Transportation & Logistics Analysis

Container shipping soft landing looks unlikely

November 08 2022

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BAROMETER. Asia-Europe freight rates since the end of October make it look more likely that the shipping companies are heading for a runway overrun than a soft landing.

Under the combined effect of excessive stocks and weak consumption, Western economies have reduced their new orders from Asia.

The reaction of the shipping companies

The shipping companies have responded to the slowdown by cancelling and delaying departures from Asian loading ports in line with a now, well-established strategy.

They would certainly have liked to surf a little longer on the "super profit" wave, but the time has now come for them to secure earnings which have returned to more normal levels for the foreseeable future.

If demand remains insufficient, they have four ways of limiting the capacity at their disposal. They can:

  1. Cancel departures: the three big alliances have already started doing this and have even suspended entire services.
  2. Take out of their fleets as much heavy carbon-emitting capacity as possible at the end of 2022.
  3. Delay the introduction of new ships into their fleets.
  4. Slow vessel speeds even more than they already have.

The improved financial position of the shipping companies allows them to use all these methods, at least temporarily. The current heavy erosion of their margins per unit is encouraging them naturally to make use of their biggest ships, even if it means waiting some time to fill them before they leave Asian loading ports.

The impact on supply chains

The first conclusion to be drawn is that these policies are not going to facilitate the restoration of supply chain regularity. Quality of service, which seems to have markedly improved since the end of the second quarter looks like deteriorating again in the fourth quarter as things stand.

The second conclusion is that the current strategy of the shipping companies recalls the one they introduced in April 2020 at the height of the Covid-19 pandemic. They decided then in a certain sense to turn off the engine and wait for shippers to start fighting for space on ships. It was the only way to ensure they survived at a time when their finances were extremely precarious. Today, however, the situation is more complex. In the first half of 2020, there was space in the warehouses and logistics costs were minimal, which is far from being the case today. The market dynamic has changed, therefore.

Freight rates

Asia-Europe freight rates have fallen by €1,000 per container since the summer and we risk shortly coming close to the companies' break-even point (...) 

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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).
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