Container Shipping – Adaptive Strategies for the Future
July 21, 2023
The flourishing container shipping industry, integral to the European logistics network, has prompted an uptick in demand for new, expansive vessels. Forecasts for 2023 to 2025 suggest that the freshly minted fleet will comprise 27% of the total operational capacity. This investment in new vessels is primarily driven by anticipated future demand and the enhanced efficiency of larger ships. Within the timeframe of 2023 to 2024, it is projected that around 700 ships will be completed, with a further 150 or so anticipated in 2025. Notably, Neo-Panamax size vessels account for about 45% of these orders while the most substantial sizes (ULCV) make up an additional 20%.
The Surge in Ship Orders: A Response to Demand and Efficiency
The container shipping sector appears to be spearheading the transition to alternative fuels. Approximately 50% of the overall new ship orders are accounted for by vessels that are equipped for or prepared to accommodate dual-fuel functionality, notably methanol or LNG. Currently, LNG commands the lion’s share of orders for alternative vessel fuels, with methanol coming in second, and ammonia also in the running despite its hazardous properties.
Alternative Fuels and Challenges Ahead
Dual capacity introduces an element of adaptability but a potential storm is brewing. This is due to the considerable influx of new capacity meeting with decelerating trade growth. This situation could trigger a downward spiral in freight rates as the surplus capacity might not be matched by an uptick in demand. The focus now shifts to capacity management. Yet, the predicament lies in whether container liners, as key players in the freight forwarders network, will seek to capture more market share or choose an alternative route. Decreasing occupancy rates (reducing to 75% in Q1), coupled with precarious freight rates, might set the stage for intense price competition, given the robust financial standing of container liners.
Strategies to Overcome Capacity
Container liners have three tactics at their disposal to control overcapacity and curtail excess supply. The first is scrapping, which involves dismantling older ships on the verge of exhausting their useful life. While shipping lines might opt for this method to shrink capacity, they are equally inclined to sidestep potential capital losses.
The second approach involves slow steaming, a deliberate lowering of the ship’s speed to brace for the influx of new vessels. Indeed, there was a noticeable deceleration in average speed during the first quarter, marking a 4% slowdown compared to the same period last year. Although this method might offset approximately 5 – 7% of the surplus capacity, it won’t eliminate it entirely.
Lastly, carriers could cancel or blank sailings, a strategy learned during the pandemic to level the short-term supply-demand equilibrium. Despite the effectiveness of this strategy, it does compromise the reliability factor for clients. However, with about 65% of costs being mutable, it makes sense to cancel sailings, especially in light of dwindling occupation rates. The challenge lies in whether carriers will adhere to this plan amidst escalating competitive tension.
