The “three crazy years” in the shipping industry have become the past, and a new relationship will begin in 2023. Are the shipping companies ready?
As 2022 draws to a close, the days when supply and demand in the container shipping market are booming and shipping companies make easy money are coming to an end. A series of changes in the market will drive the container shipping industry to open a new beginning in 2023. Although the volume and price of the container shipping market have fallen, the shipping company is expected to once again achieve record revenue performance in 2022. However, this may also bring an end to the crazy three years in the shipping industry. For the market outlook in 2023, industry players are generally cautious. This is mainly due to the fact that in 2023, the container shipping market is facing changes in environmental protection, supply and demand, and shipping-client relations. The tide has receded, and the real test has just begun.
New regulations on environmental protection
Entering 2023, the first thing that shipping companies have to face is the test of the new environmental protection regulations. In order to improve the energy efficiency of existing ships and achieve the preliminary strategic goal of greenhouse gas emission reduction established by the International Maritime Organization (IMO), the 76th session of the IMO Marine Environmental Protection Committee (MEPC 76), adopted the amendments to MARPOL Annex VI and proposed the relevant mandatory requirements for the existing Ship Energy Efficiency Index (EEXI), Operational Carbon Intensity Index (CII) and Ship Energy Efficiency Management Plan (SEEMP). It can be said that 2023 is the year of the big test for the energy efficiency of operating ships. Ships need to be fully prepared for performance in terms of hardware change, operation management, technical documents, and other aspects.
In 2022, Maersk set a 2040 decarbonization target for all operations to achieve net-zero greenhouse gas emissions, 10 years earlier than previously committed. At the same time, the mid-term goals for 2030 have also been determined, which mainly include: the emission of a single container of ocean container will be reduced by 50% compared with 2020; the absolute emission of terminals with full control will be reduced by 70% compared with 2020. CMA CGM has set up a special energy fund of $1.5 billion in 2022 and plans to accelerate the comprehensive decarbonization of the global shipping and logistics business through a five-year plan and a dedicated team. The environmental protection test in 2023 will be a booster for shipping companies that have already made a forward-looking plan. However, those companies that have not yet planned environmental protection goals and paths will be eliminated at an accelerated pace.
The new normal of supply and demand
The implementation of the new environmental protection regulations will not only further accelerate the decarbonization process of the container shipping industry, but also have a big impact on market supply and demand. A batch of container ships over 10 years old will be banned from shipping because they do not meet the requirements of EEXI; a batch of container ships will be required to slow down due to the low CII level. This may become a major factor impacting capacity supply in 2023. In 2021, a large number of new capacities ordered by shipping companies during the peak demand period will soon enter the delivery period in 2023. At the same time, demand has fallen rapidly from its high point in early 2022 under the pressure of multiple factors such as low economic expectations, increasing inflation pressure, repeated Covid-19, and geopolitical tensions. Totally, the industry is not very optimistic about the supply and demand prospects of the container shipping market in 2023.
In order to meet the new environmental protection regulations, old ships must be slowed down or eliminated to reduce carbon dioxide emissions. Shipping companies are starting to recycle ships. A few days ago, a 1248 TEU container ship built in 1990 was sold for dismantling. This is the world’s first container ship to be sold and dismantled in 2022, and it is seen as a landmark event for market changes. Alphaliner forecast data shows that at least 250,000 TEU of container ships will be dismantled in 2023. The Baltic and International Maritime Council (BIMCO) also believes that the implementation of new environmental protection regulations may absorb 10% of the shipping capacity in the market. However, the demand side of the container shipping market will decrease in 2023.
The WTO lowered its forecast for global trade growth in 2023 to 1% in October, down from the 3.4% forecast in April. The WTO believes that import demand will decrease as growth in the world’s major economies slows. It is foreseeable that the container shipping market in 2023 will change from the previous boom in supply and demand to tight supply and demand: the demand has dropped significantly, but the old shipping capacity will gradually exit the market. Under the influence of supply and demand, freight rates will gradually return from historical highs and stabilize within a normalized range. At the same time, orders for green energy ships will increase. At present, green fuel has been favored by many shipping companies, including Maersk, COSCO Shipping, CMA CGM, and other shipping giants, all of which have placed orders for large green fuel container ships.
New shipping-client relationship
In the past two years, the tight supply chain and the sharp increase in transportation demand have quickly brought the relationship between shipping companies and clients closer. On the one hand, clients who have experienced a tense supply-demand relationship hope to obtain capacity guarantees by directly signing long-term contracts with shipping companies; on the other hand, shipping companies also hope to achieve long-term cooperation with large clients to stabilize cargo and lock in profits. The two sides of the shipping companies and clients entered the cooperation period. However, the high-priced contract in 2022 is still being implemented, but the market freight rate has continued to decline, even lower than the contract price.
The latest news is that Taiwan’s three major shipping companies have considered re-contract negotiations with clients. Evergreen Shipping said that according to the needs of different customers, there are indeed individual negotiations. YML Shipping said that some customers proposed to renegotiate due to the lower quotations provided by other shipping companies, and the company will make necessary adjustments depending on the situation of different clients. WHL Shipping said some customers did ask to renegotiate contract prices, and WHL may offer short-term discounts depending on market conditions. 2023 has also become a year to test the relationship between shipping companies and clients. However, whether the market is rising or the market is going down, shipping companies, should not only pursue short-term profits, but a stable contracted cargo volume is an important guarantee for enhancing their ability to resist risks.
In 2023 and 2024, there are downside risks to the profits of shipping companies, according to a new research report by HSBC, which has cut its profit forecast for shipping companies by 51%. On September 6, 2022, seven companies including the world’s largest shipping company Mediterranean Shipping, the worldwide leader in independent containership management and ownership Seaspan, and oil giant Shell jointly established a new alliance. The alliance is committed to exploring and developing green solutions and green technologies and has a common goal of building a new ecosystem of supply chains.
