Global News Container shipping entering a ‘precarious balancing act’

The container shipping market right now can at best be described as teetering at the top of a sharp pyramid. The ability to predict — even roughly — what freight rates will do over the next six months appears more difficult than ever. This is because the two most likely paths lead to extremely different outcomes

But to understand this precarious balancing act, it is necessary to think of the underlying market balance as being comprised of several layers.

Layer 1 — the baseline fundamentals. This is where demand growth of some 8% over the past five years combined with fleet growth of 25% has created substantial overcapacity. Quite a bit of this capacity has indeed been absorbed through slow-steaming, but there is overcapacity nonetheless. We will still see some 1.5 million TEUs of capacity injected in the rest of 2024, and hence the overcapacity will worsen.

Layer 2 — the Red Sea crisis. The much longer sailing distances around southern Africa mean a sharp change in demand when measured in TEU miles. Essentially, the overcapacity seen in layer 1 is just enough to cope with the new diversions around Africa, provided vessels are sped up again and — crucially — provided there are no additional disruptions.

Layer 3 — increasing port congestion. Port congestion in Asia and the Western Mediterranean has been gradually worsening for several months. It appears to have flown somewhat under the radar, almost like the proverbial boiling of a frog which doesn’t notice the problem if you only increase the water temperature slowly. However, this has come to reach a boiling point over the past month. And as the developments in layer 2 led to a situation with zero excess capacity to deal with new problems, it means that in layer 3 we now have insufficient capacity in the global supply/demand balance.

Layer 4 — a sudden sharp spike in demand. In reality, this appears to have caught everyone by surprise, and to some degree even the carriers. A good hypothesis presently is that this is an extremely early onset of the peak season. It would fit the mentality of shippers anxious that the peak season might see large scale disruptions on the US East Coast if labor negotiations break down. Also, an earlier peak season should be expected for any services being diverted around Africa. Finally, it appears that while container shipping is seeing a sudden sharp spike in demand, the same is not the case for air freight. If the sudden sharp demand was driven by a sudden buying rush by consumers, one would expect that air freight had also seen such a sudden spike.

Layer 4 is to some degree the straw that broke the camel’s back in terms of capacity shortages. Echoes of the pandemic market The market situation right now is similar to the early parts of the pandemic disruptions where insufficient capacity led to the largest rate increases the industry had ever seen. If the market remains at layer 4 — and especially if this is not just a temporary early peak season but a sustained boom — then the rate development is poised to do a repeat of the pandemic disruptions.

However, if the Red Sea routing reopens — which is unlikely right now, but not out of the realm of possibility in a few months — this would instantly recreate the substantial overcapacity the market was grappling with at the end of 2023 and could cause a sharp drop in spot rates.

The difficult state of affairs for shippers trying to plan their supply chains and, importantly, manage their freight budgets for the rest of 2024 is therefore that the two most likely scenarios appear to go in two extremely different directions.

It is entirely possible that we could again see the rate spikes of pandemic-level proportions. There were already offers over $10,000 per FEU floating in the market as of May 20 from Asia to the US East Coast. Platts, a sister company of the Journal of Commerce within S&P Global, pegged spot rates on the North Asia to USEC route at $6,425 per FEU as of May 21, up 5% on the week and 179% from a year ago.

But it is also entirely possible that if we are only seeing a short-term spike in demand due to an early peak season, and if the Red Sea reopens, we could see freight rates plummet back to the depths seen in the later parts of 2023.

Which scenario plays out is especially dependent on predicting the reopening of the Suez route. With continued sporadic attacks by the Houthis operating in Yemen, global carriers continue to be cautious, with CMA CGM the only exception among major carriers to have a few Asia-Med vessels go through the still-risky passage.