2023 is set to be another interesting and potentially tumultuous year in shipping, and shippers and carriers are advised once more to favour agility in their supply chains. An expanding market and an increase in market capacity has been observed as one of the many important factors affecting the supply chain, and industry players will need to factor it into their preparations for the year ahead.
Order books indicate that there will be an approximate increase of 8% in shipping capacity in 2023, resulting in a global fleet of 30 million twenty-foot equivalent units (TEUs). The cause of this increase in capacity is largely due to the unprecedented circumstances brought about by the Covid-19 pandemic, which led to a shortage of space in major trades. As a result, shipping companies have spent the last few years placing record levels of new orders for container vessels. A direct example of this was the decision by the Ocean Alliance to sign the Ocean Alliance Day 7 Product, an agreement to add 22.4 million TEU capacity across 40 services on the world’s major trading routes.
From a market perspective, the aim of introducing new capacity was always to relieve pressure on rates and to create more space to help ease the pressures caused by the pandemic. Another observation was that carriers invested in bigger ship orders during the pandemic, using the opportunity to capitalise on their desire for more modern and bigger vessels. Expanded market capacity comes with its own challenges, but the need for a renewed fleet is certainly present and understandable. Carriers also have to consider their own market competitiveness and ability to float greener ships which are compliant with IMO sustainability regulations, which came into force this year.
Additional capacity in the market responds directly to a necessity for fleet renewal which has its roots in the global disruptions of 2019-2021, but shippers and carriers need to be conscious of new capacity and how it should be navigated. Extra capacity combined with high inventory levels from shippers and sluggish market demand can cause an imbalance in supply and demand for carriers. In response to this, carriers must maintain the balance of supply and demand by better utilising the new capacity that is present in the market. Shipping lines could also take advantage of the opportunity to remove some loops and replace them with larger ships.
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Another important and valuable strategy that can be employed to manage the influx of new ships on the market is the continued use of blank sailings. Blank sailings are a favourable option in these times of oversaturated capacity and their deployment could prove extremely useful if done properly. Recent efforts in Q4 of 2022 however, have not had the significant impact on prices that were desired.
New capacity in the market has also coincided with the continued period of rapid price drops which came into effect over the second half of 2022, and many shippers have already begun moving toward a spot market mentality. This doesn’t necessarily spell the end of long-term contracts, which will continue to be an important tool, especially if the pace of rate decline slows in the future. Long-term contracts are highly beneficial to the relationship between shippers and carriers, allowing for better implementation of visibility and forecasting of the supply chain. If carriers can access forecasting data, then capacity and equipment are more likely to be guaranteed by those who require it.
From a geographical standpoint, it’s worth noting that the effects of increased market capacity will be felt internationally. Most of the new ships will be added to Asia-Europe and Transpacific trade, with smaller ships likely being added to other areas. It’s likely that there will be some cascading of medium-sized ships being pushed into trade areas, which could affect the dynamics of smaller markets.
Strategic changes by the dominant forces in shipping will also impact on market capacity in 2023 and beyond. Although the Ocean Alliance is committed to increasing capacity through mutual and contractual agreement, it is also important to observe and prepare for the impact of the big moves made by their peers. The 2M Alliance, the container shipping line sharing agreement between Maersk and MSC which was signed in 2015, is coming to an end in 2025.
The alliance has been a broad success during its tenure and has helped the two businesses capture more market share and develop complementary services. The demise of the 2M Alliance will, however, leave the companies in very different positions once the deal expires in two years’ time, and competitors will be watching to see what changes and opportunities this brings. The breakup of the alliance between these two shipping giants could have ripple effects across the rest of the alliances and a broader impact on the market. The possibility of new services for shippers is enticing, but tempered by the possibility of a reduction in the frequency of sailings. Carriers are already working with each other to share capacity and maintain service levels while running vessels at the maximum capacity possible. The increased flexibility brought about by the end of the 2M Alliance in the carrier market may create more opportunities for agility on both the partner and shipper sides.
The floating of new capacity will continue to be a major theme across the shipping and container industry in 2023, and it is evident that shippers and carriers will need to be wary of the impact this could have on their businesses. The temptation would be to rationalise these changes by writing them off as the latent effects of the pandemic, but if the past few years have taught us anything it’s that we are living in an increasingly disrupted industry and 2023 will likely be no exception to that rule. Agility, flexibility and foresight are required from shippers and carriers. Embracing change today and investing in the future of the supply chain is the most important thing we can do going forward.
Source: By Anne-Sophie Fribourg, VP, Ocean Procurement – Zencargo, exclusively for Hellenic Shipping News Worldwide (www.hellenicshippingnews.com)