Refinitiv experts look at the decline in container shipping freight rates and assess the likelihood of further volatility throughout 2023.
- Container shipping freight rates have fallen away after reaching post-COVID19 highs in 2021.
- The decline has been driven by instability in the global economy, with the war in Ukraine acting as a catalyst for rampant inflation and consequent cost-of-living crises while central banks across the globe raise interest rates.
- Following forecasts by the International Monetary Fund and the World Trade Organization, data from Refinitiv points to weak container demand for 2023.
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While more finished and intermediate goods are being transported on large container ships around the world, container shipping offers insight into the overall consumer sentiment and manufacturing demand.
Container shipping freight rates in recent months have fallen off the cliff after seeing a huge surge in post-pandemic disruption.
On key China to the US East and West routes, the Freightos Baltic Index spot container rates have fallen over 80 percent and reached near 2019 levels from the highs seen in September 2021.
This is on the back of weakness in the global economy, particularly in China, the USA and Europe, which are seeing a drop in demand due to a spike in inflation, and a cost-of-living crisis because of the war in Ukraine.
Other contributing factors for these low rates include the absence of a demand uptick ahead of the Lunar New Year and the disruption caused by the recurring COVID-19 lockdowns in China. and retailers mistiming inventories.
Freightos Baltic Index – China to U.S. West and East Coast
As can be seen in the charts below, container freight volumes were down from August to November 2022 in Los Angeles, while container throughput slowed due to lockdowns at key ports such as Shanghai in China in the past year.
Los Angeles loaded container inbound % m-m
Shanghai container throughput (TEU)
The supply chain disruption that was caused by the spike in congestion and waiting times for containerships at key loading and discharging ports in China and the U.S. has started to ease, creating an increase in the available containerships fleet. The increase in tonnage supply charms freight rates.
Congestion and waiting times
As a result of falling spot rates, container lines have started actively managing capacity by slow-steaming and bringing in blank sailings (cancelling a scheduled port call or voyage).
The average fleet speed for both large and medium containerships has decreased by about 10 percent compared with previous highs in 2021. Reducing speed virtually adjusts the supply of containerships to decrease while also reducing bunker fuel costs.
The correction of supply due to slow-steaming or idling ships in turn helps in the restoration of the supply-demand balance. Further constriction of supply in relation to demand then triggers the increase in freight rates.
Medium and large containerships fleet average speed
Global economic and trade outlook
The International Monetary Fund (IMF) forecasts the global growth for 2023 to be slow at 2.7 percent, and it is not likely to downgrade the forecast further due to the labour market remaining strong and the oil price spike failing to materialise.
However, uncertainty prevails because of various factors such as the escalation of the war in Ukraine, a major climate event, social unrest in some countries or a significant cyber-attack. The IMF expects China to again contribute to global growth from mid-2023 depending on its COVID-19 policies. The United States economy is expected to suffer a mild recession.
On the other hand, the World Trade Organization (WTO) expects the global merchandise trade volume to grow by 1 percent in 2023, down from its earlier forecast of 3.4 percent. One of the risks was the raising of interest rates to tame inflation that could lead to overtightening, and which could trigger a recession in some countries, applying downward pressure on imports.
To date, the import and export rates show that shipping trends have not been consistent globally – German imports from Russia have not decreased nearly as much as German exports to Russia, causing the largest-ever trade deficit from a German point of view.
Container shipping outlook
Given the IMF and WTO outlook for 2023 and China maintaining its current COVID-19 policies, we anticipate the container demand growth to be weak in 2023 overall but are optimistic about improvement in the latter part of the year.
Containership fleet growth (LHS: TEUs and RHS: % growth)
In terms of containership fleet growth, given the past period of high freight rates and large containership ordering, we forecast an increase in tonnage supply to be about 6.8 percent in both 2023 and 2024, as per data from Refinitiv Eikon.
We anticipate some amount of tonnage scrapping in 2023 and 2024 due to the impact of new International Maritime Regulations for the Carbon Intensity Indicator (CII) and the Energy Efficiency Existing Ship Index (EEXI), up from an extremely low base in 2023.
As seen in previous charts, the congestion and waiting times at key load and discharge ports have been unwinding and are unlikely to constrain containership supply.
We anticipate some volatility in container freight rates, dependent on the individual exposure of container lines to spot and contract rates while being able to extract some premium on modern eco-tonnage.
However, container shipping’s previous experience and its ability to manage capacity to restore the supply-demand balance will lead to a decline in rates but not to pre-pandemic levels. We believe that the recent boom will not lead to a bust, but times will be challenging for container shipping this year.