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A normal cyclical downturn

It must now be said that the market has returned to normal.

By “normal” it means the major developments are governed by normal supply/demand as well as competitive dynamics. The dominant forces shaping the market are no longer mainly caused by the pandemic ripple effects.

Operationally the data for December showed only a marginal 0.1% improvement in global reliability. At first glance this might seem to show improvements as stalling. But there is a seasonality to reliability in container shipping. December always shows a decline in reliability compared to November, and the norm is an average decline of -3.1%. Hence a 0.1% improvement is indeed a sign of continuing reductions in the bottleneck effects. The pace of improvement over the past 12 months has been fairly constant and implies a full reversal to normality in April 2023 at this pace.

The predictions for 2023 are low cargo volumes

The rapid rate decline is clearly governed be a combination of demand decline and capacity injection. In December global demand measured in TEU declined -6.7% compared to the year before and for full year 2022 global volume declined -3.9%. At the same time the magnitude of the global fleet capacity increased 4%. Into this mix is the fact that in January 2022 a full 13.8% of the global fleet was caught in bottlenecks. By December this had been reduced to 5.9%. This added a fleet growth of almost 8% during 2022.

In other words, the drop-in freight rates we are seeing is a perfectly normal development in a market where capacity growth significantly exceed demand growth, and as such no different than what has been seen in previous market cycles. Presently the outlook for demand growth in 2023 remain very subdued – potentially with a decline, and this contrasts with an expected fleet growth of 4-7% when taking scrapping and other effects into account. This is almost a textbook down cycle we are heading into.

Competition is increasing between carriers

Another element is the increased competitive pressure between the carriers themselves. They have the same ability to reduce capacity as we saw when the pandemic hit the market in early 2020, and as such put a floor under the rate decline. The drop in demand in recent months is not much different than the drop in early 2020 when the pandemic struck. And whilst they do indeed blank a large number of sailings, it is not as much as during the pandemic – indicating a lower level of alignment between the carriers this time. Add to this the announced break-up of the 2M alliance as well as new slot sharing agreements between carriers in THE and Ocean Alliances and a picture of increasing competitive pressure emerges quite clearly. This sets the stage for a potential deeper price war in the months ahead and implies the market might not have bottomed just yet.

This is characteristic when the market is in a stage of change, especially when entering a period of re-alignment of alliances in combination with a down-cycle. This creates instability in the network structures and hence less predictability for the shippers in 2023, but the expectation should be for the emergence of new more stable market structures in 2024.

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