The global pandemic threw the ocean freight sector into a frenzy that’s slowly beginning to wind down as rates stabilize, capacity frees up and the number of ships waiting outside of global ports wanes. These and other positive trends may prove beneficial for shippers as we head into 2023, while lower demand and stabilizing freight rates are likely to have an opposite effect on ocean carriers.
After two years of pandemic-driven turmoil, the ocean shipping environment began moving in a more “normalized” direction about midway through 2022. By October, ocean containers were no longer being forced to anchor outside of major ports for weeks on end, waiting to get in and unload.
Marine Exchange of Southern California, for example, reported that the backup of container ships has fallen from a peak of 109 vessels in January to just four ships in October. According to WSJ, the container ship backup off of California’s coast—which drove much of the supply chain congestion experienced during the pandemic—effectively disappeared.
Transportation costs were also leveling off across most modes and cargo was taking less time to get to US and European destinations from factories in Asia—86 days in October versus a peak of 113 days in January 2022.
These are all positive signs for shippers that are planning out their ocean freight for the year ahead, but the question is, will the situation continue to stabilize and/or improve? With major electronics makers in China currently experiencing a new wave of COVID-related factory shutdowns, for example, the supply chain uncertainty may flow over into 2023. This, in turn, may impact ocean shipping availability, capacity, movement and rates.
In early-November, Foxconn, one of Apple’s largest suppliers, was dealing with major disruption at its biggest iPhone assembly factory in China. According to CNN, the Taiwanese company raced to control a COVID outbreak at its campus in the central Chinese city of Zhengzhou. Authorities imposed a seven-day lockdown of the area that houses the Foxconn plant. This is just one development that shippers and carriers will be keeping an eye on as 2023 dawns, potentially bringing COVID-related issues with it into the third year of the global pandemic.
More Ships, Please
It should come as no surprise that the container industry experienced its most profitable years in history during the 2021-22 timeframe. Shipping volumes were at all-time highs, demand was strong and rates were astronomical. In September 2021, for example, shipping a 40-foot container from either Europe to Asia or the West Coast of the US to China peaked at over $20,000, according to Marine Insight.
Those costs dropped significantly as 2022 wore on. By September, Marine Insight says the US-China route was down to $5,400 and Europe to Asia had decreased to $9,000. Those numbers represent a 60% and 42% drop, respectively, compared to the rates that carriers were charging earlier in the year.
Now, American Shipper is predicting a “tidal wave” of new container ships over the next two years. Flush with cash, carriers have ordered new ships even as freight rates began to normalize in 2022. This may present challenges for carriers as they try to absorb all of the new vessels just as demand is waning and freight rates are receding.
American Shipper says the majority of the new ships on order will be delivered the next two years: 2.34 million TEUs in 2023 and 2.83 million TEUs in 2024, compared to around 1.1 million TEUs in both 2021 and 2022. “The scale of the upcoming deliveries is unprecedented,” the publication points out. “Historical delivery data from Clarksons shows that annual fleet growth averaged 970,000 TEUs in 2001-20. Deliveries in 2023-24 will be 2.6 times higher than that average.”
Not Quick Back to Normal Yet
Right now, FreightWaves says US shippers are currently experiencing a 20% drop in ocean freight orders and that “ocean carriers are canceling as much as 50% of sailings to rebalance vessel capacity to demand.” It also says freight prices on one key route from Asia to the West Coast are now down more than 80% from last year.
“To put a floor on prices, ocean carriers are doing what’s called tactical canceled sailings so they can match the vessel space with orders, which they hope will stop the decline in prices,” the publication reports. It will take time for the cut in capacity to stop the freight rate slide, FreightWaves adds, noting that outbound tender rejections are another current sign of a decrease in orders right now.
Even if the ocean freight market normalizes in 2023, JOC cautions that it may not necessarily return to pre-pandemic normality. “Contract frameworks are gradually shifting toward mutual commitments, head-haul freight rates are likely to remain above their pre-pandemic averages, and shippers for the next two to three years will continue to focus less on just-in-time logistics and more on building buffer stock,” the publication predicts.
“Should the supply chain prove stable in those two to three years,” it adds, “those buffers will be removed, gradually setting the scene for a similar operational crisis sometime in the 2030s.”