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Discipline could break container boom and bust cycle, says AlixPartners

APM Terminals via Flickr AMP_Terminals_LA_Pier_400.jpg
APM Terminals LA Pier 400 in low light.
The timing of COVID market disruption brings an opportunity for the container sector to break out of its usual cycle, according to a report by AlixPartners.

In its 2021 Container Shipping Outlook, the consulting firm said that current market fundamentals—high freight rates and a small orderbook—could bring a more sustainable future for container shipping if owners refrain from rushing to shipyards to order new vessels.

Historically, owners have lacked the discipline to withhold from expanding their fleets in times of rising profits, the report said.

“Whereas in the past, demand shocks hit just as orders for new vessels were increasing or already at elevated levels, in the latest cycle a sudden drop in demand occurred while both capacity and orders for new vessels were relatively low,“ the report said.

AlixPartners attributes the current rate environment in a large part to lower capacity growth, with the COVID demand shock hitting when the orderbook was at record lows and after a prolonged period of ship demolition.

Two concerning factors facing the container sector are the shift in US consumer demand from goods to services in 2020, and record low reliability in the container trades.

Market uncertainty around future environmental regulation supported rates by disincentivising orders, said the report, and the cost impact of sulphur regulations in 2020 had been lower than expected as fuel costs did not rise as much as predicted.

“Until the regulatory picture clarifies, many carriers will likely slow their ships to reduce emissions, which effectively further limits capacity,” said the report.

In 2021, carriers will face the challenge of maintaining their ordering discipline and improving reliability, while shippers will need to adjust their offerings to fit a higher-rate environment, said the report.

The full report can be accessed on the AlixPartners website here.

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