The hopeful projections for recovery in cargo volumes in 2023 may be overshadowed by the more pessimistic projection of delayed recovery which may only manifest itself in 2024, according to Lars Jensen, Principal at Vespucci Maritime based in Copenhagen, Denmark.
Jensen was speaking to the Propeller Club of Northern California (PCNC) on January 17th in which he said that the recovery in ocean shipping volumes may have to wait until 2024.
However, Jensen believes the more pessimistic outcome is more likely: “The pessimistic scenario is somewhat easier to swallow. In that scenario, the Russian war does not end anytime soon, it takes inflation a lot longer to get under control, and the current recession might be deeper and longer than we expect. In this case, it will take consumer sentiment a lot longer to come back. In which case, the boom that we get in cargo demand following the inventory correction will not happen until the first quarter of 2024.”
Jensen said that the core driver of the massive decline in container volumes “is very simple: it’s an inventory correction. Inventory corrections always hit container volumes hard. That means that the decline will continue until the owners have run down their inventories to a more satisfactory level. This is likely to happen sometime during the first quarter of 2023.”
Service Reliability Decline
At the same time, carrier service reliability “dropped off a cliff” at the onset of the pandemic in 2020. “It reached a bottom in January 2022. That was when only 30% of vessels arrived on time. Since then, we have seen a 57% improvement in on-time performance, which is a substantial improvement over 2022. In January of 2022, delays were averaging 8 days, we are now down below 5 days. One of the worst problems was the Transpacific service going to the West Coast in which less than 10% of vessels arrived on time in January of 2022. That situation has improved massively over 2022.”
Freight Rates Have Crashed
Jensen said freight rates: “have seen a massive roller coaster where rates from Asia to Europe went from $14,000 per container down to less than $2,000 dollars. For the Transpacific we have gone from $11,000 to $2,000. There are now spot rates for containers that are below pre-pandemic rates.”
The result has gone from absolute boom to bust for the carriers.
Transatlantic Volumes Decline By 10%
The Transatlantic rates appear to be the odd one out: “Rates there remain strong in 2022 because they were capacity driven as a result of the congestion on the U.S. West Coast driving volumes to less congested ports on the U.S. East Coast. The congestion on the West Coast in 2021 drove many shippers to redirect goods to the U.S. East Coast. The predictable result was massive congestion at ports on the U.S. East Coast. This resulted in delays and reductions in capacity, which strengthened the freight rates.”
The bright picture for U.S. Atlantic coast ports has begun to change in the last few weeks and the Transatlantic spot rates have begun to come down: “The latest numbers show that demand for the Atlantic ports to be down 10% so you are going to see the freight rates on the Transatlantic do the same roller coaster ride that you saw in the Transpacific and Asia to Europe markets.”
ILWU/PMA Impasse Helps U.S. East Coast Ports
Cargo moved away from the West Coast to the East Coast because of congestion and while that congestion is now gone: “The cargo has not come back to the U.S. West Coast. As long as there is no new agreement between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU), most shippers would not want to move their cargo back to the West Coast until a new union agreement is signed.”
Carriers Are Renegotiating Contracts With Shippers
Jensen noted that for months there has been renegotiation of existing contracts: “Not surprisingly, nobody wants to pay $4,000 more than the spot rate. That’s just not going to fly. So, you have a lot of contracts that have been re-negotiated over the last couple of months.”
Given the sharp decline in demand, “a lot of the carriers have been quite amenable to changing rates in contracts … simply to try and hang on to the volume. In some cases, the carriers have actually been proactive and have gone to the customers saying ‘shouldn’t we lower your rates in the contract?’”
MSC/COSCO Plan Big New Ship Orders
In terms of the orders for new ships by the global alliance carriers for 2023 and 2024, there are substantial differences between the leading carriers: “For example, MSC is going to grow phenomenally and so is COSCO. Maersk and Yang Ming are not going to grow much at all according to the order books. This means that some carriers are going to be very aggressive in growth and they will need volume for these new vessels. The others are not into growth at all: they want to sell logistics products or increase their unit profitability. This is going to ramp up the pressure between the carriers.”
Uneven Capacity Reductions
Jensen posed the question of ‘why have the carriers done so poorly in reducing capacity in 2023 when they were so efficient in reducing capacity’ following the onset of the pandemic in 2020.
Back then, he said, the carriers maintained the freight rates “because they had to stay alive.”
Today, the carriers no longer have this aligned interest: “The competitive pressure is much larger. They still want to reduce capacity, they are just not as efficient as they were back in 2020 and hence this massive rate collapse that we have seen.”
Challenges Facing 2023
The resolution of the following trends and challenges will determine the business outlook in 2023 as well as who benefits and who does not:
The U.S. labor negotiations on the West Coast “are absolutely key.”
The East Coast ports are increasingly winning the volume war with the West Coast ports: “Ten years ago, the West Coast ports had a 1.5:1 container volume advantage over the East Coast ports. In other words, for every 1.5 containers that were handled on the West Coast only 1 container was handled on the East Coast. The latest data shows that there are more containers being handled on the East Coast than on the West Coast. This is a very dramatic shift. Some of that cargo is coming back to the West Coast but not until a labor contract is in place.”
There is increasing congestion at Chinese ports: “China chose to go from zero Covid tolerance to 100% in a heartbeat and that is creating all sorts of disruptions there. This pertains to the production and to cargo-handling at ports.”
In North America, there are increasing cases of shippers pushing back on detention and demurrage, which became easier to challenge under the new U.S. Ocean Shipping Reform Act of 2022.
As a result of the sharp decline in spot freight rates and contract rates: “we should expect to see a dramatic worsening in carriers’ financial performance. I would not be surprised to see carriers adjust their projected profit rates for 2023. I would also not be surprised to see that carriers would become loss-making in 2023.”
Everyone should be prepared for more blank sailings as a result of these changing conditions.
