Global News Capacity management will stabilize rates despite growing orderbook

Shippers expecting the flood of new container ships that will be deployed over the next two years and deteriorating economic conditions to bring ocean freight rates crashing down will likely be disappointed, as carriers vow to flex capacity to match any slowdown in volume.

“The alliances have demonstrated the industry is capable of managing fluctuations in demand by blanking sailings and idling vessels, and the capacity discipline will react to any oversupply situation,” Xavier Destriau, CFO of Zim Integrated Shipping Services, told JOC.com in an interview this week.

Hapag-Lloyd had the same message, with spokesperson Tim Seifert telling JOC.com that “adjusting capacity to demand is an integral part of our day-to-day business.”

The longest-lasting effect of the COVID-19 pandemic on the global shipping industry will be that the carriers are fully committed to sacrificing the “liner” part of liner shipping when volumes come under pressure, according to Alan Murphy, CEO and founder of Sea-Intelligence Maritime Analysis. In other words, carriers won’t hesitate to skip sailings and forgo weekly schedule integrity to keep utilization — and rates — elevated.

“The second quarter of 2020 saw the sharpest drop in container volumes in the history of liner shipping, but rates held firm through the volume crash as carriers blanked up to 50 percent of sailings in some weeks,” Murphy told JOC.com, adding that the trans-Pacific and Asia–Europe markets “will never see $500 freight rates again.”

After withdrawing huge amounts of capacity at the start of the pandemic in 2020, carriers reversed course, deploying everything that can float to support strong and sustained demand on the major east-west trade lanes. Older vessels have been kept in service and out of the scrap yards, and the number of inactive ships — also referred to as the “idle fleet” — has remained at record lows.

Chronic port congestion and equipment shortages resulting from record trans-Pacific volumes have also helped to keep rate levels elevated. Current spot rates from Asia to the US West Coast are at $7,930 per FEU, double those at the same point last year, while trans-Atlantic rates from North Europe to North America are this week at $6,593 per TEU, up 145 percent year over year, according to rate benchmarking platform Xeneta.

Although Asia–North Europe spot rates have slid almost 30 percent since Jan. 1 to $5,855 per TEU, they remain 30 percent above the same week last year.

Carrier executives are expecting spot rates to decline through the second half of 2022, but several have already all but assured their profitability for the year by locking in long-term contracts at high rate levels. Orderbook now a quarter of global fleet However, the scale of new capacity that will delivered to carriers over the next two years will take some managing. In 2023, global fleet capacity will grow 8.5 percent, while demand will tick up 4.5 percent, according to maritime analyst Alphaliner.

The orderbook currently stands at 6.6 million TEU, equal to 26.7 percent of the global container shipping fleet, according to data from JOC.com parent company IHS Markit, now part of S&P Global. That’s up from 22.7 percent last year and the highest level since 2008, when the orderbook exceeded 42 percent of the global fleet.

Much of this capacity will be delivered over the next two years, and some in the industry have suggested that because these ships are coming online as the global economy weakens, the market will return to its pre-pandemic state of overcapacity and rates will come crashing down.

Executives from both Zim and Hapag-Lloyd noted that carriers are still having a hard time meeting seemingly insatiable demand for capacity and will also have to phase out older, less environmentally friendly ships as decarbonization efforts ramp up over the next few years.

“Yes, the orderbook is comparatively high at around 25 to 26 percent and in the first quarter, newly placed orders reached 1 million TEU, but vessel availability remains tight, and the idle fleet is at a low level,” Seifert said. “Slower expected demand growth and an influx of additional tonnage from 2023 onwards should ease the tight capacity situation, but on the other hand, sustainability efforts could accelerate scrapping so delivered newbuildings that are more fuel-efficient will replace older tonnage.

“Our 10 vessels of 13,000 TEU on order will, for example, most likely replace smaller and inefficient vessels,” he added. “All in all, we expect demand and supply fundamentals to become more balanced in the years to come.”

Destriau said there are several other significant factors that will influence the balance of supply and demand in container shipping over the next two years.

“The orderbook suggests oversupply, but China shipyards are experiencing difficulties in meeting some of the delivery dates, so those may slide to later delivery of some capacity,” he told JOC.com.

“There will also be a strong incentive for the industry — which, let’s face it, can afford it after the profits of the last two years — to retire older tonnage. There will be increasing pressure from our customers and regulators to move to greener operations and retire older ships. Big customers like Walmart and Amazon have made clear they expect carbon neutrality from their service providers by 2030 or 2040, which will have a big impact on the effective capacity to be deployed in 2023 and 2024.”

Destriau added that in addition to idling vessels and blanking sailings, Zim’s strategy of chartering most of its vessels — rather than purchasing them — serves as another lever for matching supply with demand.

“In 2023, we have 28 vessels that will need to be renewed,” he said. “If we see there is pressure on supply, we will return those vessels to their owners. The same goes for 2024, when we have 34 vessels that are due for renewal.”