The peak season in the ocean industry ended, and it is now facing a dull season. The Shanghai Shipping Exchange Index (SCFI), the representative indicator of global container ocean freight rates, recorded 916 points in March, 1007 points in April, 984 points in May, and 1004 points in June this year. This is a decrease of 80%, 76%, 76%, and 76%, respectively, year-on-year.
[Representative Indicator of Global Container Ocean Freight Rates (SCFI)] (Source: Shanghai Shipping Exchange)
Therefore, this column will deal with the key reasons (demand/supply side) for the decrease in ocean freight rates and the major incidents that influenced them. Demand/Supply Side Demand Side: The ocean industry is facing difficulties in terms of demand. According to the World Bank’s Global Economic Prospects report, the growth rate (real GDP growth rate) of the world economy in 2023 is expected to be 2.1%, 0.4% up compared to that of January. However, this number is lower than 6% in 2021 and 3.1% in 2022. Similarly, the economic growth rate of the IMF is also expected to be 2.8% in 2023 and 3% in 2024. The international organizations prospect prolonged economic recession, and this impacts cargo volume.
[Real GDP Growth Rate] (Source: World Bank)
In fact, the growth rate of the ocean container volume decreased compared to the same month last year. It decreased by 6.5% in February, 3.1% in March, and 3.7% in April. According to the research findings of ocean freight predictions from this writer and Samsung SDS, the ocean container volume of 2023 is expected to be about 1.9% year-on-year. Global key institutions’ expectations on ocean container volume forecasts are as follows: Clarksons, Drewry, and Development Bank predict a 1.6%, 1.9%, and 2.1% increase, respectively, year-over-year.
[Ocean Container Volume Forecasts from Major Institutions in 2023]
However, the global economic recession is likely to continue until 2024. Therefore, the surge in container volume is hardly expected.
Supply Side: The delivery for over 8,000 TEU container vessels recorded 55,406 TEU in March, 81,028 TEU in April, and 133,625 TEU in May. It is an increase of 100%, 106%, and 458%, respectively, year-on-year.
[Global Container Volume Indicator] (Source: Clarksons Shipping Intelligence Network)
Regular liners who recorded exceptional performances during the pandemic competitively ordered container vessels. The vessels ordered at this time will be delivered starting from 2023. Because of this, container vessel delivery this year is suddenly increasing. According to this writer’s study results, global container capacity this year is expected to increase by about 7% compared to the previous year. Alphaliner’s prediction is about 8% and MSI’s is about 7%.
To sum up, the growth rate of capacity until June 2023 has a big lead over the growth rate of cargo volume. Because of this, the ocean industry is currently facing a recession. The problem is that the outlook is also not good, and the surge of freight rates is also unlikely.
(*Container cargo volume and container capacity will be described in more detail in the December 2023 column.)
[Delivery of Container Vessels over 8,000 TEU] (Source: Clarksons Shipping Intelligence Network)
Major Incidents and Carrier Strategies Major Incidents: The incidents that may potentially influence container freight rates in 2023 are the drought in Panama and the union strikes in the ports of the US West Coast. The bottlenecks in supply occurred due to the drought in Panama, but there was no surge in freight rates since it was not an emergent situation for the shippers.
(Source: Getty Images Bank)
However, we have to keep an eye on this incident from now on. The Panama Canal Authority (ACP), the agency responsible for the operation and management of the Panama Canal, announced to reduce the maximum sea gauge of vessels that pass the canal to 43.5 feet (13.26m) from June 25. The restriction after June 13 was 44 feet (13.41m), and 0.5 feet was added at the end of June additionally. In the case of Neo-Panamax (15,000 TEU), the loading capacity of a container reduces by about 40% when the maximum sea gauge becomes 44 feet. Because of this reason, carriers will adjust the loading capacity and adopt a transit toll for the Panama Canal. Hapag-Lloyd is expected to charge an additional cost worth 260 dollars per TEU starting from July 1 on its 3 services from East Asia to North America. Other carriers are also planning to apply additional charges of about 300-500 dollars per TEU from July. In other words, because of the severe drought that influences the Panama Canal, the loading capacity of vessels reduces, and higher costs will be incurred. Considering the fact that 4-5% of global ocean trade passes the Panama Canal annually, this can no longer be ignored.
In the case of union strikes on the US West Coast, it was an issue that could influence the ocean freight rates in the long term. Until now, it did not influence the ocean freight rates that much, but the progress should have been considered. This was because the management-union conflicts are ongoing between the Pacific Maritime Association (PMA), the representative organization of operation of terminals in the ports of the US West Coast, and the International Longshore and Warehouse Union (ILWU). There were terminal shutdowns in the Port of Long Beach at the end of March and the first week of June this year. In addition, there was a shutdown in the Port of Seattle in the third week of June.
Unlike the pandemic, many staying vessels decreased due to the lowering of cargo volume, so it did not lead to any major problems for the moment. However, if the situation got prolonged, it could have led to logistical disruptions that have been improving recently. On June 15, US time, the two announced a tentative agreement on the 6-year contract.
Carrier Strategy: There were two rises in the SCFI this year on the first to the second week of April and the first week of June. These were due to the strategies of carriers not because of the two major incidents described above. In the trough of freight rates, carriers protect the rates by adjusting shipping capacity. Even this year, large-sized carriers including Maersk, MSC, and HMM are continuing with their blank sailings in order to increase freight rates. According to Alphaliner’s report in March, the container volume of 350,000 TEU disappeared as of this year. The global container capacity was expected to be an 8% increase compared to the year before, but it changed to just 6% increase as blank sailings continued. But according to Drewry, the service reliability of carriers greatly increased currently. Therefore, if the voyage is carried out as expected for 5 weeks from now, the predicted percentage of vessels is 96%.
Carriers also implement General Rate Increases (GRI) to increase freight rates. The GRI refers to the general increase of freight rates, and it also means increasing the base freight rate in the rate table. Generally, the rates are increased for some or all routes. It is normally implemented when the ocean freight rates are low. However, the GRI does not always succeed. For example, there were rate increases in the US West Coast and US East Coast routes by 376 dollars and 418 dollars, respectively, in the second week of April compared to that of the previous week. These could be seen as carriers’ efforts to increase the rates in the North American route, preparing for the new contract season in May. The GRI was implemented in May too, but it did not succeed, and there was no increase in rates. In addition, the rates in the US West Coast and US East Coast routes in the first week of June increased by 268 dollars and 260 dollars, respectively, compared to that of the previous week. These increases could be due to the GRIs of carriers. However, the rates in the second week decreased just by the amount increased in the first week. This shows the instability and characteristics of the ocean market which can change depending on situations.
[Comprehensive SCFI in 2023] (Source: Shanghai Shipping Exchange)
It is important to continuously keep an eye on the direction of the market and get prepared considering the instability and variability of the ocean market. This is the approach required for the ocean market which is like a rugby ball that can bounce off anywhere.
Currently, it is a dull season in the ocean market, favorable for shippers. However, to get prepared for sudden changes in market conditions and logistics disruptions that may occur in the future, it is important to establish win-win strategies between carriers and shippers and come up with a cooperative system by improving relationships with service providers including carriers. In addition, a certain amount of establishment in long-term contracts is also essential to secure shipping capacity during the necessary period. For a favorable contract, forecasts on ocean freight rates are necessary. Through these, shippers can respond to fluctuations and come up with better decisions. However, the ocean industry is closely related to variability, so it is difficult to predict the rates. Therefore, accurate data collections, analyses, and experts’ experiences and knowledge are important. Moreover, the market conditions should be continuously monitored and risk management methods should be made to effectively respond to them. # Reference
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