Morosity is the order of the day in this early part of the second semester. Restructuring and industry recomposition look to be inevitable.
At the start of the year, we gave three possible scenarios for the container shipping business in 2023, as the overheating of the world economy finally ended but geopolitical tensions grew. Let us see, first of all, how these different scenarios compared with what actually happened.
- Scenario 1 suggested that the shipping alliances would implode. This scenario was proved right quite quickly, as Maersk and MSC announced that they were separating by mutual consent. It is true that this is still an isolated case for now but one which involves the sector's two leading shipping groups.
- Scenario 2 bet on carrier discipline being maintained, in other words on the ability of the shipping companies to maintain tight control of the supply and demand balance. This did not work out generally for the shipping companies, however, so steep was the drop in cargo volumes. Slowing down ships' commercial operating speeds and cancelling port calls were not enough to stop freight rates from collapsing.
- Scenario 3 supposed that the Russia-Ukraine conflict would spread and/or that tensions with China over Taiwan would become even more acute. Happily, this catastrophic scenario did not become reality. Both possibilities remain major potential game-changers for container shipping, however, and concern is markedly greater than at the start of the year, since neither conflict has so far made any progress towards a pacific solution.
Apart from Scenario 3, the outcome of which is impossible to know, four main economic factors can help us to evaluate the likely direction of the container shipping markets in the second half of 2023:
- The state of Western retail stocks.
- Inflation control in Europe and the United States.
- Long-term overcapacity, as new ships arrive in the market, outnumbering the older vessels taken out of service at a time when demand for capacity has fallen back to 2019 levels.
- Cargo lost to long-haul shipping, as shippers relocate and look for alternative supply sources.
Having drawn up an inventory of the major trends to be seen in container shipping in the first half of 2023, let us now turn to the delicate exercise of trying to foresee what lies in store in the second half of 2023.
1/ The state of Western retail stocks
After the first lockdowns resulting from the Covid-19 pandemic, retailers placed huge orders. They were looking to react to the vigorous recovery they saw, in demand and to constitute emergency stocks after having been caught unawares by the virtual overnight paralysis of supply chains during the first lockdowns. Since then, demand has fallen off considerably and the goods they ordered have been piling up in the warehouses, where they have become obsolete or difficult to sell.
Certainly, stocks are tending to diminish in Western economies, but the process is a very slow one. According to The Wall Street Journal, wholesalers' stocks were worth USD915.7 billion in April, 0.1% less than in March. What is more striking, however, is that this total is still 33.5% higher than that of April 2019.
The question of "dead stock" and the exponential increase in its cost over time remains a burden for Western retailers, who, in their efforts to respect a certain kind of financial orthodoxy, are continuing to try to regain control of their stocks before placing big new orders.
Certainly, for the majority of supply chain managers, the conclusion to be drawn from their recent experiences is that pre-pandemic stocks were inadequate, with too little provision made for rapid restocking. For post-Covid logistic planning purposes, it seems reasonable, therefore, from a financial planning point of view, to increase stock volumes by a safety margin of 10%, compared to their pre-pandemic levels.
The shipping companies are looking for a sharp recovery in bookings in the second half of 2023 as part of a major restocking operation. The scale of this phenomenon is likely, however, to be less wide-ranging than they had been hoping at the start of the year. The process of absorbing existing stock on the downstream market is clearly too slow, particularly in Europe. The pockets of the leading operators are empty; fixed costs have soared, and the fear of unemployment has started to reappear.
Overall, therefore, the prospects in this first area of concern are unfavourable for shipping companies exposed to the East-West markets.
2/ Inflation control
As always, where inflation is concerned, questions of psychology and dogma need to be taken into account when evaluating the situation.
During the pandemic, the United States deliberately allowed salaries to increase by printing money to avoid exposing purchasing power to a negative shock. The European Union, meanwhile, tried to do all in its power to keep salary increases to a strict minimum, even though this seriously penalised consumers.
In the United States in recent months, salary growth has slowed along with inflation, creating a gentle, controlled slowdown in the economy and enabling interest rates to be reduced in the longer term.
In Europe, the negative demand shock is being felt more strongly than in the United States. The European Central Bank, under its president, Christine Lagarde, initially minimised the inflation threat, but was then obliged to recognise that inflation was increasing and was likely to be a long-term phenomenon. This led to social discontent and mistrust in political leaders, whose only arm seemed to be to try to control profit margins in the retail sector, so as to avoid possible abuses.
Given the scarce resources of the leading economic operators, the slowdown in inflation has not been sufficient to generate a more general recovery in demand. Since salaries are not increasing, or not by much, in any case, only low-cost stores and discounters are holding their own. In France, the Casino group, which has been struggling for several years, has had to partially concede defeat. In the Eurozone overall, retail sales volumes fell year on year in February and March and stagnated in April.
From this point of view, too, the shipping companies' prospects in the second semester hardly look to be favourable.
3/ Shipping overcapacity
The wide-ranging renewal of shipping companies' fleet is taking place in a market which has fallen in value and is having a heavy, even disastrous, knock-on effect on the companies themselves.
They are doing what they can to delay the arrival of their new ships on the market and to use their least costly ships on lines which are less profitable. They have also reduced their commercial operating speeds, which automatically reduces capacity. All this has not been enough, however. The market is continuing to decline dangerously at below-cost levels.
The decision of market leader MSC, moreover, to go it alone is affecting freight rates, enabling it to increase its share of a declining market and creating a climate of internecine warfare which is starting to do the companies a great deal of damage.
With regard to this scenario, the situation promises to be difficult in the second half of 2023 but also, by the same token, in 2024, given the expected arrival of a large number of new ships.
4/ Lost cargo which will not return
There are limits to the split between the big trading blocs. China remains an essential trading partner for the United States and Europe. It is nevertheless reasonable now to take account of the concepts of "nearshoring" and "friend-shoring".
One can estimate that emerging economies and new industrial powers closer to the major consumer markets now account for 10% of cargo volumes. The shipping companies, therefore, need to adapt to a veritable reset of long-haul trading patterns by comparison with those prevalent in 2019. Those which offer deep sea and short sea services are already doing a little better than those which are present solely in the deep sea sector.
Once again, apart from a certain number of niche operators who have a card to play on local short sea markets, freight rates risk not covering their costs for a long time to come.
Summarising, therefore, as the second semester of 2023, gets under way, morosity is the order of the day in the container shipping sector. Restructuring and industry recomposition look set to take place inevitably before the end of the current financial year. As a major market player put it to me recently, "the sector is bleeding heavily at the moment and we do not know when the bleeding will stop".