The current state of the market is undeniable. 2023 will not be a classic case of the boom and bust of the container market. With shrewd maneuvering, carriers can make significantly more money this year than in pre-pandemic years.
The gap between supply and demand
The baseline scenario for 2023 predicts demand growth of 1.9%. On the supply side, if all the new ships were theoretically delivered on time and there were no port congestion and scrapping, it would represent a “huge” 34% increase in capacity over last year.
Carriers cannot influence demand. They have no choice but to focus on supply. After consolidating and restructuring, they are better positioned to weather the ‘dangerous years’ and use leverage to ensure a “soft landing.”
They have already started, as numerous flights have been suspended and many empty (canceled) flights in recent weeks. The Drewry World Composite Index, which measures spot rates, is still falling, but not as fast as it was a few weeks ago.
The decline is still there but much smaller than it was. The carriers get a little more control. The groupthink of the carriers has been to milk profits as long as possible and then start cutting capacity when rates approach a level acceptable in the long term.
Scrapping of old ships and delay of new ones
Carriers have several ways to manage capacity and prevent a crash in 2023. One of them is to sell old ships for scrap.
The baseline scenario calls for a write-off of 600,000 TEU (twenty-foot-equivalent units) next year, or 2.5% of fleet capacity, by the end of 2022. This would be the second-highest annual scrapping rate on record, surpassing only the 660,000 TEU scrapped in 2016.
The capacity of the TEU order book has reached a record level. 2.6 million TEU of new power is planned for next year alone. Another way carriers can reduce their ability is by delaying the delivery of new vessels.
Delivery dates are always very variable. Carriers have an advantage over shipyards and can almost dictate when these ships will be delivered. Also, shipyards face potential construction delays due to the pandemic, power shortages, extreme weather events, and shutdowns.
There was always a “slippage” of delivery terms from year to year between 2008 and 2020; actual container ship deliveries exceeded 90% of planned deliveries only three times. This ratio was at 70% during the Great Recession.
So only 60% of the capacity scheduled for delivery in 2023 will come online next year. This is probably the boldest prediction because it’s the easiest of all carrier capacity levers.
Another way shipping lines can manage capacity is to idle ships. Idleness was one of the main tools used back in 2009 to deal with the fall in demand caused by the financial crash. During the year, almost 10% of the fleet was docked.
In 2016, 6.6% of the cargo was idle. As a result of the COVID-lockdowns, 6% of the shipment was inactive in 2020 (almost all in the first half of the year). For all of 2023, the baseline scenario assumes an offline mode of 5.8%.
The volume reduction will allow more ships to go into dry dock for repairs and maintenance. This will help with the periodic decrease in bandwidth.
Port congestion persists
Port congestion is a side effect of supply chain issues rather than levers that carriers actively pull, but it severely impacts vessel supply.
Сongestion will reduce adequate capacity by 15% this year. By mid-2023, congestion levels will remain the same to 2019, leading to a 6.9% reduction in sufficient capacity next year.
There are still many disruptive risks, possible disruptions due to strikes by port workers, and production issues such as power shortages, which could lead to more delays.
Add in all these factors — disposals, order delays, vessel idles, congestion — and the theoretical maximum estimate for a 34% year-over-year capacity increase drops to 11.3%. This is still well above the forecast demand growth of 1.9%. But carriers can use empty shipments and canceled services to close the gap, a process they have already begun.
Empty sailings will remain essential in carriers’ arsenal to curb capacity growth next year.
If demand is even lower than forecast in 2023, carriers will have to push those capacity levers harder.
We’re seeing regulators scrutinize carriers more closely than ever before. However, there is a limit to how much they can pull. Any suggestion that carriers hold back potential trade and harm the national economy for their gain will be frowned upon.
These capacity management assumptions are based on the premise that shipping lines will not engage in price wars and market share battles as they have in previous downturns.
The main lines dominate the market, but there are hundreds of individual operators, each with their strategies. At this point, they will do what’s in their best interest. The biggest challenge is predicting carrier behavior, which is highly error-prone.
In the meantime, logistics operators and importers are looking for optimal solutions to secure the supply chain.
PartnerTrade is also looking for new ways to transport your goods to different parts of the world. Our managers do everything to ship cargo in the best way.