Carrier industry entering period of ‘managed decline’

The carrier industry could return to its pre-pandemic trend of low profit margins if the current decline continues.

Following its historic profit of US$150 billion in 2021, the industry is in a state of “managed decline”, according to the latest Drewry Container Forecaster report.

The global shipping consultancy said carriers must focus on capacity management if they are to maintain any of the sector’s gains.

“Carriers didn’t really have to do too much to fall into the profit bonanza of the past two years,” the report said. “The upsurge in demand combined with chronic supply-chain congestion guaranteed their windfalls,” it continued, adding that the industry-wide earnings before interest and taxes profit have tracked above US$400 billion since the second quarter of 2020 to the same period this year.

However, with high inflation reducing the spending power of consumers and spot rates in a seven-month decline, “liner bosses are going to have to work much harder to keep the profits flowing”.

Drewry stated: “Now entering a period of managed decline, what they do next will go a long way in determining how much of the gains of the supercycle they get to keep. Failure here will mean that the industry will be doomed to return to the low-margin pre-pandemic trend. A golden opportunity to reset expectations will be lost, possibly forever.”

The ability of shipping lines to influence the impact on their profits is further weakened as supply increases. With the easing of congestion at major ports globally, capacity will improve.

Additionally, independent ship owners/operators spent much of their profits on new vessels, with 2.6 million twenty-foot equivalent unit (teu) of newbuild capacity to be delivered in the coming year barring adjustments for delivery delays or cancellations.

“The task in front of carriers has been made even harder due to a weaker outlook for port handling. Drewry has lowered its demand outlook for 2022 to 1.5 per cent and to 1.9 per cent for 2023 on the back of heavily downgraded GDP (gross domestic product) predictions.

“It is the speed with which the market has turned that has led us to believe that carriers will fight back with more proactive capacity adjustments than previously envisioned.”

Despite the glum outlook, Drewry said that “carriers are better placed now to tackle the ‘danger’ years than ever before” and that they will act to ensure a “soft landing for the market”.

This analysis was provided despite the continued decline in the spot market for approximately seven months at the time of the report’s publication. It was noted that even with reduced profits, rates are very profitable when compared to those before the pandemic.

“Carriers will have accepted that prices and profits were unsustainable, and a correction was inevitable at some point. In our view, the group-think has been to milk those profits for as long as possible but start cutting back when rates sink close to a level that would be acceptable in the long run.”

It said that reports of more suspensions to the East-West service are an indication that the cuts have begun.

It concluded that overordering new vessels in the boom years has made it difficult for carriers to make that increased capacity go. Even if they accomplish this in the coming year, they will be forced to “rinse and repeat for 2024”.

“In our view, carriers will not sit idly by as spot rates tumble. To maintain profitable business, they will look to offload as many older, more polluting ships from the market as quickly as they can. Our base forecast includes provision for a near-record level of demolitions in 2023.

“This capacity-reducing lever will be pulled along with others, namely, pushing back deliveries of new builds and greater idling, effectively calling on shipbuilders and independent owners to share some of the supply burden.”

Additionally, Drewry recently warned that despite the industry’s decline, a quick return to normalcy should not be expected. It revealed that even though the container market has turned, the winding down of high rates will take time. It may be well into 2023 before a major decrease in customers cost and carrier profit is experienced.

In that forecast, it said a shift by stakeholders will be necessary. “Ocean carriers need to address the looming environmental and overcapacity risks by scrapping older, less green ships, while shippers might be wise to wait for the market to come back to them before committing to lengthy contracts.”

The Container Forecaster is Drewry’s flagship quarterly analysis and outlook for the container shipping market. The product is a popular reference for what is happening and what will happen in the future of the global container industry.