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Warning of container shipping rate war ahead

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Container shipping could be headed into a prolonged rate war as cash rich carriers battle falling demand and a sharp increase in supply.

Speaking at TOC Asia Alan Murphy, CEO and Founder of Sea-Intelligence, said the container market was returning to normality but asked if this was pre-pandemic level of normality in 2019, a relatively good year for container shipping if 2020 – 2022 is excluded, or a much worse scenario of five – six years ago.

Murphy noted that container spot rates had been driven to stratospheric levels by a combination of a sharp rise in consumer demand and some 15% of global capacity being lost due to congestion at ports and in the supply chain.

What is happening now is that consumer spending on durable goods has come down to a more reasonable level and this is being translated into container volumes which saw a quite serious contraction in September.

Capacity loss, which normally stands at around 2%, is now down to around 8% and Sea-Intel expects it to reach normal levels in Q1 next year. Murphy noted an almost perfect correlation between lost capacity and spot rates, with a 95% correlation with Drewry’s World Container Index (WCI) which is down 77% from its height.

For contract rates the decline is slower but looking data from Xeneta Murphy commented, “For contracts signed in last three months we are seeing contracts are being renegotiated at lower rates.”

Meanwhile lines are facing an influx of some 2.4m teu in new capacity in the next few years, the largest amount in nominal terms ever and well above previous highs of around 1.5m teu.

One key difference to the past is carriers now have huge amounts of cash and it was noted lines had earned the same amount in the first six months of 2022 as they did in 10 years prior to the pandemic.

Murphy sees two scenarios playing out – a managed decline with lay-ups starting now or a rate war. “What I personally think is much more likely is headed into we’re in for a rate war,” he said, putting an 80% chance on a rate war.

“The carriers have much large war chests than before,” he said. “The only thing scares me more than shipping lines with no money and is shipping lines with money.”

The result could be a prolonged rate war which is dragged out by carriers with more money to fight.

But shippers looking forward to prolonged low rates were warned of a possibility of a repeat of 2009 – 2010 down the line where once large amounts of tonnage is in lay-up only a relatively small spike in demand could tip the market in carriers’ favour.

TAGS: Ports