Liner shipping will make just 5% of 2022’s mega profits, and up to 25% of the massive container orderbook will likely be postponed. These are the headline predictions in a unique survey carried out today looking at how the container sector navigates its way out of its greatest ever boom.
Both Drewry’s World Container Index and the Shanghai Containerized Freight Index (SCFI) have halted their plunges at the cusp of the new year, however, experts are warning carriers will need to brace for some very challenging conditions in the coming months.
“Carriers are starting the year with a weak hand, and I expect they would turn in losses before the year is over,” said Hua Joo Tan, the founder of Asian consultancy Linerlytica.
More bullish is John McCown, whose Blue Alpha Capital quarterly liner profit reports have become essential reading during box shipping’s record earnings run since 2020.
McCown anticipates that the carriers will be profitable in 2023 with a net income to revenue margin in double digits but with aggregate quarterly profit levels below the Q4 level recorded in 2022.
More aggressive capacity management will be a central factor as lines doggedly avoid red ink this year, McCown suggested.
“There are certainly a lot of moving parts and we’re at a fulcrum point right now, but my broad view is that the container shipping sector will be performing better than most think and there has been a fundamental change in sector DNA,” McCown told.
UK consultants Drewry estimate liner shipping made record combined operational profits of $290bn last year, something that will slide to just $15bn in 2023, with shippers enjoying more affordable freight rates and better service reliability.
“2023 will not be just about lower carrier profits,” said Philip Damas, the managing director of Drewry Supply Chain Advisors. Among the other key trends to watch, according to Drewry, are the easing of port congestion and associated operational delays around the world and the return of overcapacity in container shipping.
For Peter Sand, chief analyst at freight rate platform Xeneta, 2023 looks certain to be the second year in a row of falling container volumes, and subsequently the main characteristic of the market to look out for will be the idle fleet. This includes both hot and cold lay-ups in addition to blank sailings.
Making headlines this year for sure, Xeneta expects that 25% of the scheduled orderbook will be postponed, while no more than 10% is expected to be cancelled – and that would probably be options not called rather than outright and expensive cancellings.
Sand reckoned carriers with heavy exposure to long-term contracts rather than spot business will remain profitable this year. Carriers with a full exposure to the spot market are already losing money and will continue to do so for many months to come, he warned.
On top of the worrying amount of new tonnage due to enter the container markers this year and next, HSBC sees downside risks to demand in 2023 as inflation bites into household savings, which the bank said this week could likely trigger another round of price competition.
Scrapping is likely to ramp up over the course of the year, according to Daniel Richards, associate director at UK consultancy Maritime Strategies International (MSI). MSI expects scrapping will reach a year-end total of around 270,000 teu, before increasing even more in subsequent years. Xeneta, meanwhile, is forecasting up to 400,000 teu worth of ships will be torched this year, still some way short of the record 696,000 teu scrapped in 2016.
Attention is now turning to contract rates, with TPM, the industry’s leading business event coming up shortly.
Contract rates are collapsing on most routes, based on early data seen by Drewry.
“Despite a current Tic Tac Toe environment, BCOs will still not be able to play their best hands depending only on the flop. 2023’s longer term ocean freight market requires the skills of a chess grandmaster to successfully check their opponent, the ocean vendors,” advised Steve Ferreira, the CEO of New York-based shipper advisory Ocean Audit.
“The pendulum has clearly swung back towards shippers,” said Richards from MSI, predicting that some shippers will simply hold off from extensive contract commitments unless the rates they are offered end up close to pre-pandemic levels.
“It will likely be a frustrating contracting season where neither side feels it has gotten all it wanted, but also where worst-case scenarios were avoided,” Richards predicted.