Will the container shipping crisis repeat itself?

Will the container shipping crisis repeat itself?

2010s: A Decade of Market Imbalances and Super Large Container Vessels

In the last three years of the past decade, supply has grown more than demand: TEU capacity of the fleet has increased by 75.6%, while demand measured in volumes has grown by 46.1%. This imbalance left the container market in a worse condition at the end of the decade than at the beginning.

As in other shipping sectors, the fundamental balance in the shipping market has deteriorated in the last decade. This led to difficult prospects even before the COVID-19 crisis. As demand falls and the fleet continues to grow this year, 2020 will be a difficult year for carriers, even if freight rates are supported with extra values.

On the supply side, the main history of the past decade in container shipping has been the ever-increasing size of ships in order to achieve economies in scale.

The continued growth of ships, not only in size but also in number, reflects the increasing use of the «Hub-and-spock» model, while medium-sized ships have become less popular.

The increasing size of container ships has led to investments in ports, cranes and maritime infrastructure around the world to allow facilities to accommodate these larger ships. The example is the enlargement of the Panama Canal and the lifting of the Bayonna Bridge in New York/New Jersey, which have opened more U.S. east coast ports to these ships.

However, by this time carriers have broken the self-destructive cycle of the decade following the 2008-2009 financial crisis, when they have no leverage to influence supply and demand, they turned to construction of mega-container ships to reduce costs and sailing in small steam in order to save fuel.

One of the key changes compared with 2010’s is the frequency of voyages is now much higher. Container ships are larger, there are fewer consortia, but this allows for much more voyages per week and gives much more opportunities for changes in terms of capacity bandwidth control.

Changes in freight rates

The stagnation of changes in freight rates at the end of the decade is an indication of the pressure faced by the container shipping market. The focus on cost cutting that has been prevalent in recent years, will continue as ships of the ULCS type are able to offer a lower cost per TEU than smaller ships.

The past decade brought increasingly challenging market conditions with more competition, excess capacity and greater consolidation of the main carriers. Significant cost reductions were achieved through the unrelenting pursuit of economies of scale.

But as the nominal growth of the fleet exceeded demand growth in most of the years, freight rates came under increasing pressure, resulting in lower operating margins of container carriers.

Future expectations

Despite all this, demand is recovering in many sectors now, so that should lead to improved market condition.

The crisis could be a key catalyst for digital and technological progress in the shipping industry.

Investment in freight technology companies will help the industry to connect different players, shippers, brokers and carriers in the maritime sector to optimize current operations.

In the long run, whatever form will take the future of container shipping in the post-pandemic world, it is likely to be very different from the recent past. But, thanks to «new reality», consolidation and new technologies, container shipping has every chance of a successful renewed future.