Sunday 25 Feb 2024
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This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

SUPPLY chain disruptions, brought on by the Covid-19 lockdowns in 2020 and 2021, were still a major issue this year, compounded by the Russia-Ukraine conflict, worker shortage and zero-Covid policy in China. Though less severe than earlier, they contributed to higher costs and an inflationary environment.

Still, after nearly two years when the balance of power shifted to the carriers, shippers finally got a reprieve as freight rates started to plummet towards the second quarter of the year, owing to the easing in supply chain disruptions and capacity constraints that were built up over the pandemic, as well as weakening demand due to shifting consumer spending patterns.

In a June 23 report, New York-based supply chain software company Shifl says major US retailers such as Walmart, Target and Amazon.com have indicated inventory overstocking, which saw them reducing their imports to improve inventory turnaround times.

“The reason for the excess inventory? Simply enough, consumers have stopped spending with abandon,” says Shabsie Levy, founder and CEO of Shifl, a digital freight-forwarding platform. “As shopping habits revert to pre-pandemic norms, inflation decimates buying power, and home sales stall, the demand for consumer goods is stalling as well.

“Ocean freight spot rates are continuing to drop fast. The Shifex index (by Shifl) shows China to the US West Coast has gone below US$7,000 per 40ft container (FEU), while China to the US East Coast is moving downwards to below US$9,000 per FEU.”

Data from Shifl also shows that vessel queues have fallen drastically across the US ports of Los Angeles and Long Beach, with ship numbers dropping to 25 in June — a far cry from the historical high of 109 ships in January 2022, when the queues were growing on the US East Coast.

The latest Drewry World Container Index composite index of US$2,120 per FEU on Dec 22 was 80% below the peak of US$10,377 reached in September 2021. On a year-on-year basis, the index had dropped 77%, but remained 49% higher than average 2019 pre-pandemic rates of US$1,420.

Global container shipping turned a corner in the second quarter of 2022, according to the findings of a quarterly review of the market produced by UK-based transport economics firm MDS Transmodal and Global Shippers Forum on Sept 15.

“Covid-19 lockdowns in China, suppressing supply of manufactured goods and demand for raw materials, and plummeting sentiment in consuming countries, due to rising interest rates and energy prices, contributed to a fall in average earnings per container carried for the first time since 2020,” the review says.

S&P Global Market Intelligence, in a Sept 7 report, concurs, noting that dry bulk and container freight rates have continued to fall over the past three months. Owing to the seasonality of the market, dry bulk freight rates would typically peak in the third quarter; but, the second quarter is likely to be the peak of 2022, it says.

“Container freight rates have declined significantly in the third quarter, with slower growth in container trade demand in response to a high inflation rate and endemic consumer pattern. After the third-quarter peak trade season is over, the de-containerised trend is expected to be reversed and some of the container spillover-related minor bulk cargo demand will gradually return to container box, which would put backhaul geared dry bulk freight rates under further pressure,” says Daejin Lee, lead shipping analyst at S&P Global Market Intelligence.

S&P Global Market Intelligence’s Freight Rate Forecast model predicts that the Baltic Dry Index (BDI) is expected to fall 20% to 30% on the year to average 1,300 to 1,400 points in 2023 before recovering to average 1,400 to 1,500 points in 2024.

The BDI had fallen 24.9% over the past year to 1,723 points on Dec 22.

S&P Global Market Intelligence says a much reduced port congestion level, along with weaker cargo arrivals, was a major reason behind the significant decrease in freight rates. “Based on expectation of weaker trade volume, we do not expect extremely high congestion again in the coming quarters,” it says.

‘2022 will be strongest year on record for container shipping’

An unexpected event this year was the Ukraine-Russian war, which heightened inflationary pressures globally. The US Federal Reserve’s rate hikes led to a strong US dollar, which worsened the situation in many import-dependent countries, including Malaysia.

In 2022, recession fears also dominated amid increasing signs of growth slowdown. Market experts say inflation risks are far from over and the Fed and other central banks remain committed to continuing their aggressive rate hikes in the months ahead.

In an Oct 6 report, Moody’s Investors Service says that, although port congestion and delays were still an issue in 2022, falling or only slowly growing throughput at major container ports globally has alleviated some of the pressure on global supply chains.

The credit rating agency says: “We also expect demand to soften during the next 12 to 18 months, which will further ease bottlenecks. As a result of these factors, we predict that the aggregate earnings before interest, taxes, depreciation and amortisation of the largest shipping companies we rate globally will fall by up to 70% in 2023 compared with 2022, which is one of the main reasons we are changing our outlook for the global shipping industry to ‘negative’ from ‘stable’.

“However, the sharp expected drop in combined earnings in 2023 is mainly because of tough comparisons with current data — the base effect. This year will go down as the strongest year on record for container shipping, which dominates our outlook, and 2021 was the best year for dry bulk carriers’ earnings in 13 years.”

The agency expects the shipping industry’s combined earnings to be almost 75% higher in 2023 than in 2019.

Moody’s Investors Service says: “Carriers are on course for another year of record-high profitability. However, signs pointing to a more benign market environment in 2023 to 2024 abound: an order book implying supply greatly outstripping demand, decreasing utilisation rates and falling spot rates. That being said, carriers have very strong balance sheets and are already trying to address softening demand by cancelling sailings as well as through more transformational actions, such as diversifying into terminals, air freight and third-party logistics.”

As for the dry bulk segment, the agency believes that, with global gross domestic product growth slowing, dry bulk charter rates are expected to be lower over the next 12 months after hitting multi-year highs in 2021.

“Chinese imports of iron ore, which tend to drive Capesize charter rates, have weakened. However, looking at 2023 and beyond, the low likely growth in vessel supply over the next two years will help keep charter rates relatively elevated,” it adds.

In a Nov 23 statement, Moody’s Analytics chief economist for Asia-Pacific Steven Cochrane observes that the problem of supply-chain disruptions has largely eased since the middle of this year.

“Not that such disruptions have disappeared. Indeed, they remain disruptive in the US because of labour shortage in the transport and logistics industries, which could be made worse by a potential rail strike before the end of the year,” he says.

Cochrane adds that in China, supply-chain disruptions have also eased but that periodic lockdowns associated with China’s zero-Covid policies are here to stay, perhaps through mid-2023.

He says Southeast Asia will also slow, but more moderately. “The Philippines and Vietnam will lead growth in the coming year, just ahead of the India forecast. The remaining Asean6 countries will follow.

“Malaysia will slow the most [in 2023] compared with 2022 as lower commodity prices, particularly for palm oil and crude oil, weigh on export receipts,” he adds.

Moody’s Investors Service, in a Sept 29 report, expects stress on global supply chains to improve but stay elevated.

It says: “Shortages of parts, particularly microchips, eased but are not resolved, so vehicle production is stifled. That leads to low inventory and keeps automotive prices high. We expect semiconductor supplies to the auto sector to improve in 2023 as the global macroeconomic environment weakens. Still, energy price escalation, or even physical shortages, should Russia cut off natural gas to Europe, add risk to auto production.”

Air freight prices have also come off their highs. In 2022, air cargo rates started to track at near 2019 levels, taking a step back from the extraordinary performance of 2020 and 2021, says the International Air Transport Association (IATA).

“Volatility resulting from supply chain constraints and evolving economic conditions has seen cargo markets essentially move sideways since April,” says the airline grouping’s director-general Willie Walsh.

The zero-Covid policy in China and Hong Kong continues to create supply chain disruptions as a result of flight cancellations, owing to labour shortages and because many manufacturers cannot operate normally, Walsh adds.

“Air cargo markets mirror global economic developments. Peace in Ukraine and a shift in China’s Covid-19 policy would do much to ease the industry’s headwinds. As neither appears likely in the short term, we can expect growing challenges for air cargo just as passenger markets are accelerating their recovery.”

What to expect in 2023

In a Dec 7 report, Christian Roeloffs, co-founder and CEO of Container xChange, says: “In 2023, there is a high possibility of an all-out price war. It doesn’t seem that the capacity restrictions that we have seen in the past two years are due to return, so we’ll just have ample capacity on both the vessel and the container side.

“With the competitive dynamics in the container shipping industry, I don’t expect the big players to hold back, and we do expect prices to come down to almost variable costs. We also foresee market consolidation.

“Into 2023, freight forwarders will be able to go window shopping quite a lot, and there’s going to be a lot of room for negotiation, especially in the early parts of the year. Contract rates will follow suit as spot rates fall significantly,” he notes.

“Inflation and the energy crisis are leading up to cautious spending, which will have its own impact on the container industry. The shipping industry will survive this, and we will again start to see normal activity levels in the future, though not the immediate future. The good part is that the worst is behind us,” adds Roeloffs.

 

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