Transportation & Logistics Analysis

Container shipping prospects in 2021

January 12 2021

The year 2020 showed how dangerous it is to make forecasts…We are going to take the plunge nevertheless and put forward three possible scenarios for the container shipping business. Following the sharp rise in freight rates seen in 2020, it seems to us most likely that the balance of power in the sector will be reversed in the second half in shippers' favour.

The Covid pandemic has shaken up existing trading patterns, as we pointed out in our 2020 container shipping report. Some fundamentals still apply, however, including China's domination of global industrial production. Certainly, we are seeing some relocation from China to other Asian countries, particularly Vietnam, and this trend, which began before the pandemic, should continue. In the short term, however, there will be no major switch to "nearshoring". Traffic at some Chinese ports was even higher at the end of 2020 than it was in 2019. Certainly, the global market showed greater resistance than expected in cargo volume terms but such a result was difficult to imagine last March!

At the same time, 2020 saw a radical transformation of the classical container shipping equation. From the start, this has been based on a constant search for greater fluidity in the movement of containers from one transport mode to another and the optimisation of costs. This is what the industry has been able to offer shippers over the last 30 years, thus contributing massively to the globalisation of world trade. The modern supply chain, with the SAP and Oracle-type data systems on which it relies, is built on these two constants: ships which enabled transit times to be constantly shortened and cost reductions. There was a sharp break from these constants, however, in 2020.

Uncertainty takes over in 2021

Following this break, many questions still need to be answered in the shipping industry:

  • Will east-west freight rates continue to soar?
  • Will shipping companies be able to get a grip on current disorganisation in the positioning of containers?
  • Will the regulatory bodies really take action?
  • Is shipping company strategy holding up economic recovery?
  • Are the shipping companies going to attract more traffic by offering a greater range of services?
  • What differentiates the digital services offered by the leading NVOCC logistics groups and those offered by the shipping companies?
  • Can the market shares of alternative transport modes, particularly rail, continue to increase rapidly enough to create a real second market between Asia and Europe?
  • How quickly and at what cost can the sector go green?
  • Is the high freight rate policy practised by the shipping companies going to encourage "outsiders" to come into the market?

It is currently impossible to reply to all these questions, as it is to another sizeable unknown. How strong will demand be in 2021 and, nearly more importantly, how reliable will demand forecasts be? It is these questions which are causing annual rate negotiations to mark time at the moment. Let us nevertheless trying to identify three possible scenarios for 2021, beginning with the one most likely to be realised.

Our three scenarios

Scenario 1. The balance of power is reversed in the second half

This scenario is based on the likelihood that the existing balance of power will be reversed in favour of shippers in the second half, and even a little before the end of the first half. It relies on the three following factors:

  • A strong reduction in demand in the first half

This fall in demand will be caused by surplus stocks and a cascade of company failures. Many companies have been weakened by the 2020 crisis, which has created anxiety in that segment of the small and medium-sized company category which depends heavily on exports.

Demand will also be influenced by the progression of the pandemic. As things stand, vaccinations against Covid-19 seem unlikely to have any major effect for several months. Alternating lockdown and lockdown relaxation measures are likely to continue, therefore, preventing any real recovery in the short term.

  • Intervention by regulatory bodies in favour of Western shippers

The Federal Maritime Commission in the US is currently carrying out an investigation and it cannot be ruled out that some shipping companies will be fined for having failed to comply with the US Shipping Act. If that happens, some existing practices could be outlawed.

  • The arrival of fresh shipping capacity

Ships with greater capacity than those they are replacing have started to come into the fleets of the major shipping companies and this process will continue in 2021. Today, we are dealing with 24,000 teu vessels, which are clearly not suited to a period in which demand is fragile. In 2020, shipping companies certainly registered record operating profits but the sharp rise in freight rates has resulted in many ships being laid up, as had already started to happen in 2019. This is a hidden cost, which nevertheless constitutes a real threat, since this strategy cannot be maintained forever.

  • Return to bulk shipping

Low-value products in the agri-food or basic chemicals sector will not be able to bear the high container shipping rates for long and it will be interesting to see if there is not a move back from containers to bulk transport for some commodities in these categories.

Scenario 2. The shipping companies keep control

This scenario assumes that the balance of power remains favourable to the shipping companies and is based on the following hypotheses:

  • Carrier discipline is maintained

Under this hypothesis, shipping companies succeed in maintaining control of shipping capacity and keep freight rates at a high level. In 2020, the Covid pandemic created a shock, which, in its early stages, led to a real collapse in demand and triggered a survival reflex on the part of the shipping companies, with results which exceeded their expectations. In 2021, this mechanism can continue to function but to a lesser extent. On the other hand, the shipping companies can now use port congestion to impose "schedule sliding" from one week to another, as well as postponing and cancelling departures (the traditional "blanking").

  • An indulgent European regulatory environment

Calls are starting to be made for the creation of a shipping regulatory body in the European Union. Until now, the EU competition authorities have been relatively indulgent towards the shipping companies' alliances in the name of preserving the competitiveness of EU shipping. Last year, the companies were given an extension of the Consortia Block Exemption Regulation.

  • Reductions in port costs

Shipping companies are making less calls per year per port. This means that the revenues of the ports and attendant services (pilotage, towage and berthing). This could give the shipping companies greater negotiating power since these services are often in difficulty. The company will also be in a strong position to favourably renegotiate its cargo-handling contracts because of the reduction in the number of their port calls.

  • A digital boost

The biggest shipping companies are preparing for the early part of the current year offers similar to those of the big NVOCC logistics groups. This constitutes a sort of "digital putsch" which needs to be followed.

Scenario 3: "Sow the wind and reap the whirlwind"

This scenario supposes that relations become much more strained, causing the different cargo-side parties to take radical measures against the shipping companies. This would involve the following factors:

  • More legal action against the shipping companies

An American-style judicialization of the sector cannot be ruled out if the companies continue to make abusive use of their dominant position. Some big law firms in the English-speaking world must already preparing behind the scenes to do battle! Such a development could create cracks in the discipline applied by the shipping companies since the start of the pandemic as some less virtuous operators become dangerous for the rest of the profession. They could even be denounced by their fellow operators in return for immunity from prosecution. This has already been seen in the past.

  • Short-term regulation of the transpacific market

The Chinese and American regulatory authorities, which have already expressed concern over ocean freight rate levels in September 2020, could agree to take short-term measures on the transpacific market pending a return to normal operation. Such joint action could have the additional advantage of improving trade relations between China and the United States as Joe Biden and his new administration take over the reins of power. If this were to happen, the position of the European Union could prove difficult to maintain as they come under pressure from cargo interests.

  • New logistics solutions

After having had their fingers burned in 2020 when they were obliged accept a sharp increase in freight rates and a reduction in quality of service, shippers could be tempted to think much more seriously about alternative modes of transport. The railways began to come into their own last year between Asia and Europe but road transport also looks to be becoming a credible solution, at least for highly sensitive merchandise, on the basis of price and…its ability to guarantee access to transport capacity.

Captain Upply's point of view

By way of conclusion and on a personal note, I think that the level of exasperation among shippers is such that they are ready to take the leap and carry out a far-reaching revision of their transport programmes, even if they involve additional, unplanned investment. They could support the development of niche transporters via a less global, more regional management of freight flows…at least until confidence with the leading shipping groups has been restored.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).