The year 2021 will be remembered in the container shipping sector for its excesses. The shipping companies are now going to have to manage their return to earth, which could be bumpy.
After the Covid-19 shock which marked 2020, the container shipping world could have been expected to go into resistance mode in 2021. It did nothing of the kind. The year turned out to be highly chaotic under the impact of a series of excesses:
- Excessive demand from Western consumers (United States / Europe), driven, notably, by e-commerce.
- Excessive rates charged by the shipping companies on the spot market (up to USD18 000 per 40' container FAK in June-July in the Asia-Europe trade).
- Excessive deterioration in the quality of service offered by the shipping companies, which generally practised a "take it or leave it" policy when the crisis was at its worst last summer.
- Excessive inflation resulting from the efforts of governments worldwide to combat the pandemic and redynamise their economies. The European Central Bank revised its 2021 inflation forecast upward to 2.2%. Inflation is expected to peak, however, in the fourth quarter (+3,7%), according to the latest economic forecasts from the European Commission. GDP growth figures need to take account of this inflation.
Generally speaking, we can see that the pandemic has sometimes served as a pretext to explain the changes taking place in the functioning of the market. The shipping companies have cleverly manoeuvred to take advantage of the following winds for as long as possible, presenting themselves when they needed to as champions of environmental transition. This was demagogical on their part even if the transition is necessary from the macro-economic and societal point of view.
A clear victory for Scenario number 2
To make our assessment of the year 2021, we propose going back to the forecasts we made in January 2021 and the three scenarios we presented at the time.
- Scenario n°1. The balance of power is reversed in the second half
We have to accept that there was no reversal of the freight rate trend at the end of June. We had to wait until October to see real, discernible downward movement. Today, space is available and rates seem to have settled below the psychological USD10,000/40' container level for online spot bookings for incoming goods from Asia. Careful, though ! Fresh rate increases cannot be ruled out at the end of the year in the run-up to the Chinese New Year. Occasional surcharges and blank sailings can still have a major effect on the end-price for transport.
- Scenario 2. The shipping companies keep control
This scenario referred to the all-powerful position held by the shipping companies and has been largely confirmed throughout the year. The leading members of the shipping Top 10 recorded record financial results in the first half after having already enjoyed a sparkling 2020. "Stop! The swimming pool is overflowing," one LinkedIn professional exclaimed in response to one of our articles. The image is a colourful but perfectly accurate. The shipping companies showed great agility, using their windfall revenues to reduce their debts, invest, boost their digitalisation programmes…and lock down the market. The countries concerned are delighted by the performance of their respective champions. Chests are puffed up with pride and pockets are full!
- Scenario 3. "Sow the wind and reap the whirlwind"
This scenario was based on the likelihood of market intervention by states and regulatory bodies. In the event, we saw a lot of gesticulating but little in the way of results.
Certainly, the United States reacted on the orders of the new Biden/Harris administration, with backing from Congress, by giving additional powers to the Federal Maritime Commission. But the results were meagre in relation to the scale of the problem posed - just a few directives on charging practices for port services.
In Europe, nothing has changed. As France prepares to assume the presidency of the European Union for six months from 1 January 2022, priorities is clearly being given to the greening of transport activity and fishing much more than to market regulation. At the same time, the first preparatory commissions are due to start looking at the exemptions granted to regular line shipping consortia in 2022 and it is perhaps from them that will come a change in the organisation of the market. If the shipping companies in their alliances continue to offer highly disorganised services, they deprive themselves of the main justification for their special status. Given the size that they have now reached, it is by no means clear that the end of the exemption will result in a lower level of service.
In China, even if there is little communication on the subject, one feels that there is a desire to normalise the situation and return more reasonable freight rates so as to avoid reducing freight volumes at a time when the pandemic has not been stopped and upstream raw materials logistics are still under strain.
Points to remember
1/ Signs that the market is returning to earth in the fourth quarter
There are signs that the market has begun to regulate itself in a certain sense. The impact of rising ocean freight rates on retail prices is beginning to draw attention, which could help to bring a return to reason. Add to that the expected arrival of fresh shipping capacity and one can reasonably consider that market overheating is over. The days of five-figure freight rates for 40' containers are becoming a thing of the past, in our opinion for a long time to come, in the Asia-Europe trade. The extreme elasticity of rates in this trade (USD4,000-14,000 for the same 40' container) does not make much long-term sense for any of the parties concerned.
The end-of-year negotiations on long-term contracts have turned out less easy than expected by the shipping companies. Shippers, who are starting to come back to their senses after the hammer blow they took in 2021, sense that the wind is turning in their favour, particularly if they succeed in completing their contract negotiations after the Chinese New Year.
2/ A more even balance of power
It would be an illusion, however, to think that the balance of power can be reversed in the short term, with freight rates returning to below cost levels, as was the case in the pre-pandemic period. The shipping companies will be all the more careful to avoid this, moreover, given that their own costs have markedly increased.
The USD6,000-7,000 average rate for 40' containers in the Asia-Europe trade in 2021 represents a masterful achievement by comparison with the USD2,500-3,000 rates applicable in 2020, particularly given that, this year, there has been plenty of cargo volume. The shipping companies' fourth quarter financial results will still be very good even if there are some indications that the highest freight rates are starting to be eroded.
3/ New integrator strategy
Several big shipping companies have started to extend the range of their activities. This is true of Maersk, which now claims to be a global integrator, and to a lesser extent of CMA CGM and Cosco. This approach has doubled their freight billing leverage. These companies have updated the notion of one-stop shopping, giving it a new digital dimension.
4/ Supply chain transformation
As a result of the pandemic, the shippers have been able to take the measure of the risk posed by being over-dependent on a single supply source. Now is the time for diversification and near-sourcing. This change of strategy is also being driven by environmental consideration. After falling in 2020, global CO² levels have returned to pre-pandemic levels.
In this situation, modal switching and alternative sourcing are very present in shippers' minds. This could little by little have an impact on ocean cargo volumes but transformations of this kind will take several years to come into effect.