There’s loads at stake for container lines’ 2024 bottom lines in the previous few weeks of 2023. If lines can’t push up spot rates very soon, next 12 months’s annual contract rates will reset much lower versus this 12 months’s.
That scenario — which might have a really negative financial effect on liners — looks increasingly likely. Time is running out for a fourth-quarter rebound, and indexes show spot rates falling, not rising.
Shipping lines’ attempts to make use of general rate increases (GRI) this month to enhance their negotiating hand for annual contract resets have failed. They’ve one last probability in December, but their track record of getting GRIs to stay has been poor.
Maersk CEO Vincent Clerc bluntly laid out the worst-case scenario during a conference call on Nov. 3: “If nothing has happened to the spot market through the [fourth] quarter, it will not be the trough, because that may mean there’s a reset of [2024] contract levels all the way down to those levels.”
He noted that there’s a significant gap between contract rates signed earlier this 12 months — that are about to reset — and current spot rates.
What happens in the present quarter with spot rates could have “a profound impact on what 2024 goes to appear to be,” Clerc continued. “If Q4 will not be delivering some form of improvement, I believe we’re taking a look at a reasonably dire situation in 2024.”
Spot rates fall back again
The worldwide composite of Drewry’s World Container Index (WCI) fell 6% within the week ending Thursday versus the prior week, to $1,384 per forty-foot equivalent unit. The worldwide composite has given back all of its gains because the starting of Q4 and is now down 1% versus Oct. 1.
All but considered one of the foremost east-west trade lanes is down from the start of the quarter, the Shanghai-Rotterdam lane being the exception.
Even in that lane, rates are declining. The WCI’s Shanghai-Rotterdam assessment was at $1,148 per FEU on Thursday, still up 9% from the start of the quarter but down 10% from the recent high on Nov. 9.
Shanghai-Los Angeles spot rates showed signs of life earlier this month but gave back the last of their quarter-to-date gains in probably the most recent week.
The WCI assessment of Shanghai-Los Angeles spot rates was $2,000 per FEU within the week ending Thursday, down 13% from the recent high within the week ending Nov. 9 and down 1% from the start of the fourth quarter.
Recovery not expected until 2025
If Asia-Europe annual contracts reset within the vicinity of Q4 spot rates starting in January, and if Asia-U.S. contract rates don’t improve — or fall further — after they reset in May, container lines would face steep losses in 2024, particularly provided that costs are up 25-30% versus pre-COVID levels.
Container lines are still flush with money from the COVID-era boom, so that they should have the opportunity to weather the money burn next 12 months. But what if steep losses proceed through 2025 and even 2026?
Clarksons Securities analyst Frode Mørkedal ran the numbers of Zim (NYSE: ZIM) in a client note on Wednesday. “Our evaluation indicates that Zim’s quarterly money burn rate is roughly $300 million, suggesting that its existing money reserves could sustain operations for about nine quarters, or roughly 2.3 years.
“This duration needs to be sufficient to weather market challenges no less than through 2025,” wrote Mørkedal.
“The important thing factor that might signal a market turnaround is a policy shift amongst liner firms, particularly when it comes to profitability focus and ship capability reduction.
“The foremost issue, in our opinion, is ship overcapacity relatively than future demand,” Mørkedal continued. “We anticipate that a pivotal response to the present overcapacity issue will likely be implemented in 2024, with the goal of raising freight rates, potentially marking a big turning point within the industry.
“The critical juncture at which fleet growth aligns with trade growth could occur around October 2025, implying a two-year contraction phase,” said Mørkedal.
Nonetheless, that timeline assumes liners make the vital capability adjustments next 12 months, whether through slow steaming, ship idling, scrapping and/or service cancellations.
Many pundits and industry executives expected shipping lines to make the vital capability adjustments this 12 months. They haven’t. Scrapping and ship idling have been much lower than predicted.
Not only have liner firms not withdrawn older ships, they’re still ordering latest ships. In accordance with shipbroker reports, Ocean Network Express (ONE) just sealed an order for 12 newbuildings for deliveries in 2025 and 2026. The 13,000-twenty-foot-equivalent-unit vessels will likely be able to using methanol as fuel, and the brand new series could have an aggregate price tag of just below $2 billion, in keeping with Alphaliner.
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