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Updated: Choppy fiscal seas ahead for container carriers and terminals in 2023

Demand down, fleet capacity up on the transpacific and other major maritime shipping trade routes
The Port of Vancouver’s GCT Vanterm faces the prospect of reduced container cargo flow in 2023 as demand for transpacific shipping decreases in the wake of the pandemic economy boom | Chung Chow

There’s a painful New Year’s Eve hangover looming on the horizon for maritime container cargo carriers.

In the leadup to New Year’s Eve 2022, the 18-month pandemic economy profit party enjoyed by Vancouver-based Seaspan Corp., A.P. Moller Maersk (CPH:MAERSK-B) and other major players in the global container-shipping sector has been historic by any measure in any industry sector.

But a host of demand and capacity issues are signalling an end to the freight movement festivities as early as 2023.

An October report from John McCown, a New York-based container shipping industry analyst, noted that the 10 largest ports in the United States recorded a 9.4 per cent drop in inbound container volume compared with the same month in 2021, which was “the biggest year-over-year decrease since the beginning of the pandemic.”

The downturn was led by West Coast ports, which suffered an overall 23.3 per cent drop in volume.

That, McCown pointed out, was the biggest decline in over seven years.

McCown’s updated numbers for November showed an overall 17.5 per cent drop in inbound container volume at the 10 largest U.S. ports compared with the same month in 2021. West Coast ports again led the cargo decline with a 26 per cent drop, which McCown estimated “is most likely the biggest decline ever for the West Coast.”

Globally, the numbers are similarly sobering.

Demand growth for container cargo movement measured in 20-foot-equivalent units (TEUs), according to Lars Jensen, CEO of Denmark’s Vespucci Maritime, “has dropped off a cliff.”

A panellist on S&P Global’s year-end outlook for container shipping in 2023, Jensen said September data shows that, regardless of how that global container cargo movement is being measured, “[it] is now less than what we did pre-pandemic.”

Jensen added that most of the supply chain bottlenecks at major container cargo hubs like Los Angeles-Long Beach have been removed. He pointed out that more than 50 per cent of ships are now arriving on time. Jensen said that vessel reliability factor is still poor, but it is an improvement over January, when it was below 10 per cent on the U.S. West Coast.

The average containership delay time at the top five West Coast ports has consequently been cut by 40 per cent between January and October, according to Container xChange, a logistics technology company. That supply chain efficiency improvement has also increased container-shipping reliability and capacity.

“So, the backdrop here is, we’re seeing a lot of capacity come back on stream at exactly the same time as we are seeing demand collapse,” Jensen said. “The result is, of course, not surprising at all. We’re seeing freight rates drop like a rock.... The extremely high freight rates that we saw in late 2021 and early 2022 were clearly driven by a physical shortage of capacity.”

Several factors have contributed to the steeper decline in container traffic to North America’s West Coast. The historic supply chain bottlenecks at Los Angeles-Long Beach and other major container cargo hubs that began in late 2020 coupled with fears of potential port labour disruptions resulting from stalled contract negotiations on the U.S. West Coast between the International Longshore and Warehouse Union and the Pacific Maritime Association have diverted more transpacific traffic to Gulf and East Coast ports.

But other market conditions are at play in the wider world.

Consider, for example, the 2023 outlook in the November shipping market review from Danish Ship Finance (DSF).

The Denmark-based ship financing company sees market conditions deteriorating next year as weaker economic conditions combine with reduced supply chain dysfunction, increased container ship carrying capacity and reduced demand.

“The fundamental balance between supply and demand has deteriorated during 2022,” DSF’s review noted, “as the world fleet has expanded by three per cent while distance-adjusted seaborne trade volumes have only grown by 1.2 per cent.”

That capacity increase, generated in large part by the huge ocean carrier company profits, is documented in a recent report from global shipping data company Alphaliner.

It notes that a record amount of container ship tonnage bankrolled by that US$400 billion in ocean carrier earnings will be added in 2023 and 2024 to a global fleet that has more than doubled to a capacity of 26 million TEUs since 2008.

“The order-book-to-fleet ratio stands at ‘only’ 30 per cent, compared to the ‘crazy’ 60 per cent of 2009,” Alphaliner’s shipping report noted.

Seaspan, the world’s largest lessor of container ships, has been among the fleet expansion leaders.

The Atlas Corp. (NYSE:ATCO) subsidiary’s fleet has grown to 134 containerships from zero in 2001. Seaspan also has 67 ships under construction and will have a working fleet of 201 with a total carrying capacity of 1.95 million TEUs when they are delivered over the next two years.

Despite concerns of market overcapacity raised elsewhere, company management remains bullish on the long-term market fundamentals of container shipping and Seaspan’s rapid fleet expansion.

Responding to analysts’ questions about the prudence of that expansion during Atlas-Seaspan’s 2021 third-quarter earnings call, Bing Chen, Atlas Corp.’s president and CEO, pointed out that all Seaspan’s new ships are backed by long-term charter agreements.

Chen has maintained in previous earnings calls that supply and demand in the container-shipping arena remains fundamentally balanced and that he is confident in forecasts of solid demand growth in the sector over the next few years. 

But there is less optimism in other quarters.

Drewry’s most recent ports and terminals market briefing shows average global container port throughput growth dropping to 0.2 per cent in 2022’s third quarter. That’s down significantly from 8.2 per cent in the same quarter in 2021.

The U.K.-based global shipping consultancy’s overall throughput growth for 2023 is a mere 1.9 per cent. Its December container equity index also noted that the year-to-date stock value for major ocean shipping lines had declined 44 per cent compared with the S&P 500 Index’s 17.3 per cent decrease.

DSF’s shipping review pointed to a deteriorating macroeconomic outlook from such organizations as the International Monetary Fund, which predicts global growth slowing to 2.7 per cent in 2023 from six per cent in 2021. Oxford Economics forecasts global GDP growth to shrink to 1.3 per cent and the world’s trade in goods to drop by 0.2 per cent in 2023.

The DSF also echoed concerns about the erosion of underlying demand in the container-shipping sector and the “massive inflow of new tonnage” in 2023 and 2024.

“There is no doubt that surplus vessel capacity will be a major topic as soon as 2023,” DSF’s review predicted, “but it remains to be seen how tightly liner operators will be able to manage capacity at the expense of tonnage providers.”

Container xChange also noted that transport expenses for ocean carriers jumped 22 per cent this year compared with 2021. A 71-per-cent price spike in bunker fuel costs supercharged that increase.

Jensen estimated that ocean carrier unit costs have risen close to 40 per cent compared with the pre-pandemic market.

Port terminal operators are similarly being squeezed by rapidly rising labour and other costs and the downturn in container cargo traffic.

Marko Dekovic conceded that Port of Vancouver container cargo numbers are down much as they are elsewhere on the West Coast. But the vice-president of public affairs for GCT Global Container Terminals Inc., which operates the port’s Vanterm and Deltaport container terminals, noted that the drop in cargo flow to the West Coast has been affected by several issues, including retailers adjusting inventory volumes due to “high inventory shoreside and fears of weakening economic conditions.” He added that uncertainty over potential port and rail labour disruption in the U.S. has resulted in shippers continuing to divert cargo to East Coast and Gulf ports.

There are many variables affecting the accuracy of any market outlook, but Jensen pointed out that those variables today include wild cards that make any shipping predictions difficult.

One of the biggest wild-card unknowns, he said, is the social unrest in China that has been sparked by the Chinese Communist Party’s unwavering adherence to its zero-COVID policy.

That adherence has wavered recently, but Jensen said the net result of the country’s civil unrest and disruption to manufacturing will be more manufacturing migrating out of China.

“That’s going to create supply chain problems.”

Jensen added that, if the global economy sinks into a recession that is deeper and longer than expected, challenges for the supply chain, the shipping sector and the economy will multiply.   

“We expect, then, that 2023 is going to remind us very much of 2009 during the financial crisis.” •

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