Over the past month, the market downturn has gathered further steam, and we are now entering the phase where the market in places is now beginning to go below pre-pandemic levels as the correction downwards from the historical high turns into a price war driving rates down.

In terms of complex data, the demand numbers from Container Trade Statistics covering all cargo loaded during September showed a dramatic downturn. Looking purely at the amount of TEU lifted globally, this declined -8.6% compared to last year. Even worse, if demand is measured in TEU*Miles, which better reflects the need for vessel capacity, in this case, demand had declined -13.2%. This is a decline almost similar to the drop seen when the worst parts of the pandemic struck the market in 2020.

That the market is suffering from a collapse in demand can be even more clearly seen compared to pre-pandemic levels. In this case, demand measured in TEU has declined -2.6%, and demand measured in TEU*Miles is now -7.6% lower than the level in 2019.

This rapid decline in demand is caused by the onset of an inventory correction, mainly by North American and European importers. Inventory corrections always have a severe impact on container volumes.

If the situation was only one of an inventory correction, then this process is likely completed in early 2023. Following an inventory correction, there is always a subsequent surge in demand as importers then strive to return to normal operations. This is, for example, what we saw in the surge of demand in 2010 following the financial crisis or in the summer of 2002 following the inventory-driven recession in the US in 2001.

Hence, the current collapse will, at some point, be followed by a demand surge and likely a smaller rate spike again. The question is one of timing.

The present course for the market is for spot rates to reach the bottom after the Chinese New Year in early 2023. Suppose the world only sees a mild recession presently, and inventory correction is the main driver behind the collapse. In this case we should expect a cargo surge already in summer 2023 and spot rates will surge again.

However, suppose the world economy enters a more profound and prolonged recession on the back of inflation and geopolitical turmoil. In this case, we might see a subdued 2023 where the cargo surge only materializes in the lead-up to Chinese New Year 2024.

In either case, the current collapse will cause a large amount of operational turmoil in the next few months as carriers will continue to blank large amounts of sailings in an effort to halt the slide in spot rates.

From a shipper perspective, this also means that negotiations for annual contract rates will become very favourable in the next few months, with potentially outstanding deals to be had in February/March 2023. However, should the market correct itself to normal levels, such contracts are unlikely to be useful as shippers might face carriers suddenly demanding various surcharges to accept the bookings. From a shipper perspective, this becomes a matter of risk management balancing the rate level itself against the likelihood that a given rate level is also likely to be honoured in terms of physical space by the carriers if the market tightens later in 2023.

Agencies

Marex Media