DOWNGRADES AND UPGRADES

How crazy is the container shipping market? Presenting Drewry’s latest outlook briefing, Simon Heaney, Senior Manager, Container Research, Drewry, made it clear: the forecast includes a downgrade in the outlook for world port handling volumes but it also included sizeable upgrades for freight rates and carrier profits.

Container system inefficiencies, disruptions and port congestion have been the dominant drivers of freight rates and carriers’ substantial profits over the past two years, he said. Now Drewry considers these factors to be embedded in the market and ‘simply relegated to the margin’.

“Ultimately, carriers’ ability to charge customers extremely high freight rates is going to be dictated by the longevity of the liner supply chain bottlenecks, which sadly remain highly unpredictable,” said Heaney.

After a 110 per cent increase in 2021, Drewry is expecting average global freight rates to rise by a further 39 per cent this year.

‘Mounting headwinds’ for container lines include the Russia-Ukraine war; inflation and the dampening of consumer and business confidence; Covid-19; regulatory scrutiny; bunker prices; and the implications of decarbonisation measures.

Individually, each risk is of concern and difficult to predict in terms of duration, “but the biggest source of uncertainty comes from not knowing how all these various risks are going to interplay with each other”.

Drewry considers the war in Ukraine to be the top risk; this is followed by, ‘rising fast’, China’s zero-Covid strategy and consequent lockdowns.

CONTAINER HANDLING PROSPECTS

World port container handling increased by an estimated 6.5 per cent in 2021. Drewry has downgraded its previous 2022 forecast from 4.6 to 4.1 per cent, “and if we ran the forecast again, I am pretty sure it would be lower again”. For 2023, Drewry has lowered its outlook for port handling from 3.5 per cent to 2.8 per cent growth.

Nevertheless, Heaney said: “Slowing growth prospects are going to be a concern to carriers but as long as any formal growth and sharp contraction can be avoided, the party should keep on going from the carriers’ point of view. It is entirely possible for rates to remain extremely high at the same time as headline demand growth is falling.”

He said carriers would be most concerned about the COVID-19 situation in China and whether its impact will be felt most at factories or in ports.

“Covid has been very good for carrier profitability – the primary side-effect was to create capacity shortages in nearly every link of the freight transport supply chain at a time of high demand. Production outages were mainly confined to the start of the pandemic, but any new factory slowdowns or shutdowns could choke demand for services,” he warns. “The ‘sweet spot’ is for disruption to be bad but not so bad that it closes the factory gates.”

Drewry has extended its horizon for supply chain recovery and now expects the issues to ‘start unwinding’ in the first half of 2023.

“That is going to mean at least another 12 months or so of lengthy delays and high freight rates, but we do expect to see gradual improvements beforehand.”

Using AIS data to measure the number of container ships waiting outside selected major ports around the world, in high, medium and low-volume categories, Drewry assesses port congestion based on a standardised score.

High-volume ports on average were very congested throughout 2021. “We haven’t seen any signs of improvement and the situation appears to be getting worse, as we are now starting to see medium-volume and even low-volume ports increase – the problem is now spreading to these too. That is to be expected as ships divert to find clear pathways,” said Heaney.

He was asked: What will motivate carriers to reduce rates? “They don’t want to. But if port congestion is the thing that has propped up and elevated freight rates, if you take that away, the market fundamentals are not going to be so strong. There is a slowing and potentially contracting demand environment with substantial amounts of new capacity to join the market from next year,” he said.

In this scenario, the traditional supply/demand fundamentals would come back into play once congestion is over, “and frankly, the market will dictate how much carriers will be able to charge customers”.