The container shipping industry has the chance to break away from its recurring ‘boom and bust’ loop
This was the conclusion of Alix Partners’ report 2021 Container Shipping Outlook: Carriers have a chance to break the cycle. Will they take it?
The report explains that for at least 30 years, the container shipping industry has been in a recurring boom-and-bust loop. During times of strong macroeconomic growth, shipping rates skyrocketed.
It said “Using these profits, container ship operators would invest in new, ever-larger vessels. With each boom comes a bust, and without fail, the economy would slide into a downturn, demand would plunge, rates would tumble, and operators would find themselves burdened with heavy debt and idle vessels. During these times, overcapacity kept rates low, leverage would expand, revenues would fall, and ship operators would tumble into bankruptcy – or stay out of court thanks only to amend-and-extend agreements with their creditors.”
But the authors of the report argue that today the fundamentals that would support a break away from that cycle are in place – but questions whether carriers will take their chance to break the cycle.
The climate is favourable for shipping lines, with the report noting that global container freight rate indexes topped US$5,000 per 40-ft container in February 2021 after climbing steeply and steadily since May 2020. Furthermore, carriers are holding back on making new ship orders, successfully managing capacity and keeping rates stable even as demand slipped by 5% during the first nine months of 2020 while overall capacity increased by just 2%. Meanwhile, idle capacity, which rose to 11% in May 2020, retreated to 3% by Q3 2020 because the industry increased blank sailings and suspended service on some routes. Carriers also cut sailing speeds, which fell 1.8% in 2020.
The report added “Merger-and-acquisition activity continues apace, furthering the industry’s consolidation: seven global carriers now each control at least a 5% share of the market, and three alliances have helped increase pricing leverage”. It noted that fuel costs remain low despite strict new regulations aimed at reducing sulphur emissions.
But despite these favourable conditions, the report warns “A sustainable departure from boom-and-bust, however, requires carriers to exercise discipline over their pricing and orderbooks, as rates make their eventual and inevitable regression toward the mean – a discipline carriers historically have been quick to abandon when profits were climbing. In a sign that such discipline may already be fraying, a number of carriers recently placed large orders for new vessels – but further additions to fleet capacity could severely dilute any pricing power that carriers have been able to establish.”
The report summed up that much of what is needed to break out of the boom-and-bust cycle is in the carriers’ control, including balancing capacity against demand, holding the line on pricing, and opportunistically pursuing industry consolidation through mergers, acquisitions and liquidations.
It said in conclusion “If they can manage to execute along those dimensions – and that’s a very big if – they’ll have an opportunity to reshape container shipping into an industry built to withstand all manner of demand shocks – whatever their origin and duration.”
Riviera will provide free technical and operational webinars in 2021. Sign up to attend on our events page