By Costas Bardjis
Increasingly, it seems that unanticipated events are becoming the norm in shipping.
Placing the words “unanticipated” and “norm” together in the same sentence might seem like an oxymoron.
But when looking back over the last five years, one can easily mark three such events (the so called “black swan” events) which helped shape shipping fortunes: the pandemic, the war in Ukraine, and the Red Sea crisis have all been unexpected events that have impacted shipping market developments to a greater or lesser degree. They have affected supply chains, upset trade patterns, and upended vessel demand/supply fundamentals. At times, some have spoken of shipping super-cycles and of new market norms due to prevailing geopolitical uncertainty.
The liner industry stands out as the shipping sector which saw the most pronounced (and profitable) impact after the pandemic.
Then again, this year, the Red Sea disruptions have led to new liner rate spikes, second only to the astronomic heights seen during the post-pandemic boom of 2021-2022.
In retrospect (and only in retrospect), this year’s developments are not surprising given the fact that a massive 18% of global containerized volumes was diverted from sailing the Red Sea to longer hauls around the Cape of Good Hope. We estimate that longer distances and rejigged service rotations have boosted containership demand by an extra 9% in 2024 (and when taking into consideration trade volume gains, boxship demand should improve by a remarkable 14% in 2024). This taxed vessel availability despite a very sizeable influx of boxship newbuildings this year. Moreover, port congestion hindered vessel operations at main Asian and European gateways and transshipment centers during the summer months, thus further limiting vessel availability. Port delays were also attributed to Red Sea disruptions, thanks to logistical bottlenecks resulting from service rescheduling and equipment rerouting and shortages.
Today, liner companies are preparing to live with uncertainty. Several leading carriers have judicially announced service plans for next year pertaining to two Red Sea scenarios. One assumes restoration of trade patterns to pre-crisis levels (via the Suez Canal), and the second assumes continuation of Red Sea diversions well into and possibly throughout 2025.
Of course, uncertainty is inherent in the business and other events (such as industrial action and strikes and even weather – see Panama Canal transit restrictions in 2023H2-2024H1) could impact trade patterns in the short term. For example, a possible labor action at the US East Coast and US Gulf coast ports this October could have a lingering impact on cargo movement and on freight rates (and mostly on charter rates), an impact which could carry on for several months.
But nothing compares in magnitude to events like the pandemic and the Red Sea diversions. Based on reported financials, the containership divisions of ten leading ocean carriers accrued $10 billion in net profits during the first half of 2024 (and this does not include MSC, the largest liner operator which is a private company and does not report financials). Such windfalls were unheard of in the history of the liner industry prior to the pandemic (of course, the same companies amassed $100 billion in 2021, and $140 billion in 2022 in net profits (!), but the post-pandemic story is a unique chapter to be discussed separately).
All this is good for liner operators and for charter-vessel owners, with possibly one exception: the profit bonanza during 2021-2022 was accompanied by overbuilding of vessel capacity at the time. Upon delivery of these newbuildings, the industry plunged into overcapacity in late 2023 and the situation (and carrier losses) would have been much worse in 2024, had it not been for the Red Sea crisis. Instead, today, liner operators feel vindicated for their newbuilding “excesses” of 2021-2022. So much so, that they have plunged into another newbuilding spree. During the June-August three-month span, an astounding two million TEU was added to the cellular orderbook. And more, possibly much more, is yet to come, judging from announced plans by leading carriers, signed letters of intent with shipyards existing options and rumored ordering additions. The exception to today’s prevailing market prosperity mentioned also could be driven by another wave of overbuilding setting a foundation for new bout with overcapacity towards the end of this decade. The liner industry’s drive for alternative fuels (methanol, LNG, and -more recently- bio fuels, such as bio-LNG or bio-methane) could act as justification for the new ordering spree. Undoubtedly, ocean carriers lead the way for shipowners in other sectors when it comes to investing into dual-fuel ships (other than gas carriers) and off-taker agreements for supply of alternative fuels.
But the main reason for the new love affair for newbuilding capacity is the time-old goal to defend and expand market share. But thereof lies the largest risk that has plagued the industry historically: overbuilding. Should the current newbuilding binge continue uninhibited during the next 6 to 9 months, the industry would need another unanticipated, “black swan” event to circumvent a suppressed market after 2027. Can liner operators bet on this happening again?
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