2022 looks set to be another bumper year for container lines, the factors applying the brakes to container rates
In its 2022 container shipping report, AlixPartners noted that the supply/demand imbalance which currently benefits container lines, may flip as soon as 2023.
The first negative noted by the management consultancy firm was a warning from history; capacity constraints have slowed demolition and, along with environmental regulations, incentivise new vessels orders at a time where container lines have the cash to make orders. The orderbook is on the rise, albeit from a record low, and so lines threaten their own recent success should vessel supply grow too quickly. While ordering activity is currently more restrained than in the run up to the great boom and bust seen after the financial crisis, lines will be keen to avoid a repeat of the decade of depressed rates after the last ordering boom.
Aside from driving new orders, regulatory pressure at the IMO also poses an operational threat to container lines as they each place their bets on the low carbon, low sulphur fuel of the future. The cost of compliance has contributed to inflated newbuild costs but will also add retrofit costs for existing ships which will need investment to remain compliant and competitive.
“To date, CMA, COSCO, HL, and MSC have opted for LNG for their newbuilds, while Maersk has decided on methanol. The wrong bet will be hugely expensive and difficult to rectify,” said the report.
The ongoing payday for container lines has attracted regulators of another kind, as businesses and consumers call for government assistance to fix the extra delays and costs weighing on commerce.
“Industry stakeholders can expect continued government scrutiny of supply chains and their backbones. Any remedial measures taken will likely have little direct effect on rates but could eventually reduce wait times at ports and improve reliability,” said AlixPartners.
Lower wait times would effectively improve vessel supply as ships return to service instead of standing idle, putting downward pressure on rates.
Container shipping serves global economies and so an economic cooldown could hit rates hard. The report noted consumer incomes are being eroded by a drop in COVID economic relief payments and pay rises trailing inflation, while household debt is rising; each factor could restrict spending on non-essential goods, cutting demand for shipping.
“Sky-high consumer spending and demand show signs of returning to earth in 2022. Consumer outlays dropped for six consecutive months in the second half of 2021 as durable-goods demand eased. Durable-goods purchases are by definition infrequent, and it is possible that spending on durables may already have peaked for the cycle,” said AlixPartners.
Corporate budgets also look to be tightening, with earnings on the downswing, said the report.
“Historically, increases in earnings revisions—particularly in the nonessential goods subsector—have been a leading indicator of earnings declines, and revisions and earnings misses have been on the rise since the fourth quarter of 2021 with the percentage of companies reporting earnings shortfalls reaching its highest point since 2012.”
The final negative factor noted in the report is the threat of nearshoring. As shipping becomes more expensive and less reliable, companies may look to bring manufacturing closer to markets in a bid to make their supply chains more dependable, removing the need for ocean shipping altogether.
“The relocation of supply chains is already under way in the EU and the US. Much of the shift in US supply chains is toward Mexico… The relocation of supply chains also leads to increases in volumes shipped along second- and third-tier lanes to secondary ports, as is already becoming apparent in Canada and along the U.S. Gulf Coast,” said AlixPartners.