Collapsing container markets face fresh challenges in 2023

The global container market is facing a myriad of difficulties for the rest of the year, as it acclimatizes to rates dropping to pre-pandemic levels after the boom years of 2020-2021. The challenges ahead for liner companies are mostly prevalent through deploying capacity in a market with faltering demand from continued macroeconomic pressures.

Risk of overcapacity looming

To compound a weakening carrier sentiment, a significant flurry of new ships is expected to hit the waters this year, which will require more capacity management requirements. Total TEU capacity on order accounted for 30% of the existing fleet. Although majority of the nearly 8 million TEU on order is expected in 2024 and beyond, just over 2.44 million TEU is set to come online in 2023, just as the market has begun what many now see as a cyclical downturn.

According to Sea-web, an orderbook tracking platform within S&P Global Market Intelligence, some 32 mega-max vessels are due to enter the global fleet in 2023.

Swiss-based Mediterranean Shipping Company which is expected to grow its fleet by 40% over the next two years, has a gigantic orderbook that is nearly the same size as Hapag-Lloyd's existing fleet capacity.

Methanol gains steam

Despite much of the industry grappling with tighter emissions reduction directives, the container shipping sector is viewed as a likely mover in alternative fuel propulsion due to its wide scope of market participants and its relationship with eco-minded consumers like Walmart, Home Depot and IKEA, among other large retailers looking to decarbonize their supply chains.

The current orderbook largely consists of dual-fuel engines, capable of burning both distillate and residual fuels as well as alternative fuels such as methanol or liquified natural gas. LNG has grown in popularity in recent years as shipowners consider it a transition fuel, to be used for marginal emissions reductions in tandem with speed reductions and vessel design improvements, to meet emissions standards.

However, an uptick in appetite for methanol-fueled vessels has permeated across the marketplace in recent months. Other early adopters include Danish liner Maersk and X-Press Feeders, with 19 and 18 vessels on order, respectively. South Korea's HMM was the latest asset owner to join the list when it ordered nine 9,000 TEU methanol dual-fuel ships set for delivery in 2025 and 2026.

For vessel orders placed so far in 2023, methanol-capable engines have increased to account for 68% of tonnage on the orderbook, said Braemar shipbrokers.

Liner companies with methanol-based assets will be keeping an eye on upcoming emissions regulations in the European Union. Greenhouse gas intensity in the EU is to be cut by 2% from 2025 under FuelEU Maritime regulation, which would impact the usage of the more abundant fossil-fuel methanol and dissuade its usage in the EU.

"As [FuelEU maritime] looks at lifecycle emissions, it could have an immediate impact in dissuading demand for fossil-fuel methanol," Braemar analyst Ian Metzger said, adding that the EU considers fossil methanol to have a higher carbon intensity than VLSFO.

The first methanol capable box ship is set to hit the waters later this year, as Maersk takes delivery of its 2,100 TEU feeder vessel from Hyundai Mipo Dockyards.

Scrapping rises but remains inadequate

With approximately 12% of the global fleet having reached its scrapping age, scrapping activity will likely require a significant uptick in the coming months, after liner companies held off in the past due to strong market conditions, including elevated demand and historically high freight rates delaying scrapping and demolition activity. With the bull phase now over, many players in the market expected demolition activity to pick up pace this year, but so far only 12 ships have been demolished, according to Sea-web. A total of five ships were demolished in 2022.

Potential mitigating factors could be the strong and growing interest in purchasing demolition class container ships coming out of Asia. This has removed possible candidates from the scrapping market as small-scale players, who were previously unable to buy ships due to high unit prices, are now looking to acquire cheaper vessels to expand their fleet portfolio. The trend is not limited to small-scale buyers in Asia alone as MSC has reportedly purchased a few demolition class vessels, including two ships from Evergreen.

"The scrapping activity so far has not picked up. Apart from small-scale buyers in Asia looking to buy older vessels, bigger carriers such as MSC and their new rival CMA CGM appears to be competing on expanding their fleet capacity, so they are buying a lot of second hand vessels," a logistics source mentioned.

Lasting effects of 2M breakup

As demand continues to falter and the 2M alliance inches toward its 2025 dissolution, Maersk and MSC breakup's effects on rates, capacity and other alliances will be major market factors for several years.

"2M is the just the first domino to fall," said Lars Jensen, an analyst for Journal of Commerce, part of S&P Global. "When it was formed, you had two parties with the same strategic interest. Now you have two parties whose interests are no longer aligned."

The disintegration will bring increased market competitiveness as Maersk and MSC, the world's two largest carriers, become direct competitors in 2025. The added pressure comes in the wake of the record-breaking container freight rate volatility during the pandemic.

"It's a normal downcycle we are going through, then there are some elements that are slightly different," Jensen said. "Rates are coming down faster than they went up. It is a rate war."

Additionally, the Ocean Shipping Antitrust Enforcement Act, proposed at the US House of Representatives in March, would eliminate the antitrust exception for maritime carriers if passed.

The shake-up could influence other allegiances, such as Cosco Shipping breaking from the Ocean Alliance when their contract expires in 2027. It is currently the third largest carrier with the second largest orderbook, behind MSC.

Like Cosco, CMA CGM is also poised to grow its fleet significantly through 2024 – putting both carriers in a better position to compete with MSC and Maersk in a post-2M landscape, adding uncertainty to Evergreen's future. Market participants also predicted a culling of small- and mid-sized carriers in an increasingly aggressive market.

Spot rates attracting recontainerization

A glimmer of hope for container demand lies in the attractive nature of box rates at present for traders.

As spot rates on key global container trade lanes stabilize to around pre-pandemic levels, the decontainerization trend seen through 2020-2022 has now started reversing. Record-high container freight rates during the peak of the coronavirus pandemic saw cargo spilling over from containers to related minor bulk vessels.

Bulk freight rates are seen recovering while box rates are expected to weaken further through 2023.

"Dry bulk freight rates may recover with mainland China's easing 'zero-COVID' policy in the medium term and limited active supply in the long term, while container freight rates are expected to decline further with reduced congestion and heavy investment in new buildings," Daejin Lee, director for shipping analytics and research at S&P Global Commodity Insights, said in his quarterly market outlook.

From the carrier perspective, the recontainerization of certain commodities – specifically agriculture – is expected to uplift volumes on certain trade lanes. However, it will not be enough to pull the container market out of its slide.

"Yes, it is [decontainerization] reversing very significantly," a carrier source told S&P Global. "But with abundant equipment deployed in the market and congestion all but cleared, the volumes still aren't enough to help the container market as demand from developed nations is yet to recover."

Recontainerization prospects are only a small contributing factor to any upside potential for carrier support. Inventory levels need to be cleared on key trading lanes and macroenomic headwinds eased in order to allow for carrier rates to rebound further over the course of the year. The fact that more mitigating factors are inbound for carriers spells further difficulty ahead in 2023.

Reporting and analysis by David Lademan, Usama Khalid, Laura Robb, Tanya Kalra, Ayush Verma