A lot has been said in the recent past by various experts about “shortages”, “lack of availability” and recently, “surpluses” of freight containers and the prognosis of the general health and well-being of the Liner Container industry going forward into 2023 and beyond. It is reasonably agreed though, across the board, that the Liner Container industry will post healthy margins in 2022 and possibly 2023 as well.
The extraordinary equipment imbalances that started to manifest in the mid 2020’s because of lockdown induced blank sailings from Asia and which continued through 2021 because of Port congestion at W Coast North America and European Ports, created an abnormal buildup of empties at the light leg ends of the trade lanes quite simply because the vessels that would normally retrieve between 60-80% of the equipment imbalance on the return voyage never showed up.
Roughly, the 800 odd blank sailings would have created a backlog of about 8-10% of the world’s container fleet at the non-business end of the chain. The resulting “non-availability” of containers at head-haul Ports across Asia was quickly termed a “shortage” by the experts and by Politicians across the spectrum and the consequent knee-jerk reactions by the usual bureaucratic set across the world ended up in a futile attempt to tackle this issue. Following the onslaught of Covid-19 on personnel manning Ports, Trucking and warehousing industries, productivity at major receiving and loading Ports suffered adversely, thereby exacerbating the “shortage” at the loading Ports.
China’s zero-Covid tolerance policy did not help the creation of fresh loading opportunities at the head-haul end and neither, for that matter, did the prevailing high inflationary trends that have impacted most of the World for various reasons including, but not limited to, the Russia-Ukraine conflict and its effect on the procurement of food-grain and other commodities as also, oil prices/production vagaries. The effect of reduced demand in the United States of America (the world’s largest consumer) and Western Europe, depressed export volumes from Asia and once again, empty-container Depots are filling up, freight rates reducing rapidly, utilization levels dropping and the Shipper, beginning to heave a sigh of relief from high costs.
The question is, how long would this respite last?
Which brings us to Fourth Quarter 2022.
The general belief is that there is an excess of containers in the market. This is a fact for the reasons pointed out below, and that things look quite gloomy. This presumption, however, does not take into account the structural strength, state of seaworthiness and cargo worthiness of the current “surplus” of containers. Numerous anecdotal incidents indicate that unless CSC norms are strictly enforced by Lines, Ports and the Administration, accidents are just waiting to happen because of substandard containers being used to carry CSC payloads on sea, road, and rail networks.
This situation will only hasten the logical demise of about 6-8 million teu that were pressed into extended use during the Covid/post-Covid “shortage” and are now well past their “use-by” dates. The natural attrition rate of the container fleet, assuming a lifespan of 12 years across owners/lessors would imply that about 8% of the fleet should retire annually. At a global container fleet strength of about 45 million teu, the annual attrition rate should be about 3.5-4 million teu. This implies that about 4 million teu which should have been retired annually had not since mid-2020.
They will retire now.
The next few quarters will most likely see about 7-8 million teu dropping out of circulation and bearing in mind that China’s annual production capacity is about 7 million teu, over one full year’s worth of production at full-tilt ( Covid zero-tolerance excepted ) is very likely to disappear from the system.
2023 Shape of things to come:
Assuming a conservative growth rate in World GDP of about 2.2-2.5%, at the current multiplier, merchandise trade growth of about 4-4.5% is likely and the impact of the reduced available container fleet through forced attrition is something to be re-considered.
There is, however, a new variable on the capacity side which is very likely to seriously upset the status quo:
January 2023 heralds the entry of the following jargon into ship-operating lexicon:
EEXI Energy Efficiency Existing Ship Index
CII Carbon Intensity Indicator
SEEMP Ship Energy Efficiency Management Plan
AER Annual Efficiency Ratio
To the uninitiated this sounds unintelligible, but it seems evident that Amendments to MARPOL Annex VI which will come into effect in January 2023 will have severe repercussions on vessel operator efficiency and operating indicators. All ships would be mandated to calculate and publish their EEXI and follow technical means to improve energy efficiency. Part III of the SEEMP will list targets and implementation plans and measures that need to be deployed.
Without going into technical detail, this implies that ships would be required to limit their shaft power, restricting maximum power (including maximum power for contingencies) that can be generated.
Ergo: Reduction in steaming speed. It is estimated that a normal long-haul deployment of tonnage would need between 7-15% more tonnage than earlier to maintain the same capacity. In other words, depending on the number of vessels in a string and the operating contingency margins, at least one or more additional vessels would be needed to provide similar coverage – traditionally, weekly port coverage.
The projected intake of tonnage into the container liner trades during 2022-2025 is estimated to add about 19% to available container slot capacity if current orders are maintained and ignoring scrapped tonnage. The new dispensation is estimated to effectively neutralise this fleet increase between 7-16% and thereby match projected merchandise trade growth.
Summary:
In summary, the effect of the now hastened attrition of the container fleet combined with the effective reduction in slot capacity because of the MARPOL amendments and vessel scrapping, could well result, ceteris paribus, in a “balance” of sort being restored to the anticipated skew in the supply-demand situation in 2023-24-25. Imponderables such as the Russia/Ukraine effect, global inflation/recession etc. remain to ensure that there are interesting times ahead for Container Liner shipping and the leasing industry. Easing of hostilities and consequent normalizing of supply chains, reduced inflationary pressure, and increasing demand could well alter the equation quite significantly increasing Shipper costs all over again. Unless cost reductions are achieved by improved efficiencies elsewhere in the logistics chain, Shipper costs are likely to increase again with every likelihood of a scenario where scrapped containers, longer turn times on vessel deployments, increase numbers of ships etc. putting pressure on container availability yet again.
Interesting times indeed.
