After years of low rates and supply growth that exceeded increases in demand, the COVID pandemic turned out to be a boon to container shipping lines, after early fears it would send carriers into deep losses.

Supply Chain Digest Says...   Drewry believes that while carriers over the last two years were milk their profits for as long as possible, they started cutting back supply when rates sink close to a level that would still be acceptable in the long run.     What do you say?   Click here to send us your comments       Click here to see reader feedback

Instead, high demand starting a couple of months after the start of the pandemic, which combined with port congestion and savvy supply management sent rates and container profits soaring to record levels, as shipper transportation budgets were devastated.

According to the maritime analysts at Drewy, in the two years from Q2 2020 to Q2 2022, industry-wide EBIT profit totaled an incredible $400 billion.

But that was then. This now. Spot market rates have dropped precipitously, and shippers under contract are widely reported to be demanding discounts.

Drewry says carriers are entering a market characterized by “managed decline,” and that what they do next will go a long way in determining how much of the gains of the super-cycle they get to keep.

Interestingly, Drewry adds that “Failure here will mean that the industry will be doomed to return to the low-margin pre-pandemic trend. A golden opportunity to reset expectations will be lost, possibly forever,” at least from the carriers’ point of view.

But it won’t be easy for the container shippers to navigate these waters (pun intended).

The first problem they face is rapidly increasing supply. That, Drewy says, is actually coming from a couple sources.

Firstly, there is the latent capacity that had been “lost” due to port congestion but that is returning to the market as the bottlenecks ease.

Second, carriers and other ship owners have ordered a lot of new container ships. Drewry expects about 2.6 million TEO of new ship capacity will be delivered next year.

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Then there is a great slowdown in demand growth. Drewry is now forecasting just 1.5% container growth in 2022, and 1.9% for 2023, as global economic forecast keep being taken down.

But despite those dynamics, Drewry things the carriers will be able to orchestrate a gentle fall.

Drewry says that “following consolidation and alliance restructuring, carriers are better placed now to tackle the “danger” years than ever before, and that they will pull the right capacity levers to ensure a soft landing for the market.”

But what about the fact that carriers were unable to stop the huge decline in the spot market?

“It must be remembered that [current] rates are still very profitable, even at their recently diminished values,” Drewry notes, adding that a sharp pullback in spot rates "was inevitable."

Drewry believes that while carriers over the last two years work ed tomilk their profits for as long as possible, they started cutting back supply when rates sink close to a level that would still be acceptable in the long run.

For example, Dewry says carriers “will look to offload as many older, more polluting ships from the market as quickly as they can,” with Drewry forecasting a near-record level of demolitions in 2023.

That said, “By over-ordering in the boom years, carriers have set themselves an enormous challenge to shuffle and make capacity magically disappear,” Drewry concludes.

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