As we are nearing the traditional peak season in container shipping, the key question is how supply, demand, freight rates and congestion will play out this year.

The problem is that global economical and geopolitical forces have created an environment of extremely high uncertainty, with two different scenarios vying for the “honor” to be the baseline scenario. One is almost a repeat of the problems in 2021 and the other is a swift downwards slide in rate levels and the emergence of a rate war, especially in the Pacific.

Looking at the hard data known at the end of May, the odds favor the 2021 déjà vu scenario.

Despite having been in the low season for a few months in terms of demand, there are still significant congestion problems in many ports and terminals, especially in Europe and North America. If these congestion problems cannot be resolved in the low season, what will happen during the peak?

Whilst year-on-year demand growth shows a weak development, a more nuanced context, including market data, paints an opposing picture. Global container volumes declined 1.8% in the first quarter (Q1) 2022 compared to same period a year ago.

However, comparing to Q1 2019 before the pandemic, volume has grown 5.6% equal to an annual growth rate of 1.8%. But the growth has not been uniformly distributed – in fact it has been quite polarized, particularly withimports into North America growing at a very high level. Lopsided growth leads to larger trade imbalances, which leads to a need to move more empty containers. This increases the demand for vessel capacity beyond what can be seen purely from the traditional demand for cargo movements. There has also been a slight trend whereby containers are shipped 64 nautical miles longer on average in Q1 2022 than three years ago.

If the increasing imbalances and sailing distances are taken into account, then the demand for container vessel slots has increased 12.2% in Q1 2022 compared to Q1 2019 – equal to an average growth rate of 3.9% annually.

In other words, demand has been fairly strong.

At the same time, congestion continues to delay vessels, which reduces the available fleet. The latest data from April shows that 10.5% of the global vessel fleet remains de facto unavailable.

The expected Shanghai reopening might well lead to a minor surge of cargo, while the continuing two month delay of the supply chain compared to pre-pandemic conditions is likely to prompt an early start to peak season.

As a result, these factors point to a near-term scenario of capacity shortages and rapidly rising spot rates – not unlike what we saw in 2021.

However, there is an opposing scenario that has grown in likelihood over the past month.

The continuing high levels of inflation and surging energy prices are reducing the consumers’ ability to purchase goods. Add to this a consumer sentiment, which is on one hand influenced by concern for the future driven by the Russia/Ukraine war, as well as a gradual shift away from goods and onto services in a reversal back to pre-pandemic normality, then the scene is set for a sudden reduction in consumer sales.

Should such a reduction happen, this lead to a situation where inventories are already at record highs as the supply chain is two months longer than usual, making it challenging for the importers to respond in a timely fashion. The most likely outcome of this scenario will be a sudden inventory overshoot and swift reduction of orders for new goods, causing container demand out of Asia to plummet.

Should demand plummet, carriers will respond with blank sailings. These are likely to be somewhat effective in stemming a rapid rate decline on the Asia-Europe trade as the alliances operate more than 95% of the operated capacity. However, on the Pacific trade, non-alliance services operate more than 30% of the capacity to the US West Coast and more than 10% to the US East Coast. This means that the ability to stem a rate decline, especially to the US West Coast, is impeded. In fact it is quite likely that in a declining rate situation, the smaller non-alliance carriers will become quite aggressive in attracting cargo in order to fill their expensive chartered vessels.

All in all, this means the market is faced with two very different scenarios and current fundamental market data does not provide a clear guidance as to which side of the line the odds will eventually favor.

Marex Media