Super-cycle? What drives the containership markets?
A seeming paradox: Fleet capacity expands faster than trade volumes during the 2019-2021 period and yet there are not enough ships to satisfy demand today.
We have all seen the headlines: Not enough boxships to satisfy burgeoning demand; Liner freight rates go through the roof; Charter rates climb to undreamed of levels; Port congestion reaches all-time highs; Containerships wait at anchor outside ports for days before allowed berth access; No room to take more cargo onboard ships/cargo rolled at Asian ports; US exporters complain that carriers turn down bookings, seek legislative assistance; Global liner service reliability at historical lows; and many-many other eye-catching headings.
How did we end up here? And is this situation here to stay? Opinions abound; some point to the right direction, but many are wrong. For example, in the autumn of last year, when these conditions were building up, many pointed to a post-pandemic inventory build-up as the main driver of the demand upturn. This could not have been further from the truth. During the ensuing months, sale-to-inventory levels in the world’s main consumer markets, Europe and the US, declined and they are still at multi-year lows; Yet others claimed that a surge in e-commerce transactions during the pandemic was a main reason behind the demand boost. This was only partly true. E-commerce sales and trade increased significantly during the pandemic but remained only a small part of the overall consumer demand. Furthermore, recent European and US government data show that e-commerce spending has subsided in recent months, adjusting back towards its prepandemic trend. And yet, tight market conditions persist.
Then again, many pointed to a consumer spending shift from services to goods (merchandise), which took place to the benefit of containerized trade during the pandemic. This is a true thesis and, in many ways, lies at the heart of the matter. Regardless, on its own, this development fails to fully explain where we stand today.
In our commentary below we highlight how supply chain disruptions, rather than the trade demand/fleet supply balance, have been instrumental in driving today’s exceptional market conditions and we point to the key driving factors behind these disruptions. Understanding the interplay of these factors could also help provide guidelines for likely future developments.
Trade vs. fleet capacity balance
Let us take a look at the situation by starting with trade/fleet supply fundamentals. With the benefit of hindsight (it takes a few months for data providers to compile global containerized trade information), we look at recent trade developments. Specifically, we examine data published by CTS (Container Trade Statistics), a leading and widely acknowledged industry data source. When comparing first-half-2021volumes against first-half-2019 volumes in TEU terms, CTS data show that liftings increased by 5.6% during the two-year period. It has certainly been a remarkable feat for global trade to recover not only its prepandemic levels in such a short period since the worst contraction in its history in 2020-H1, but to rise above these levels and resume its prepandemic growth trend. Nevertheless, trade demand gains fell short of the fleet supply gains during the same two-year time frame. Containership fleet capacity expanded by 7.4% during the 2019-H1 to 2021-H1 period. Even when we take into consideration shifting trade patterns and incorporate trade distances, our analysis shows that TEU-mile demand increased by 6%, a figure short of the 7.4% fleet expansion during the two-year period.
So, we are seemingly faced with a paradox: Fleet capacity expanded faster than trade demand during the two-year period encompassing the pandemic (2019-H1 to 2021-H1) and yet there are not enough ships to satisfy consumer demand requirements today.
Supply disruptions and port delays tip the demand/supply balance
Of course, the answer to the puzzle stated above lies with the vaunted supply-chain disruptions. This topic has been brought up as a means of explaining runaway commodity prices, rising material costs, shortages of manufacturing components and multiple logistical bottlenecks. Supply disruptions have also been flagged by the US Fed as a potential roadblock for US economic growth.
Transportation delays, equipment shortages (container boxes and chassis) and bottlenecks resulting from supply chain disruptions have also led to excessive port delays and unprecedented congestions the containership industry faces today. Any network disturbance, be it a week-long closure of the Suez Canal (March), or a week-long shutdown of the Yantian (June) and the Nantong (August) terminals due to covid-outbreaks, adds new strains to an overloaded ocean transportation network, strains which resonate for weeks and even months after regular activities have resumed.
Our analysis points out that excessive port delays alone absorb about 10% of available vessel capacity today, heavily tipping the supply/demand balance in favor of demand and boosting fleet utilization and freight rates to record-high levels.
Many experts and economists (outside shipping) expect that supply chain disruptions will subside sooner than later (within a few months). We believe that in all likelihood we will see a gradual easing of supply strains next year, accelerating towards the second half of 2022. Such developments should provide relief to delays and port congestion and lead towards market normalization.
In truth, it is very difficult to anticipate when global supply bottlenecks will dissipate, due to the plethora of factors impacting supply, demand, and logistical network capacity. Regardless, two factors stand head and shoulders above all else. Those who can best judge when these two factors will adjust to normal conditions, they would have the best grasp of when markets will return to normalcy.
a) Manufacturing shortfalls
For starters, bottlenecks resulted when manufacturing fell short of demand requirements after the pandemic. While demand fully recovered and surged forward shortly after the pandemic, manufacturing failed to keep pace. Sizeable manufacturing capacity was shut down in 2020-H1 (mainly in Asia but also elsewhere). When production resumed, manufacturers were unable to catch up with demand gains and were unable to clear bloating order backlogs. This situation resulted in shortages in materials, manufacturing components, and in end-products. Ensuing production delays and spreading shortfalls further contributed to overtaxing logistical chains, warehouse capacity and on-land transportation networks.
A case in point is the worldwide shortage of semiconductor chips necessary for the manufacturing of products ranging from credit cards, to cellphones, to laptops, to automobiles. Car manufacturing has been hit especially hard in the US, with car supply shortages leading to surge in automobile prices.
Expectations are that product demand outburst will soon moderate, particularly in the US (see below), leading to global manufacturing catching up with demand requirements and to notable reductions of existing order backlogs and bottlenecks. But uncertainties remain. For example, some say that the aforementioned shortages in semiconductor chips may stretch into 2023. But most importantly, concerns remain that new virus outbreaks could push manufacturing output back once more, thus prolonging tight market conditions. Recent lockdowns in China and in South Vietnam have already led to a contraction in manufacturing output in these countries last month, raising the spectrum of more problems still to come.
b) US consumer spending
But mostly, everything starts with the demand side. A more detailed analysis of CTS trade data points to the fact the 70% of the global containerized trade gains during the two-year period from 2019-H1 to 2021-H1 is attributed to gains in North American imports alone. Trade volumes to most other regions resumed pre-pandemic levels and pre-pandemic trend growth (with the exception of liftings to the Indian Subcontinent and the Middle East, which remained below 2019 levels), but liftings to North America stand apart, soaring well above pre-pandemic trend levels. Liner fleet deployment data paint a similar picture. According to Alphaliner, ocean carriers assigned most of capacity additions during the 2-year period to the Transpacific markets.
World economic recovery has been uneven. Amongst major importing nations, the US has led the recovery thanks to substantial gains in US consumer spending (consumer demand explains two thirds of the US GDP). When looking at US government statistics on retail sales, we see that gains in US retail spending during the 8-month period between November 2020 and June 2021 exceeded total gains accumulated over the 5-year period preceding the pandemic (2015 to 2019)! In July, US retail spending on goods by far exceeded historical trends, even though spending on services had resumed near pre-pandemic levels. By comparison, Euro-area retail volumes remained above trend levels in July, but only marginally so.
In summary, the US consumer demand for goods has driven to a large extent global containerized trade and has led to a tightening of global product demand/supply picture and has greatly contributed to world supply chain disruptions.
Understanding when US consumer spending on goods will come down to earth (perhaps due to rising inflation, and/or because of the fading impact of the massive government fiscal stimulus programs spent in 2020/2021, and/or due monetary tapering and higher interest rates), could go a long way towards understanding when container shipping will revert to norm.