Global consulting firm, Alix Partners, has published the 2021 Container Shipping Report. For at least three decades, the container shipping industry has been locked in a recurring boom and bust loop. During times of strong macroeconomic growth, shipping rates would soar and container ship operators would reinvest their profits in new, ever-larger vessels. Then 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. As overcapacity kept a tight lid on rates, 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. Today, however, the fundamentals that would support a breakaway from that cycle are in place.
The 2021 Container Shipping Report says the sector is enjoying a boom phase, with global container freight rate indexes topping $5,000 per 40-foot container in February 2021 after climbing steeply and steadily since May 2020.1 And this time, with a few notable exceptions, carriers aren’t flooding the world’s shipyards with orders yet. Instead, carriers have to date successfully managed capacity, 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 the third quarter of the year because the industry increased blank sailings and suspended service on some routes. Carriers also cut sailing speeds, which fell 1.8% in 2020.
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. Fuel costs remain low despite strict new regulations aimed at reducing sulfur emissions as a prelude to additional measures intended to decarbonize the industry. One effect of those new regulations has been to limit capacity growth.
A sustainable departure from boom and bust, however, requires carriers to exercise discipline over their pricing and order books, as rates make their eventual and inevitable regression toward the mean—discipline that 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 container shipping industry has long followed a distinct pattern. Consider the industry’s actions during the recession years of 2001 to 2003 and the subsequent economic recovery. A recession brought on by the bursting of the first dot com bubble led to a sudden drop-off in demand, followed by a lengthy spell of low shipping rates. Ships ordered when times were good, starting in 1999 and through the early months of 2001, before the bubble burst were delivered just as demand and rates were starting to fall off the table. The new builds drove up vessel overcapacity, which got further aggravated because shippers kept their inventories low relative to sales. The industry had become highly fragmented, with no alliances of liner operators forming to boost supply side pricing power. Fuel prices were low but offered only limited relief to carriers, whose greater problems were the familiar ones of too much capacity and too little demand.
History repeated itself in some respects from 2009 to 2015
In 2009, after several years of rising rates, profits, and capacity, the Great Recession struck and demand cratered. Rates plunged by more than 50% in 2009 and then, following a brief rebound, dropped again by 50% when a recovery failed to take hold in 2010. Although operators idled 10% of their fleets and reduced sailing speeds, those moves came too late to counter the record-setting capacity buildup of 2004 to 2008. Several lines went under or got acquired in the aftermath part of a consolidation wave launched in 2013 that left the top four carriers in control of 46% of global 20-foot equivalent units (TEUs) and in the longer term, offered the promise of greater capacity control. Despite signs that a different dynamic now prevails across the industry, carriers could cast aside pricing and capacity discipline at any time they believe doing so would serve their interests. It has happened before. In 2014, for example, the industry appeared on the verge of entering a period of sustained capacity control and consolidation, but after a few carriers opted to place orders for new vessels, the rest of the industry soon followed suit, perpetuating the boom and bust cycle.
Download the full report: 2021 Container Shipping Report