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The best way to win a game of chicken is to project fearlessness, unpredictability and a large dose of foolhardiness. That seems to be the strategy adopted by big container shipping companies. Notwithstanding an existing order book which will on its own result in overcapacity, they are continuing to order new vessels in a bid to win market share.
In 2023, the industry took delivery of ships with 2.3mn twenty-foot equivalent units (TEUs) of capacity in aggregate, for an annual growth of about 8 per cent. A further 10 per cent increase is expected this year, according to Bernstein Research.
In total, the container shipping industry has vessels on order for the equivalent of almost a quarter of current capacity. But operators continue to signal a willingness to suffer in the name of growth. Japanese company ONE this year confirmed an order for 12 methanol-powered dual-fuel vessels.
This spells bad news for investors across the sector. Ebitda margins fell in the fourth quarter of 2023, and the industry posted negative net income. While disruptions in the Red Sea have raised spot freight rates, most vessels are contracted under long-term agreements so the benefits to shipowners are expected to be limited. Indeed, Maersk warned earlier this year of a bigger than expected hit to 2024 profits. Longer routing around the Cape of Good Hope has temporarily absorbed capacity. But this is a temporary phenomenon that will one day reverse.
There is little reason to hope that operators will swerve off their collision course anytime soon. Balance sheets are still healthy. Maersk has no net debt. In aggregate, the 10 major operators that report financial information hold $31bn of net cash, thinks Bernstein. Meanwhile, idling and scrapping — currently at record lows — are unlikely to take off until freight rates fall below the cash cost of those older ships.
The shipping industry seems set for cyclical pain. On top of that, it faces a structural headwind. Global supply chains are being shortened and simplified, owing to the combination of pandemic-era snarl-ups and geopolitical fears. Onshoring is hard to do, and will take time. But, as goods travel shorter distances, that will dampen shipping demand relative to gross domestic product. This big bout of overcapacity will take longer to be absorbed.
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