Can ocean liners improve their finances this year after a record 2021? Is there a risk that the market will implode? Splash asks analysts for their container forecasts.
The first days of the new year in the world of container shipping continued the main themes that contributed to a record 2021 year. Covid-19 related delays, rates reaching new heights and the general public becoming more aware of all things shipping.
Can container shipping improve on its financial performance from last year, when ocean liners were warned by consultants Drewry to have made a combined net profit of more than $150 billion?
Philip Damas, Managing Director of Drewry Shipping Consultants, says spot rate volatility will remain and spot and contract rates will not normalize until the current systemic market disruptions and container shipping crisis, caused by the pandemic, will be reduced considerably.
I see a fundamental change in the DNA of carriers
“The only certainty in the container shipping market today is that annual contract freight rates this year will increase by more than 60% on major routes, compared to 2021 contract rates,” Damas predicts. Taking into account both spot rates and contract freight rates, average container shipping rates will see another annual increase in 2022: the latest Drewry Container Forecaster forecasts a 16% increase in 2022, after the doubling of rates in 2021.
In normal shipping cycles, rates would have decreased after peak season. Not today, however, as Alan Murphy, CEO of Sea-Intelligence, points out. On December 31, the Shanghai Containerized Freight Index (SCFI) crossed the 5,000 mark for the first time – and it continued to rise in the first days of 2022.
“There is no indication that rates are falling, which puts a question mark on whether there will be a slack season,” Murphy said.
As global volumes begin to slow, liner shipping still faces highly imbalanced flows dominated by US imports and worsening congestion.
In terms of contract prices, Murphy expects the spot-to-contract spread to remain “substantial” throughout 2022.
“Contract enforceability will be the name of the game,” Murphy says. “Even if shippers manage to sign contracts well below spot price, the value of those contracts will be minimal if carriers can abandon them without serious penalty, in search of a much more profitable spot market.”
Judah Levine, head of research at Freightos, expects spot rates to remain at current levels in the coming months.
“Even with a shift in consumer spending, low retail inventory levels will mean strong demand will keep volumes high between Chinese New Year and the 2022 peak season,” Levine predicts.
Peter Sand, chief analyst at Xeneta, warns that as container shipping remains under pressure, any shocks could lead to further increases in base fares or surcharges.
“With the virus continuing to spread and China maintaining its zero-Covid strategy, more port closures or other black swan events that would drive up spot rates cannot be ruled out,” Sand said.
In terms of long-term contracts, Sand says shippers signing traditional contracts face two- to three-fold increases this year.
The long order book
Much has been written about the record container ship order bookbut analysts interviewed by Splash fear not that this will dampen the prospects for earrings this year. 2023, however, is another matter.
The order book currently represents around 20% of the existing fleet, the same level as seen before the market implosion in 2015-2016.
However, a lot has changed since then, especially the absence of competitive pressure from 20 global shipping companies, as well as a much higher level of carrier determination.
Any significant impact is still 18 months away, says John McCown, the founder of Blue Alpha Capital.
“Even with this backlog, it would be a mistake to assume the market will go back to excess capacity and do the things that have typically happened in these situations,” suggests McCown, insisting that carriers will be more disciplined at the future and more inclined to reduce capacity instead of reducing tariffs to fill that capacity.
2022 delivery numbers are likely to be similar to 2021, maybe even less, says J Mintzmyer, principal researcher at Value Investor’s Edge, who goes on to point out that important environmental regulations – EEXI and CII – will start to come into play. force in early 2023, which will synthetically reduce global supply by capping the engine speed limits of older tonnages.
“No one knows if the current supply challenges will have been resolved when the new ships come into service in 2023, but if carriers start to fear an oversupply situation, they have a long list of ships older than they can scrap to restore balance, while arguing that they’re doing it for good environmental reasons,” says Murphy of Sea-Intelligence.
Brave new world?
So is this a brave new world for liner shipping, one where competitors don’t destroy the party for everyone, or will carriers return to type when conditions improve?
“Looking at all the data and facts now, I’m not sure history is repeating itself because I see a fundamental shift in DNA,” suggests Blue Alpha’s McCown, who worked with Malcom McLean, the creator of containerization, for more than 20 years.
Absolutely, confirms Sea-Intelligence’s Murphy, a man who has often been quoted in the past as saying carriers have an uncanny ability to rip failure from the jaws of victory, which he concedes is no longer the case.
“For 10 years, we have maintained that the biggest challenge facing carriers is a lack of determination. I dare say they’ve found it now, and they’ve shown they no longer have any reservations about dropping the ‘liner’ part of liner shipping if rates are under pressure,” Murphy said, referring to the reliability of carrier schedules. during the pandemic.
Drewry’s Damas is an analyst however ready to predict some sort of crash, expecting the spot market to plunge next year, although the contract market will remain strong in 2023 given the new behavior and management. carrier capacities.
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