When the tide turns

As opposed to the usual saying "stairs up, elevator down", in Ocean freight markets, since the pandemic it has been ‘elevator up, stairs down’.?

There is no doubt that freight markets are declining, albeit gradually. This season has been characterized by a rather subdued peak season, which has been a favourable factor for shippers, exporters, and traders. Despite expectations, seasonal volumes did not rise as forecast, placing pressure on already softening ocean and air freight markets, as well as road and rail freight.

Let's take a closer look at the ocean freight market. There has been a decline in most major routes to Europe and the United States, although not as rapidly as they were going up, but the trend is heading in the right direction (see charts below). Although most shippers, have avoided RFQs in the last few quarters, it is certainly a topic that will gain more traction in 2023. It is possible that some shippers, especially traders, would desire some portion of their business to be contracted via RFQs, perhaps a tiered structure that would allow for price lock-in for any unforeseen circumstances. According to a recent report from tech platform Shifl rates from China to the US West Coast for 40GP have fallen to their lowest levels in 20 months.

Although port congestion, union strikes, and labour shortages are common phenomena these days, low vessel utilization, excess capacity of equipment, and a decline in consumer demand for goods are all worrying factors for the shipping industry.

US consumer confidence has certainly deteriorated. Consumers are taking a cautious approach to their spending habits as a result of a dramatic increase in living costs, energy bills and central banks playing catch up with balancing growth with inflationary pressures to adjust interest rates more quickly than many expected.

Consider the following chart by IHS/Statista. Container capacity around the world is growing steadily, the container orderbook looks a bit heavy, and this is when greed overcomes long-term profitability, causing the entire freight market to deteriorate. There is a saying that past performance does not predict future performance, but in shipping we have seen this circus every other decade. Well, the good news is that ship scrap yards and demolition sites are vacant and need to generate some business.

With rates dropping, most of the business that previously moved to air freight will return to sea freight, however that would not be enough for them to cover the operational costs from China to Singapore.

In the past, carriers were faced with dire situations when interest rates increased. However, they are well capitalized in the current market, have made substantial earnings and continue to do so. A number of the most successful mainline carriers have diversified into other industries, including airline, hotel, and medical and hospital care, and some others continue to invest in the shipping industry. Even bigger firms have gone bankrupt very quickly when good years are poorly managed, and when rates are rising, the famous Warren Buffet quote of "Only when the tide goes out do you discover who has been swimming naked" comes to mind.

Whether it was by accident or not, I crossed over to the other side of the business at the right time. Carriers’ markets are slowly shifting back to being Shippers’ markets and I can only hope freight markets will not suffer a similar depression as we did following the global financial crisis.