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Is shipping heading for overcapacity?

MDS Transmodal consultants Nick Adshead, Antonella Teodoro and Mike Garratt analyse the latest patterns and trends shaping the global container shipping market.

The deep-sea container industry plays a crucial role in the global economy, currently handling around 160 million loaded TEU (twenty feet equivalent units) per annum, carrying goods worth approximately $8 trillion. That equates to double the GDP of Germany.

This industry is dominated by nine shipping lines that over recent years have been organised into three alliances. Collectively, these lines operate more than 2,000 ships with an aggregate capacity of 19 million TEU (89 per cent of the global total) which deliver a network service capacity of 111 million TEU per annum (85 per cent of capacity) between world regions. Ninety per cent of that deployed capacity is delivered by consortia/alliances where more than one line provides ships to deliver a typically weekly frequency. Several lines have also chosen to invest heavily in port terminals to provide a vertically integrated dock gate to dock gate service.

In 2021 APM Terminals, COSCO and TIL (owned respectively by the three lines Maersk, Cosco and MSC) alone collectively handled just under 17 per cent of global port container traffic. This is particularly in order to support transhipment with both local feeder services and between the increasingly large ships the industry has invested in. Between 2006 and 2023, the median size capacity of the ships operated by these lines has grown from 8,000 TEU to 23,000 TEU. The more transhipment between these very large ships, the fewer the number of direct services are provided between some countries; in the case of the UK, the number of direct services from the Far East has fallen from 17 to four per week between 2006-2023.

During the same period of time, the number of direct country to country pairs directly connected by liner services declined by 10 per cent. Long term traffic growth in the container sector was around five per cent per annum in the 20 years between 1999 and 2019, over a period when real freight rates fell as the industry became more cost efficient through using larger ships operating at lower speeds. As a consequence, CO2 per TEU carried fell by over 50 per cent and container penetration also gradually increased. The impact of the pandemic was initially to cut volumes (by around 12.5 per cent on the deepsea markets between Q2 2019 and Q2 2020).

The underlying recovery in demand was relatively rapid, but port congestion, supply chain disruption and a failure to recirculate empty containers led to that demand exceeding the capacity offered and a very rapid growth in freight rates; the mean revenue per container received by the lines rose by 142 per cent between 2019 and 2022 – HSBC estimated that in the two-year period of 2021 and 2022, the major shipping lines made a profit of £314 billion (around two per cent of the value of goods carried).

MDST estimates that at its peak, the container sector lost around seven per cent to other shipping modes in terms of market penetration but that the return of rates to pre-pandemic levels has at least halved that loss of market share. Global volumes in 2023 can be expected to be around three per cent higher than 2019, having grown at less than one per cent per annum between 2019 and 2023.

Taking continuing trade growth of three per cent per annum together with the need to replace older ships as they are broken up (we assume ship life of 25 years) and assuming no change in service patterns or ship speeds, there would be a need to build an additional 4.4 million TEU of new ships from 2024 till the end of 2026. However, the current order book for this period totals 5.7 million TEU of capacity (an apparent 1.3 million TEU of surplus fleet capacity), which reflects a continuing investment in large ships providing the flexibility to operate at lower speeds (to save fuel) and to further exploit the advantages of scale that market consolidation has provided.

The need to continue to refresh the global fleet and to address freight growth has also provided the opportunity to build ships powered by greener fuel; the lines (led by Maersk) are currently investing in ships able to use methanol as an alternative fuel. Of that 5.7 million TEU of fleet capacity on order, 1.1 million TEU will be methanol-powered ships, entering the market by 2026 and reflecting market pressure for shipping lines to demonstrate their ‘green’ credentials. Some shipping lines have also used the profits windfall accumulated during the pandemic to further extend vertical integration into door-to-door supply chains by buying 3PLs and investing in distribution centres; Maersk have been the leader in this respect but are not alone.

The global nature of the container industry is that it operates between nation states rather than within them so that Government regulation can only really be effective when ships enter ports. Each state (or in the case of the EU, the Commission) establishes principles with respect to permitted market shares, transparency with respect to rates and contracts and emissions.

In the case of the EU, on 10 October the Commission announced that its ‘Consortium Block Exemption Regulation’ would not be renewed after April 2024. This had effectively permitted shipping line consortia to operate provided such arrangements between lines did not result in market shares exceeding 30 per cent (at the ‘route’ level). This measure had effectively mitigated the impact of closing the ‘conference system’ (illegal to/from Europe since October 2008) that had allowed lines to fix prices between them in providing joint services on any given route.

The Commission has now decided that members of the shipping industry should be subject to the same anti-trust legislation as in any other industry. The Commission has also noted the degree to which the industry had been engaging in vertical integration. Meanwhile, the European Parliament has just brought all shipping calling at European ports into the Emission Trading System (ETS) that will levy charges based on fossil fuel consumption with, more or less, immediate effect.

This may encourage some rerouting given that ‘Europe’ can form just one part of the market for some shipping services. The shipping lines are already publishing estimated ‘ETS surcharges’ over and above freight rates (and the lines are clearly interpreting the impact differently), which is a rather different approach to that adopted in other industries subject to ETS (steel customers don’t pay separate ETS surcharges).

It is generally up to manufacturers to reduce fossil fuel consumption to cut their ETS exposure and improve their competitiveness, and not to simply pass on the costs. The commercial strength of the major shipping lines, based on scale and different levels of vertical integration, provides them with significant leverage with respect to the port sector and many nation states.

It is clearly in the industry’s interest to continue to foster international trade; it is their lifeblood. However, their strength presents countries with the challenge of defining an appropriate level of regulation, particularly to avoid a repeat of the rate hikes and poor reliability experienced during the pandemic. This maybe complex given the number of different regulators involved but the Commission’s recent decision may encourage many of the actors in the industry to review their position over the coming months over the pace of integration.

For more information, please visit: www.mdst.co.uk

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