Strong Container Market Slowing in the Face of Uncertainties 

After two years of record results driven by a surge in volumes, capacity constraints, and port delays, the container shipping industry is starting to show the first signs of weakening. With consumers shifting their spending patterns, rampant global inflation, and fears of a looming recession, signs point to the coming normalization of the market that industry executives have been alluding to in recent months.

“The container market is facing significant and unprecedented uncertainties regarding both future demand and supply,” writes BIMCO's Chief Shipping Analyst, Niels Rasmussen. He notes that while the carriers have all reported strong results, container volumes have shown some early signs of weakening. “Though still high compared to the pre-COVID market, there has been a noticeable impact on rates and prices as well as activity in the asset markets.”

Among some of the indicators that BIMCO is highlighting are recent declines in head-haul and regional container volumes. While still up versus pre-pandemic levels in March 2019, they note that the volumes which are the drivers of rates and prices, profitability, and congestion, were down in March 2022 versus the year ago. BIMCO highlights that volumes into Oceania and Europe were particularly weak in March 2022 and whereas volumes into North America continued to show gains, they too in many places were showing slowing growth rates.

The result is further demonstrated as key indicators have in many cases come off from their highs reported in 2021. The China Containerized Freight Index (CCFI) has slipped 12.6 percent from its peak in early-November 2021. BIMCO reports that the result has been felt in the time charter market for example where rates have slowed since peaking in late March. Owners, they report, have had to accept much shorter time charter periods, which on average are now down to two years from a peak of four years in mid-2021. At the same time, second-hand prices appear to have peaked for now and the number of transactions has slowed significantly, while newbuilding contracting and price increases have also slowed in 2022.

While other reports indicated that long-term contract freight rates had come in strong during the renewals this spring, the spot market however is showing the signs of near-term weakening as consumers shifted their spending away from goods and back to services. 

Digital logistics platform Shifl highlights for example that while market reports have indicated that ocean freight rates on long-term contracts have increased substantially in 2022, the reduction in consumer demand in the U.S. has caused especially ocean spot freight rates to drop considerably since January 2022. Coming off its high in January 2022, Shifl calculates that spot rates are down by just over half between China and both the U.S. West Coast and East Coast, and “as per indications it is set to maintain these levels till at least July 2022.”

Further, Shifl writes that the rates could further drop as the U.S. retailers currently have excess inventory. Clothing retailers in the U.S. for example are reporting high inventory levels with some analysts speculating that they will have to move into clearance sales. Shifl also highlights that many retailers’ orders are still pending in part stuck in China mainly due to the intermittent lockdowns which would only add to inventory levels.

Adding to the uncertainties for container shipping, BIMCO also highlights supply noting that “contracting activity has been high since Q4 2020 and 6.3 million TEU in new contracts have been signed since then. Deliveries of these ships will begin in 2023 but many will be delivered in 2024 and 2025.”

BIMCO is currently estimating that the global containership fleet will grow by three percent in 2022 but that growth will accelerate in 2023 to nearly eight percent, reaching 27.4 million TEU by the start of 2024. Some growth could, however, be offset by demolition activity, which while it slowed during the peak demand could be driven by new environmental regulations, such as EEXI and CII, due to come into force in 2023.

BIMCO concludes in its current market analysis that many indicators point to slowing growth in demand, especially for the head-haul and regional trades during 2022 and 2023. Compounded with fleet growth and the potential that despite the complications of new environmental results, supply will grow faster than demand.

“It follows that we forecast that the supply/demand balance will weaken, and this should lead to lower freight and charter rates as well as second-hand ship prices,” writes Rasmussen. “We consider it unlikely that rates and prices will quickly fall towards pre-COVID levels. We cannot, however, fully rule out the possibility if the IMF’s worst-case forecast scenario for the global economy materializes.”

The chief executives of the major shipping companies including Maersk and Hapag-Lloyd previously warned that they expected the markets to slow and normalize after the second quarter of 2022. What remains to be seen is the depth of the downturn and if global economic conditions and other uncertainties will result in steeper declines for the containership segment after the past two years of record gains.