Mr. Container's Revenge

 

Remember 2021? COVID-19 sweeps the world. Freight rates spike fantastically. The world's largest container lines order hundreds of new ships in a rush to meet demand – and to cash in on the bonanza.

If you're lucky enough to have an empty container in Shanghai, you can get $9,865 to send it to Rotterdam. And what's even crazier? The C-Suite and their advisors claim to genuinely believe that this gold rush isn't going to end.

Johan Sigsgaard, Maersk's Head of Ocean Products, delivered the quote that embodies this hubris (see "Mr. Container's Wild Ride" in the May/ June 2021 edition) when he confidently stated, "We expect rates will normalize at a level above historical."

But he was wrong, as I predicted. Rates collapsed down to levels that were even lower than they had been in 2020. The Containerized Freight Index dropped from its COVID-19-induced fever peak of $5,109.60 on January 3, 2022 to comfortably under the $1,000 level by February 6, 2023, which is where it remained for the rest of the year.

In 2021 and 2022, container lines placed a lot of orders for big new ships: 561 boxship newbuilds in 2021 alone, in fact, compared to just 114 in 2020. The total cost: $43.49 billion.

That's a gamble.

MSC ordered over two million TEUs of new capacity including several megaships in Shanghai. Maersk placed orders with Hyundai Heavy Industries (HHI) in Korea. CMA CGM went on a shopping spree at China State Shipbuilding Corporation, ordering 2.7 million TEUs. And in due course they were ready for delivery – whether container freight rates were high enough to cover their costs or not.

TIMING IS EVERYTHING

But let's skip ahead in time and consider Hapag-Lloyd.

It ordered six 23,500-TEU+, ultra-large container carriers (ULCCs) from Daewoo on June 21, 2021. These ships entered service from June 2023 to June 2025. The first ones hit the market during the aforementioned slump, but the later ones? Well, let's just say they got lucky – thanks to the Houthis.

In November 2023, right when all this new tonnage began hitting the spot market, the Houthis began attacking vessels in the Red Sea with Iranian drones. It hurt insurers, Egypt, many Mediterranean and Red Sea ports and shippers everywhere. But it rescued freight rates.

Nora Szentivanyi, an economist at J.P. Morgan, noted that the attacks caused "an approximately nine percent reduction in effective global container shipping capacity" as ships were rerouted around the Cape of Good Hope – because that journey, relative to a Suez Canal transit, takes about 30 percent longer, which meant that ships and containers were out of circulation for longer than they would have been if they could have sailed straight to their destinations.

And indeed, as important as the Red Sea is for global shipping, carriers and insurers began to avoid it, opting for the longer and less deadly route around the southern tip of Africa.

With more ships on the high seas, rather than in port to accept or discharge cargo, the law of supply and demand caused "soaring freight rates and shipping insurance costs, contributing to inflation," according to an analysis by J.P. Morgan.

As a result, in the third quarter of 2024, total container industry profits hit $26.8 billion, which is up (and this is not a typo) 856 percent year-overyear, reversing six quarters of declining earnings after the pandemic's end.

Shipping maven John McCown noted that the cause for this exceptional result was "pricing increases emanating out of the Red Sea situation."

Moreover, volume was also 2.1 percent higher than it was during the pandemic: Container lines moved 47,121,793 TEUs in Q3 of 2024, a record. High prices and high volume mean money.

Several container lines were explicit about the source of their windfall. In a statement earlier this year, COSCO said that because of the "escalating situation in the Red Sea," there was a lack of capacity, so "the market freight rate remained at a relatively high level in 2024. Hapag-Lloyd told Reuters that "when capacity is relatively tight, rates simply go up." Taiwanese container line Yang Ming also attributed the absorption of excess container capacity to the Red Sea crisis.

CASE STUDIES

So the supposedly ill-conceived newbuilds of the COVID-19 era entered service in time for this newest crisis. A few case studies illustrate this happy circumstance.

In August 2021, Maersk ordered eight 16,000-TEU, dual-fuel ships from Korea's HHI with an option for four more. In November 2022, a further six 17,000-TEU, dual-fuel ships were ordered. Ane Maersk, the first of the 16,000-TEU ships, was delivered in January 2024 with the rest to follow that year and in 2025. From February 2024 onward, it was scheduled to run the AE7 string, carrying cargo between Asia and Europe.

In October 2022, CMA CGM ordered the hull that would become CMA CGM Seine, a 24,000-TEU ULCC. Its keel was laid down at Hudong-Zonghua Shipyard in China. CMA CGM Seine was delivered in April of this year, when freight rates were at a peak from the Houthi attacks.

In March 2021, Evergreen ordered 20 M-class ships, each carrying 15,000 TEUs. The $2.5 billion order was split between yards in South Korea, China and Japan. In December 2024, the 14th one of these ships, Ever Most, was delivered. Ever Max, the first, was delivered in June 2023. The subsequent deliveries fall within the 2025 timeframe.

In each of these cases, except for Ever Max, the timing of the delivery was impeccable and coincided with the November 2023 start of hostilities in the Red Sea. Galaxy Leader was captured by the Houthis on November 19, 2023, and its crew was released 430 days later. By December 2023, freight rates were already relatively out of control.

Those ships would otherwise have entered into a low freight rate environment, adding to already existing overcapacity and dragging profits down further. Instead, because of the disruptions caused by the Houthis, each TEU slot was suddenly precious.

BOOM OR BUST

But regardless, it's an iron principle of supply and demand that what goes up must come down – as the market always finds its equilibrium. And freight rates are already moving toward normal.

Drewry noted recently that "the major trade routes, Transpacific and Asia–Europe, are now aligned in a downwards trajectory," and "the momentum (…) has now faded." Drewry's Container Forecaster expects the "supply-demand balance to weaken again in 2H25." Specifically, Drewry remarked that carriers are struggling "to match increased capacity – due to new vessels entering the trade – with softening demand."

Does it matter, though, if the "new normal" of permanently higher freight rates never arrives? The $43.49 billion spent on new container ships in 2021 seems reckless, but not when set next to the $110 billion in net profit the industry earned during that year of the pandemic, according to Sea Intelligence.

Ocean cargo is cyclical, a "boom or bust" industry. Indeed, an argument can be made that if container rates are easily absorbed by shippers even during peak crises, then over-ordering when times are good makes sense. Then you're all set to cash in when freight rates are driven up by an unexpected event.

WAITING FOR THE NEXT CRISIS

Like an predator waiting for prey, suffering through lean years in between making a kill is part of the game. As long as humans keep causing chaos, freight rates will continue to be driven by one crisis after another. Freight volume keeps growing, and if it isn't COVID-19 or Houthi terrorism, it will likely be some other unfortunate disruption.

So if you still have a ticket for Mr. Container's Wild Ride, hold onto it!