Boom over as economic headwinds increase.
The unprecedented pandemic-led boom in freight rates has peaked. The Freightos Baltic Index (FBX) peaked in Q3 2021, at 11,000 points in September 2021. Last year’s peak season pushed up freight earnings as the demand for consumer product was still there. Stimulus payments remained an influencer on spending. Inflation, although elevated, was half that of today’s levels.
The global economy is in a different place compared to last year’s peak season, the drop in earnings was expected during 2022. Macroeconomic numbers are signalling an imminent global economic slowdown, and geopolitical instability has increased significantly since 2021’s peak season.
Global manufacturing has ebbed since the summer of 2021. JP Morgan’s Global Manufacturing Index has lost momentum since last summer, the index value falling to 51.1 in July 2022 from 56 points in May 2021. Though the index just about remains in positive territory above the 50-point threshold between growth and contraction.
It is easy down talk the market, though to put current earnings levels into perspective, the average container time charter rate assessment is running 400%+ higher than at the start of the pandemic. The FBX freight rate index remains elevated at 5,300 points, 250% higher than pre-pandemic, so overall earnings remain strong. The question is how low will they go as we transit through the post-pandemic era?
As the charter market remains tight in terms of supply, we have noticed that vessel earnings are temporarily insulated from dips in trade demand, especially as time charter periods have increased significantly and locking in swathes of charter tonnage until 2024/25.
Since mid-2021, the average time charter period for container ships was approximately 25 months. Though recently, in Q2 2022, as liner sentiment switched towards caution in correlation with downwardly correcting freight rates, the average periods offered by owners have shortened. This is the case, mainly for Feeders and Regional ships. During Q2 2022, the average charter period has shortened to 20 months. Though even with this marginal dip in charter periods, these relatively longer periods will continue to provide owners will plenty of cover to capitalise on solid charter rates.
As with most shipping arenas, the state of the economy is the driving factor in pushing up or suppressing shipping costs and determining future demand. The supply side, which we will cover in this report, will certainly provide some curve balls in the next few years. Fleet renewal investment has been at full speed for almost two years and is displaying no sign of a slowdown.
The overall lack of structural growth in container trade demand in 2022 has not come as a surprise and we are expecting for the full year 2022, annual container trade growth could post a decline in the region of 0% to -1% y-o-y.
By reviewing the major global container gateway ports, we have a gauge of overall global container trade demand in 2022 so far.
In H1 2022, container demand was muted but we have not seen a significant fall or collapse in trade, more of a gentle correction towards normal levels. We estimate that in the first half of 2022, global container growth has flat lined at approximately 0%-1% growth. This number is not alarming coming off the back of a pandemic-led boom in consumer spending on manufactured products in 2021.
Regionally, we have noted some disparities.
China dealt with the Shanghai lock down in Q2, and minimised freight disruption by diverting container traffic to nearby alternative ports, mainly the Ningbo-Zhoushan terminal cluster.
China’s export growth in H1 2022 for all goods has expanded 14.3% y-o-y to $1.7Tr and beat expectations. Though with inflation now running towards double figures in Europe and the United States, China’s export growth percentage has been propped up by price increases as it is measured in dollar terms.
In terms of TEU throughput, we estimate that China’s TEU throughput growth has recorded a marginal 2% increase, not a total collapse considering Shanghai Port was severely restricted during the recent lock down measures.
The United States' throughput, although cooling, has maintained resilience. We estimate the major US gateway ports have recorded 4% y-o-y in the first half of 2022. At the corresponding point in 2021, US volumes had increased 13% y-o-y.
Europe is struggling, the effects of increased energy prices and uncertainty caused by the war in Ukraine have pushed up prices and many European nations are coping with a cost of living increase. We estimate the major European gateway ports have experienced TEU volumes slowing to -4% y-o-y in the first half of 2022.
With storm clouds darkening the global economic outlook, a bumpy road ahead is likely. In April, the International Monetary Fund (IMF) downgraded global growth in 2023 and 2024 to 3.6%. Since then the clouds have darkened significantly and several downside risks have increased. The war in Ukraine has worsened and the economic impact on the global economy has deepened. Commodity price shocks are slowing growth and exacerbating a cost of living crisis.
Higher than expected inflation has widened beyond energy prices and food costs. As a result, major central banks are tightening monetary policy, but this will weigh on the recovery. Potentially more disruption in China as the ‘zero-Covid’ policy has the potential for more lockdowns and could hinder global supply chain efficiencies and hamper economic activity.
At the end of July, the International Monetary Fund (IMF) significantly downgraded global economic growth for 2022 and 2023, since their previous estimate that was published in April. The IMF choose to title their July 2022 report ‘gloomy and more uncertain’ so we know it is not an easy read.
Global growth for 2022 has been halved from 6.1% in 2021 to 3.2%, which represents a 0.4% downgrade since April. In 2023 the IMF has pushed global growth down further by 0.7% to just 2.9% growth.
Global output contracted in Q2 2022, with downturns in China and Russia pushing down global economic performance.
The risks to the outlook are overpoweringly tilted to the downside. The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor. Tighter global financial conditions could induce debt distress in emerging markets and developing economies; renewed COVID-19 outbreaks and lock downs as well as a further escalation of the property sector crisis might further suppress Chinese growth.
The IMF mentioned that if these risks escalate and become a reality, global growth for 2022 could drop as far as 2.6% and for 2023 as low as 2.0%. Global economic growth has only been below 2% five times since 1970, in 1973, 1981, 1982, 2009, and 2020.
We must respond similarly and turn bearish on our outlook for future container demand. Our container growth estimate for the annual average growth going forward from 2022 to 2025 is 1.%.
We see a recovery, but a modest one from 2024. Though those bearish demand numbers do include the dip in 2022/23.
We are not bearish on the supply side of the equation.
As of July 2022, the cellular fleet surpassed 25.0m TEUs in trading capacity.
To be exact with the numbers, the container ship trading fleet as of 1 July 2022, reached an operating capacity of 25,023,357 TEU, comprising 5,475 vessels.
Over the past 12 months, cellular fleet capacity has expanded by 3.8%, an overall expansion in TEUs of 925,000TEU.
For the six months up to the end of June 2022, net fleet growth has achieved just 1.64%. We estimate approximately 4% net fleet growth for full-year 2022. These expansion numbers look tame compared to the scheduled deliveries for 2023 and 2024.
After the massive surge of container ship ordering in 2021 (4.7m TEU / 608 ships), the momentum of fleet renewal has not lost its energy. During the first six months of 2022, we estimate a further 2.1m TEU / 310 ships have been ordered.
The global economy during 2022 so far has been firing warning shots and numerous macroeconomic indicators are pointing to an oncoming slowdown. The need to proceed with fleet modernisation is proving an overriding factor in the decision-making currently.
Though perhaps the environmental, social, and corporate governance (ESG) driver is not the main catalyst pushing investment as only an estimated 25% of the box ship order book is alternatively fuelled. Partly since there are limited options for container ship propulsion. LNG dual-fuel engines can offer 20% reduction in carbon emissions. Perhaps a 20% reduction in carbon emissions is not enough to get the herd moving in that direction. We do have e-Methanol ships in the pipeline for delivery from 2023 onwards, and this technology will be closely watched upon delivery.
In 2023, we estimate that 2.3m TEU of scheduled capacity is due for delivery, which will push annual net fleet growth to approx 9%. Deliveries increase in pace in 2024, we estimate that 3.0m TEU of fresh capacity is due to hit the water in 2024, net fleet growth is expected to increase to by about 10%. These numbers will probably transmit some caution to ship owners and liner companies and the urge for fleet renewal could be dampened as we approach these big years for deliveries.
Capacity on order compared to the trading fleet has reached 29.8%, the highest since the end of 2011.
The composition of the order book (in terms of No. of ships) is quite evenly mixed since we have noted a revival in ordering mid-size container ship tonnage.
From 2018 to the beginning of 2021, just a handful of ships were on order in the 4,000-9,999TEU segment. Since 2021, the mid-sized order book has expanded to 219 ships, representing 23% of the order book in terms of the number of ships.
Feeders between 1,000-2,999 TEU represent 38%. For the larger types 10,000TEU+, the percentage of the order book is now 32%. Regional ships sized from 3,000-3,999TEU represent just 6% of the order book and these types can be considered niche.
For the country of build, China controls 54% of the container ship capacity currently on order, South Korea on 38%, and Japan on 8%, with others on 0.1%.
Over the past decade or so, China has increased its production of container ships. For example, back in 2011, South Korea dominated the container ship order book with 67%, China with 22%, Taiwan with 5%, and Japan with 2.1%.
As the order book climbs to new heights, average lead times have also increased, though only marginally. For South Korean yards the average lead time for ships currently on order is 29.1 months, which is compared to 28 months lead time 12 months ago.
Regardless of all these statistics, there is a lot of new tonnage to manage and the current trading fleet will have to accommodate them by utilising vessel cascading. With 240 neo-Panamax vessels on order, the size range between 12,000-16,000TEUs. These flexible big ships will be pushing older mid-sized vessels 6,000-8,000TEU into traditional-Panamax trades resulting in potential overcapacity in regional/feeder routes.
These disruptive cascading events are likely to coincide with the resumption of container ship demolition in 2023/24.
The trading fleet age profile suggests there are plenty of ships due for retirement, 1,200 vessels aged 20 years or more. Therefore, we are approaching a very busy few years of fleet changes, and vessel management strategies to deal with the challenges of inevitable oversupply.
Aggressive fleet renewal will always be accompanied by oversupply, and the associated erosion in earnings will no doubt turn off the tap of new orders at some point soon. The positive aspect is that the 900 ships on order will be considerably more fuel efficient than the ships they will replace. The expected resumption of demolition will strip the fleet of some thirsty older ships and this can only be good news.
In terms of oversupply, based on supply/demand reference point of 1 January 2020, we estimated that the annual average oversupply in the four years 2022-2025 will average 13%/year.
This estimate assumes annual average fleet growth of 6.6%/year and trade growth 1%/year. The fleet growth allows for demolition of 0.7%/year of the fleet. The gap in supply-demand has been exacerbated by this year’s demand drop and the gap has widened since the invasion of Ukraine.