While freight rates are expected to return to the pre-pandemic level in 2023, limited active supply growth driven by regulations (demolitions and speed) will likely help the market to recover from 2024 onwards, according to S&P Global Market Intelligence.
S&P said newbuilding contracts in 2021 reached the highest since 2015 mainly with container vessels but remained lower than the shipbuilding boom period during the 2000s.
It noted that fresh contracts were limited in 2022 due to high prices and limited yard capacity in top-tier yards while many owners took the options of existing contracts for much lower contract prices.
"The container sector is expected to face pressure from supply side due to heavy investment in new buildings, while fresh new contracts are limited in other sectors, including the dry bulker and tanker," S&P said, adding that gas has been a preferred choice for the alternative fuel but methanol (green fuel) started to gain attraction recently, mostly from the container sector.
Nonetheless, in its statement, S&P said the Efficiency Existing Ship Index (EEXI) is a design requirement for existing ships. Many vessels will go for Engine Power Limitation (EPL), and maximum and operating speed are expected to be reduced.
The Carbon Intensity Indicator (CII) regulation, which will be assessed yearly with stricter emission limits, will also start to reduce sailing speed from 2024 and the impact may become significant in scrap activities from 2025 onwards with favorable age profile.
The CII rating issue would incentivize higher demurrage to reduce idling time and prevent further upside risk in congestion in coming years.
While a significant drop in freight rates with high bunker prices has already reduced sailing speed, EEXI-EPL will prevent potential speed recovery, S&P added.
"Freight rates may return to the pre-pandemic level in 2023 with absence of congestion and weaker economic condition. However, limited active supply growth driven by regulations, which will lead to vessel demolitions and speed reduction, may help the market to recover in 2024 onwards," said Daejin Lee, lead shipping analyst at S&P Global Market Intelligence.
"Since 95% of vessels in service are still using conventional fossil fuel, with IMO's CII regulation, many vessels will end up scrapped earlier than normal historical lifespan of vessels, which will support freight market in the medium and long term," Lee added.