Trends and Outlook for Container Shipping Industry in 2024
29/02/2024A. General overview and review of the Container Shipping industry in 2023
As we step into 2024, it would be worthwhile to briefly review how 2023 was for the shipping and logistics industry in order to understand the underlying context, which in turn will facilitate a better appreciation of the trends and factors that are expected to influence the maritime industry in 2024 (and beyond).
In 2023, while the shipping industry in general witnessed a gradual return to pre-Covid levels, the year was uncharacteristic in many ways.
Freight rates across most trade lanes continued their steady descent to the historical average, while port congestion and other transport bottlenecks that had driven the post-COVID disruptions in 2021 and 2022 largely dissipated, greatly easing the pressure off global supply chains.
The resultant freeing up of shipping capacity and equipment, in conjunction with the infusion of new tonnage (which had been ordered in large quantities by cash-rich Carriers during the Covid-fuelled boom), led to an excess supply situation, which further drove down freight rates.
The recessionary pressures afflicting most countries and subsequent tempering of consumer sentiment had the effect of moderating demand for shipping services (as shipping is derived demand, dependent on the demand for consumer and industrial goods and raw materials).
As a consequence of these factors, the balance of power started shifting slowly in favour of shippers and exporters, first manifested in the drop in spot market rates and later in contractual rates (as and when they came up for renewal, where new contract rates were negotiated using existing spot rates as a guideline).
And amidst all this, the Russia-Ukraine conflict had ramifications spreading far beyond the region, while concerted endeavours to mitigate risks arising from reliance on a single sourcing centre, as well as the desire to diversify procurement origins and shorten supply chains, caused a realignment of trade patterns.
Attempts by various governments to increase economic cooperation with politically and ideologically alike countries to strengthen bilateral relations and make supply chains more reliable and robust (referred to as “Friendshoring”) provided further impetus to the trend of shifting manufacturing capacity and investments, thus creating new markets and manufacturing/ procurement centres.
Attacks on commercial vessels indicate a widening of the theatre of conflict, with more nations and players getting involved, greatly adding to the level of risk for vessels plying on this route. The overall uncertainty has had a debilitating impact on shipping services, compelling Carriers to sail around the Cape of Good Hope, which is a longer and more expensive route.
The combination of longer sailing distances, lengthier transit times, higher bunker consumption, increased insurance premiums, risk allowances for the crew, etc., have all caused a spike in freight rates, which will inevitably have an inflationary effect on consumer prices in most countries.
Natural factors, too, played their part, with atypical climatic variations impacting major waterways, from the Panama Canal to the Great Lakes in the US to the Rhine River in Germany. Poor rainfall and/ or drought in these areas led to a drop in water levels, resulting in the imposition of limitations on draught and the weight that vessels sailing across these waterways could carry.
At the Panama Canal, historically low water levels compelled the Panama Canal Authority to reduce the daily limit of the number of vessels that can cross the Canal, while the low water levels, by default, implied a curtailment in the cargo that vessels could carry. Low water levels on the Rhine impacted barge movement at various points in time throughout 2023, which in turn put pressure on other modes of transport such as road and rail.
Given the diverse nature, scale, and geographical spread of all these factors, the impact of which was magnified manifold when occurring in conjunction (such as the Panama Canal and Suez Canal both being blocked at the same time would leave Carriers and shippers reliant on routing options that are far longer and involve considerably higher costs), the non-controllable element of the shipping business became more complicated.
Since most of these factors are essentially natural phenomena or require political solutions – thus being outside the control of Carriers and Exporters – there is considerable uncertainty regarding their resolution and impact as we move into 2024. Further, with the complex macroeconomic and geopolitical factors at play, the operating environment is quite volatile.
Under these circumstances, there are some prominent factors that will materially impact the Container Shipping industry in 2024, the nature and impact of which we will understand in this article.
B. Trends and Factors impacting the Container Shipping industry in 2024
1. Supply-demand balance and a massive influx of additional capacity in the market
Perhaps the most common concern in the container shipping industry has been the massive influx of new capacity that is expected to inundate the market in 2024 (and 2025 as well).
As Carriers grappled with a paucity of capacity to meet the unexpected increase in demand in the second half of 2020 but still made record profits due to record-high freight rate levels, a proportion of the windfall revenues were utilised for placing orders for new vessels.
The ordering spree led to a record orderbook (measured as a proportion of existing capacity, the orders placed post-COVID ranked second only to the pre-recession period in 2008-09, when the global economy was booming and demand for shipping services was high).
The extent of over-ordering can be gauged from the fact that the capacity of the new vessels ordered is equivalent to 27% of the global fleet, which in October 2020 stood at 8%.
What poses even more challenges for Carriers is the fact that the timing of the delivery of these vessels will coincide with a marked drop in demand, with estimates for global demand ranging between 3% to 4% for both 2024 and 2025.
To make matters worse, a large proportion of the newbuilds comprise mega-vessels, which by virtue of their size are subject to the operational and infrastructure limitations at maritime ports, thus restricting the number of ports that they can call at and, by extension, the number of trades that they can be deployed on.
While cascading vessels to secondary and tertiary trades is an option that Carriers can resort to, there is a limit to the extent that this tactic can be employed, given the draught restrictions, limited handling capacity, and infrastructural constraints at most ports on these trades.
Scrapping vessels is another option, especially ones that are non-compliant with the latest emission control regulations (or where the cost of modifying or retrofitting the vessels would be prohibitively high); however, in this case, too, the extent of capacity thus removed will be limited, as the proportion of vessels deemed fit for scrapping is far lesser than the new tonnage being delivered.
2. Emission control regulations and cost of compliance
While shipping is the most eco-friendly mode of transport, the sheer amount of cargo transported every year means that at an aggregate level, the sector’s emission levels are very high, primarily arising from the use of fossil fuels.
In a bid to reduce the carbon footprint of the shipping industry, governments and international organisations have introduced wide-ranging regulations that target various aspects of vessel operations, from the use of biofuels to installing scrubbers to measuring the energy efficiency of individual vessels to demarcating emission control areas (ECAs).
The latest in the series of such measures is the European Union’s Emission Trading Systems (ETS), whereunder, starting from 01st January 2024, vessels calling at EU ports (and certain other ports) will need to purchase carbon credits. The threshold covering the proportion of carbon emissions for which credits need to be purchased will increase each year, starting from 40% in 2024.
The EU has also introduced the Carbon Border Adjustment Mechanism (CBAM) intended to reduce emissions on imports to the EU.
Covering carbon-intensive products such as fertilizers, iron and steel, and cement, the CBAM is intended to cover possible loopholes where companies relocate manufacturing to countries with less stringent environment protection policies or where imports of such products replace more eco-friendly products that are manufactured in the EU. It is mandatory for EU members to report emissions on a quarterly basis, with the first report due on 31st January 2024.
The cost of complying with these regulations is considerable and will impact Carrier’s margins and business models. With rates dropping sharply and margins back to wafer-thin levels, Carriers do not have much leeway to absorb these costs and have already announced various surcharges to pass on the costs to customers.
In 2024, this will translate into higher freight rates and TCO, as well as an increase in the administrative and procedural tasks involved in monitoring emissions and ensuring compliance.
Carriers and shippers will also respond by limiting calls at EU ports and instead redesign their service networks to call at alternate ports such that the ETS charges are minimised, leading to changes in sailing schedules and ports of call. As an aside, it must be noted that in anticipation of such evasive steps that could be construed as violating the spirit of the law, the EU has brought certain non-EU ports under the ambit of the ETS scheme.
One of the implications for container shipping is that besides the increase in costs and the administrative workload, these emission control measures will also have the effect of moderating capacity, as noncompliant tonnage will be scrapped (though the extent will be slight).
3. Geo-political tensions and military conflicts: which will precipitate realignment and duplication of supply chains, with consequent alteration in trade patterns
2024 will likely witness an intensification of trade wars, military conflicts, and other geopolitical factors that have weighed upon international trade and shipping in the recent past.
The impact of military conflicts will influence the shipping industry, both directly (as has happened in the case of the attacks on commercial shipping in the Bab el-Mandeb straits, where Houthi rebels have been successful in disrupting international shipping) or indirectly (in the case of the ongoing Russia-Ukraine conflict, which has pressurised the global economy and created recessionary pressures in European countries).
A potential flashpoint in 2024 could be Taiwan, where some Western analysts are apprehensive of Chinese military action (akin to Russian action in Ukraine).
Should this happen, the hostilities will directly impact shipping activity in the region, and we will also see an indirect impact in the form of economic sanctions, as were imposed on Russia (the difference, of course being factors such as the deep entrenchment of China in global supply chains, its control of critical raw materials and dominance in the manufacturing of electronic and high-tech products such as semiconductors, all of which will render decoupling a highly difficult exercise).
Trade wars and economic sanctions will also influence international trade patterns and economic engagement in 2024. With Western corporations increasingly looking to diversify sourcing origins to alleviate risks arising from excessive reliance on countries like China, as well as Western governments backing friend-shoring initiatives, combined with the undeniable prudence of moving at least a portion of manufacturing capacity closer home (termed “nearshoring”, intended to shorten supply chains, so as to gain better control and to reduce the possibilities of disruptions and delays), 2024 will see the emergence of new trading partnerships between geographically proximate countries (such as the US and Mexico or EU countries and Turkey), stronger economic ties between politically aligned countries, alteration of cargo flows and shipping routes, and reallocation of shipping capacity.
Economic sanctions and restrictions on technology transfer will also make imports from sanctioned countries more expensive, creating an imperative to shift production to alternate locations.
An example of this is the growing investment in manufacturing capacity in Mexico, which offers the benefits of being sanction-free, closer to US markets, connected via multiple transport modes, and cultural affinities.
An interesting point to note is that Chinese companies have ramped up their investments in Mexico and have been proactive in setting up plants there, which helps them evade tariffs and duties levied on Chinese-manufactured products.
At the other end of the spectrum, we have seen greater collaboration and trade between Russia and China.
Companies will have to create parallel supply chains, one aimed at the Western markets and the other at Chinese and other markets, to ensure that they benefit from manufacturing in China while also catering to the US and European consumer markets.
Since these situations can be resolved only through political negotiations, bilateral dialogues, and military deterrents, it is difficult to hazard a guess regarding timelines for a possible resolution.
It would be reasonable to expect that this will define international maritime trade in 2024.
4. Extreme weather events
With weather analysts forecasting a severe El Nino in 2024, there is a greater probability of the occurrence of extreme weather events, which have the potential to impact international shipping.
An example is the Panama Canal, which has been grappling with low water levels caused by drought and scanty rains, which in turn reduced the Canal’s ability to handle fully laden vessels. As a result, the Panama Canal Authority was compelled to announce restrictions on the number of vessels transiting the Canal, as well as impose weight and draught restrictions. The result was a reduction in effective capacity, which eroded the utility of the Canal. Forecasts for poor rainfall in 2024 indicate that this situation will continue well into 2024.
Likewise, the Rhine River in Germany and the Great Lakes in the US, both of which play a crucial role in barge transport, have been afflicted by low water levels.
Implications for Container shipping
Severe weather events impact the shipping industry in myriad ways, witnessed in the form of lower volumes, changes in trade patterns, revisions to ports of call and vessel deployments, modal shifts, increased pressure on other transport modes, congestion, delivery delays, etc.
Some of the more prominent changes are explained below:
a) US intercoastal volume shift: The US, by virtue of its geographical size and number of trading partners, has cargo coming to both its West Coast and East Coast ports. Traditionally, West Coast ports have been the preferred gateways and have better infrastructure and greater capacity, while the major consumption centres are located on the East Coast.
During the peak of the covid-induced congestion at West Coast ports such as Los Angeles and Long Beach, shippers and carriers started using the Panama Canal route to call at East Coast ports, with the dual objectives of avoiding the congested USWC ports and ensuring that their supply chains remained at least partially functional.
In the long run, the intent was to create an alternative route and infuse resilience in the overall supply chain. This caused the proportion of cargo handled at USWC ports vis a vis USEC ports to be inversed, which was maintained even after the COVID crisis abated. Now, however, low water levels at the Panama Canal have compelled Carriers and shippers to redirect move volumes to the USWC ports, thus bringing the intercoastal split closer to historical levels.
b) Modal shift towards Road and Rail: The curtailment in the effective capacity (both shipping vessels and cargo) that waterways can handle will inevitably drive a modal shift towards alternate modes of transport, like road and rail. Examples include Carriers now providing rail and road options to the Panama Canal or Rhine River barge cargo being transported by road. This not only increases the cost of transportation but also gives rise to more emissions. Additionally, the scale of maritime transport generally cannot be replicated in road or rail, wherefore a sudden shift will strain the rail/ road capacity, causing delays and congestion.
5. Changes to global trade wrought by concepts such as Friendshoring/ Nearshoring/ China + 1/ Decoupling and Derisking
As the traditional China-centric supply chain model was supplanted by procurement strategies which emphasised shortening supply chains, diversifying souring locations, and bolstering economic ties within politically aligned blocs, we saw the emergence of new routes and trading relationships.
In one such development, Mexico replaced China as the USA’s largest trading partner, while other Asian countries such as Vietnam, Thailand, Malaysia, India, and Bangladesh increased their share of exports to America (in the manufacturing sector). In the high-tech and electronics sector involving products like semiconductors, South Korea and Taiwan became preferred partners, as curbs were imposed on technology transfer to Chinese entities.
Whilst China has a formidable advantage in terms of scale and infrastructure in the manufacturing of most products and hence is likely to remain a critical component of any company’s sourcing strategy, other countries will increase their share of manufacturing and exports as we move into 2024.
Further, with China focussing on moving up the value chain and with its historical cost advantage eroded by rising wage levels, a significant proportion of the manufacturing of low-cost goods will shift to other countries.
Additionally, given the dependence on Chinese raw materials and components, instead of a complete revamp of supply chains, we will see the somewhat counterintuitive phenomenon of elongated supply chains, where Chinese components will be exported to new manufacturing centres in other countries, from where the finished goods will be exported to Western countries.
This will create even greater interdependencies and more intricate supply chains, where local issues could have international ramifications (to take a hypothetical example, production or transport disruptions in China, which hinder exports of buttons and raw materials to Vietnam, will impact production and export of Vietnamese garments to Western countries).
Lastly, to evade sanctions and tariffs, Chinese corporations are increasingly investing in foreign companies (that are not subject to sanctions, such as Mexico), which will provide further impetus to the shift of manufacturing capacity, while remaining in Chinese control. Taking cognisance of this development, Western governments are evaluating measures to impose stringent rules of origin.
For the shipping industry, this will translate into the need to introduce new services connecting the newer manufacturing centres, which will also imply a change in fleet composition (to incorporate smaller vessels, which can be accommodated at the newly added ports of call).
6. Shift in the centre of global trade from advanced economies to emerging economies
Global trade and growth have historically been driven by developed economies in the Western hemisphere, while Asian and African countries have largely been the source of raw materials, commodities and low-end general merchandise.
Advanced economies dominated the economy and accounted for a significant proportion of the global demand for shipping services (which in turn drove demand for raw materials and commodities).
The balance of power has, however, been gradually shifting towards the Orient, primarily due to China’s position as the factory of the world and of late, abetted by the rapid pace of growth enjoyed by developing nations like India, the ASEAN countries, and other emerging economies.
Developed and advanced economies, on the other hand, have been struggling with low growth rates and, in the last 2 years, have been facing recessionary pressures, resulting in a relative diminution of their weightage in the global economy. This is especially true for European countries such as Germany, France, and Italy, which have been battling with a lack of labour to drive their manufacturing-oriented economies and also have to contend with a subdued domestic sentiment.
This shift of economic heft is amply illustrated by the fact that, as per IMF estimates, China and India are expected to account for approximately half of the world’s growth in 2023 and 2024.
For the shipping industry, this would translate into higher export and import volumes to these emerging markets, necessitating reallocation of capacity and reconfiguration of sailing networks.
Thus, instead of having the bulk of shipping capacity connecting established manufacturing centres and advanced economies, carriers will now need to cater to growth markets and new sourcing locations.
This ipso facto also implies a change in the composition of vessel sizes in the global fleet. While ports in China, Europe and the US were capable of handling vessels of over 20,000 TEUs to serve emerging markets, Carriers will need to incorporate a greater number of smaller-sized vessels (5,000 to 15,000 TEUs).
This trend will also lead to a spurt in intra-regional trade, as rapidly developing countries trade more with each other, with manufacturing shits and supply chain interdependencies also creating new demand for components and raw materials. Carriers will have to reallocate vessels and equipment to cater to this cargo while correspondingly reducing capacity on existing routes.
7. Focus on Sustainability, circular supply chains and reverse logistics
With the broad-ranging emission control limits that Carriers have to ensure compliance with, and further considering that the permissible limits will be lowered successively in forthcoming years, Carriers have been compelled to proactively focus on sustainable operations and reducing their carbon footprint.
The intent is not only to comply with existing regulations but also to stay a step ahead and ensure that they meet emission control targets well before the stipulated deadlines.
In fact, most major carriers have already embarked upon the journey towards decarbonisation and have set themselves ambitious targets, with Maersk Line and Hapag Lloyd being examples in this regard. While the IMO has targeted net zero emissions for the shipping industry by 2050, Maersk Line has stated ambitions of reaching net zero by 2040. Hapag Lloyd has likewise set itself the target of reaching net zero by 2045.
Most other companies have allocated significant funds towards decarbonisation initiatives and have embarked upon various projects to ensure this.
In 2024, this focus will only intensify as Carriers increasingly prioritise sustainability and align commercial strategies and business objectives therewith.
Providing further impetus from the demand side are major exporters, retailers, and manufacturers who too are equally (if not more so) focussed on reducing their carbon footprint, wherefore they, as customers of Carriers, are demanding more eco-friendly or green solutions. Since studies have found that a sizeable number of end-consumers are willing to pay a premium for eco-friendly products, it makes business sense for Carriers, exporters and importers to invest in green supply chains – a trend that will gather further momentum in 2024.
For the bigger Carriers, awash with surplus funds generated during the preceding 2 years, the cost of compliance with environmental regulations is manageable, increasing the probability of all stakeholders in the supply chain playing their part in reducing overall emissions in the transport process.
Some common methods and strategies employed by Carriers to reduce their carbon footprint include:
a) Order new vessels with energy-efficient designs and engines
b) Slow steaming to reduce bunker consumption and, thus, emissions (with the added benefit of savings on bunker costs)
c) Using less-polluting fuels, such as LSFO, bio-fuels, LNG, etc. Carriers are also investing considerable amounts in R&D to determine the fuel efficiency and emission levels of alternate fuel types and combinations thereof in order to find out which fuel is the least polluting one.
As part of the endeavour to make supply chains greener, Carriers, manufacturers, and exporters will also develop circular supply chains and reverse logistics capabilities, where waste or end-of-lifecycle residue is disposed off in a responsible manner.
8. Other derivative trends
Apart from the major trends covered above, we will witness a number of other trends at play during the course of 2024, arising from the interplay of the major trends and diverse geopolitical and macroeconomic factors.
The notable ones among these are:
a) Carriers competing on rates: As capacity surpluses and the pressure to ensure higher utilisation levels exacerbate with the new tonnage entering the market, it is highly probable that Carriers will resort to undercutting prices in order to retain market share or capture volumes from competitors.
This has already been evidenced since the last quarter of 2023 and will likely continue throughout 2024 (subject, of course, to supply-side scarcity created due to military conflicts that threaten shipping through the Suez Canal and other factors which could have the effect of reducing effective capacity).
Bigger players in the industry, with their cash reserves, are more likely to attempt to undercut competitors, as they are in a better position to absorb losses in the short term.
The other rationale is that smaller players will not have the financial cushion to sustain in a low freight rate environment, leaving them vulnerable and more prone to going out of business, which will, in the long run, reduce the levels of competition in the industry and thus benefit the remaining players.
b) Break-up or reshuffling of Container Alliances: The container shipping industry has been dominated by Container alliances since the turn of the century, which collectively now control a large proportion of capacity.
MSC took the bold step of breaking up with its 2M alliance partner, Maersk Line, and is set to operate services on its own. MSC was enabled to do this due to having invested heavily in new and second-hand tonnage from 2021 onwards, which now leaves them with the scale to operate standalone services while ensuring adequate presence in all major trades and markets. While the split will be official in 2025, both carriers have already started treading their separate paths.
Although Maersk intends to position itself as an integrated logistics service provider, offering end-to-end logistics services and has been focussing on building up first and last-mile delivery capabilities, as far as container shipping services are concerned, their smaller orderbook will mean that they will be at a distinct disadvantage in an industry where scale is critical.
In this scenario, the pragmatic course of action open to Maersk would be to look at options to join or form another alliance, possibly leading to a reorganisation of existing alliances and the creation of new ones.
c) Divergent growth strategies pursued by Carriers: In the past, Carriers have mostly been guided by a similar approach towards growth through their quest for scale and pursuing economies of scale. In the post-COVID environment, Carriers have embarked upon different strategies and growth plans that they perceive will leave them well-poised to capitalise on changing customer preferences in a rapidly evolving industry.
While MSC aggressively acquired tonnage to displace Maersk from the top slot, Maersk attempted to acquire logistics assets to complement its shipping services. Carriers like CMA-CGM have adopted the middle path, with investment both in vessels and logistics assets, while Hapag Lloyd has essentially focussed on its core container shipping business, while also investing in ports and terminals.
With these developments continuing in 2024, we will see Carriers competing on varied value propositions, with their go-to-market strategies designed to play to their strengths and incorporating newly acquired assets and logistical capabilities.
Source: Marine Insight
