After posting record profits for the last two years, container lines are now facing a new challenge with more ships due for delivery over the next two years, according to a recent DHL report.
The global logistics company noted that at the start of the year, shipping companies placed record levels of new orders for container vessels but political instability, rising production costs and subsiding consumer confidence and economic growth rates are currently impacting demand.
This combination of a lowered demand, along with growing capacity, has led to a drop in rates.
Fresh challenge for container lines
"At the start of the year, shipping companies have placed record levels of new orders for container vessels. The aim was to introduce new capacity, though it would only be available in 2023, and relieve pressure on rates that have been building up over the past year," DHL said.
The global logistics firm noted, however, that the market situation has changed, with various events such as the war in Ukraine, the energy crisis and inflation leading to lowered consumer spending, and thus demand for goods.
"Containers lines are now facing a potential challenge on the supply side, where overcapacity could impact profits," DHL said.
It added that a total of 7.3 million twenty-foot equivalent units (TEU) of new building capacity, representing 28.3% of the existing cellular fleet, is expected to hit the market by the end of 2025, citing shipping analyst firm Alphaliner.
"The years 2023 and 2024 alone will see a total of 5.1 million TEU of newbuilding tonnage joining the fleet, with 2.3 million TEU expected next year and 2.8 million TEU due in 2024," the analyst said, adding that by comparison, the containership fleet is expected to see only about 1.1m TEU of new capacity hitting the water in 2022, about the same as in the year before.
DHL noted that the current fleet has an average age of less than 14 years, so scrapping is likely to be subdued, although some capacity will be effectively taken out of the market due to impending IMO carbon regulations which will force ships to slow down to reduce emissions.
"All this means that a huge number of new large containerships are going to hit the water in 2023 at a time of stagnating demand," DHL said.
It added that tonnage supply could potentially outstrip vessel demand again next year and the liner shipping market might be headed towards structural overcapacity.
"There is no doubt that we are moving towards a period in container shipping in which overcapacity is the chief challenge for carriers," said Dominique von Orelli, global head, of ocean freight, at DHL Global Forwarding.
"Hopefully, liners will take action to reduce empty slots, and look at improving service reliability for their customers," Orelli added.
Continuing Covid-related restrictions in China
Similarly, another challenge in the market is the persisting coronavirus-related restriction in China.
DHL noted that while port-related congestion issues in Europe and the U.S. have lessened, supply chain disruptions are continuing in China with its zero Covid-19 policy still in place as hopes of a significant easing of the pandemic-driven restrictions have already been dashed.
"A much anticipated State Council press conference on 7 November saw officials reaffirm that China would be sticking to the strict policy that continues to dampen both international trade and China's own economic growth," DHL said.
Kelvin Leung, CEO, of DHL Global Forwarding Asia Pacific, said a China reopening would boost supply chains and put manufacturing schedules back on track.
"We are closely monitoring the situation in China, and hope to see some loosening of the restrictions by next year. This would allow manufacturers to plan production and deliveries more efficiently. It would also boost growth and confidence in the important Chinese domestic market," Leung added.
Citing a report by J.P. Morgan, DHL said in its statement that business optimism dipped to a 28-month low, as "new order intakes and international trade flows continued to dwindle in the face of heightened economic, inflationary and political pressures."
"With demand weak, geopolitical and market volatility high, and inflationary pressures still elevated, the growth outlook remains downbeat for the remainder of the year," said Bennett Parrish, global economist at J.P.Morgan.
Rates seen to drop back to pre-Covid levels
DHL said capacity and demand also continue to be impacted by market developments.
"Traditional peak season barely materialized in 2022 and many industry observers feel that the slump is structural, rather than seasonal. These economic headwinds, and ongoing Covid-19 restrictions, have combined to impose heavy downward pressure on freight. Although uneven, the pressure is being felt globally," the logistics company said, adding that across many trade lanes, cargo volumes are weakening.
"The end result? Spot freight rates are projected to move back to pre-pandemic levels," DHL said. "The question that remains is whether there are signs of rates normalization in the near future."
