any point in history. These new vessels will start entering service in the coming months, with heavy deliveries continuing throughout 2024.
Container lines contracted new vessels after years of under-ordering in the pre-pandemic era, when carrier balance sheets were very weak. The COVID boom gave carriers the financial strength to order replacement ships that will be much more fuel efficient — promising much lower operating costs — and in many cases will feature dual-fuel capabilities allowing carriers to “future proof” assets against environmental rules.
To make room for new vessels, carriers will presumably allow existing charters for the older ships they lease to expire and will scrap the older ships they own.
Asked whether carriers can use such strategies to avoid overcapacity when all the newbuildings are delivered, Jensen replied, “The short answer is no.”
He said, “The reality is that this is a cyclical industry. Back at the end of 2019, most of the headlines were about the historically low orderbook. If you look at the hypothetical case where the pandemic never happened, you would have gone into a normal cyclical upturn because of a very, very low orderbook.
“And, as always happens when you reach the apex of an upturn, carriers make money, they order more ships and it takes a couple of years to get them, so what we are seeing now is where we would have ended up anyhow, irrespective of the pandemic.”
Jensen sounded more sanguine about the looming newbuilding barrage than most other analysts. “This is a normal cyclical downturn and it’s going to be depressing markets in 2023 and 2024, but I don’t see it as a particularly unique situation,” he said.