From gCaptain, December 27:
Will the actions of Houthi militants and climate activists inadvertently avert the widely anticipated financial fallout in the containership market set for 2024?
Editors Note: This narrative unfolds amidst a highly intricate and chaotic series of events. While we’ve strived to present this story in a clear and linear manner, it’s important to acknowledge that the actual situation is far from straightforward and tidy.
by John Konrad (gCaptain) Just before the Houthi attacks disrupted Red Sea shipping, top containership companies such as Maersk, CMA CGM, and MSC were facing formidable challenges. Coming off a period of COVID-induced record profits, the industry was dealing with an influx of new ship deliveries and unstable freight rates. This situation was poised to significantly reduce containerline profits by 2025, potentially leading to a level of bankruptcies among smaller carriers not witnessed since the downfall of Hanjin in 2016. Confronted with this uncertainty and the need to match growing fleet sizes with decreasing market demand, major carriers were compelled to branch out into other sectors, including logistics, data management, and aviation, to stabilize and diversify their business models. Everyone in the sector tightened their seatbelts for the coming downturn.
Nevertheless, two factors could play a pivotal role in rescuing the industry from the substantial financial losses anticipated next year: one predictable (new climate regulations) and the other unexpected (Red Sea militant activities). Comprehending the impact and shipping company strategies surrounding the new climate regulations could provide valuable insights into how the industry might effectively navigate and potentially capitalize on the challenges posed by the situation in the Red Sea.
A Perfect Storm Builds
Container shipping is a highly competitive and volatile industry. Ship owners often engage in overbuilding during times of favorable rates and strong cash flow, only to face steep downturns when new vessels saturate the market, leading to excessive shipping capacity.This dynamic has been intensified by two key developments over the past two decades. Firstly, the introduction of ultra-large containerships, which began in 2006 with the launch of the 14,770 TEU Emma Maersk, underscored the cost-saving benefits of economies of scale. This trend was further emphasized in 2013 with the debut of the 18,270 TEU Mærsk Mc-Kinney Møller. Secondly, the resulting overcapacity in the market led to the financial strain and potential bankruptcy of smaller players, thereby reinforcing the dominance of the largest firms in the sector.
These factors resulted in record profits when stimulus checks and COVID-induced ordering flooded the market with freight. Profits skyrocketed higher when port congestion sidelined many ships thus reducing overall capacity in the system.
The Perfect Storm Nears
With these record profits, majors followed the usual playbook and ordered too many ships. Every major shipping analyst has predicted a downturn in 2024 as new capacity is launched from the drydocks of Chinese shipyards.Maersk has already cut 10,000 jobs in response to the downturn. Analysts foresee further difficulties in 2025, with over 2 million TEU (Twenty-foot Equivalent Unit) in capacity expected to be delivered for the third consecutive year. Clarksons Research anticipates fleet growth rates of 8% in 2023, 7% in 2024, and about 5% in 2025. This rapid expansion may disrupt the balance of supply and demand until 2026....
....MUCH MORE
