Navigating Riskier Waters: Shipping Companies Brace for Impact

The next few years are going to be tough for the world's shipping giants. Supply-chain disruptions, limited shipping capacity and high container rates are all expected to continue. Things might start to improve in 2023, but it's going to be a long and difficult road to recovery.

Container spot rates began to decline in early 2022 and their decline accelerated in the second half of the year. The World Container Index compiled by London-based Drewry Shipping Consultants is down 77% so far this year. And it may decline further still—signaling the end of a record earnings run for shippers. Rates are now not far above prepandemic levels.

A price war among shipping companies is looking more likely next year. Slowing growth amid high inflation and interest rates in the U.S. and an energy crisis in Europe may culminate in recession. This demand cliff comes as the shipping industry is also preparing for a massive delivery of new vessels.

Drewry predicts that 2023 will see the biggest ever increase in new ship capacity—around 2.5 million twenty-foot equivalent units (TEU). Unless some deliveries are postponed, this will put pressure on shipping companies who will find it difficult to cope with a decrease in global trade at the same time as having too many ships. Alliances between shipping companies might help to reduce the number of journeys made, get rid of surplus capacity and persuade customers to sign up to long-term deals.

Barclays analyst Alexia Dogani believes that shipping rates will not stabilize until the global economy improves, the current destocking cycle ends, and postpandemic consumer behavior returns to normal.

Shipping companies will have to negotiate hard with clients and argue for the continuing value of long-term contracts. They still have some good arguments, including the unpredictable consequences of China’s reopening and the possibility of further disruptions related to the war in Ukraine or other geopolitical hot spots like Taiwan.

However, negotiations are expected to be difficult. As spot rates have decreased, contract rates are expected to follow. Christian Roeloffs, chief executive at Container xChange, an online platform for container logistics, believes that freight forwarders will have a lot of options to choose from in 2023, especially in the early part of the year.

A.P. Moller-Maersk, a Danish shipping company that handles about a fifth of the world’s container shipping, has seen its shares slip 32% this year, underperforming Copenhagen’s benchmark index by a wide margin. This is likely to be well-known to the company’s investors.

Shipping companies can expect more difficult conditions in 2023. Ongoing geopolitical uncertainties still give them some negotiating power with clients, but it is clear that the good times are over for the moment.