It’s curious to see container carriers making profits despite being saddled with excess capacity and falling freight rates.

It is a strange phenomenon that when container carriers are saddled with some excess capacity and falling freight rates they are still able to make profits.

Shipping organisations suggest that container trades are expected to grow significantly lower, increasing The demand for ship capacity is likely to grow only by 3-4 per cent in 2024. During 2022 containerized trade measured in metric tonnes declined by 3.7 per cent and Unctad projections of the UNCTAD suggest that it will increase by 1.2 per cent in 2023 and expand by over 3 per cent in 2024-28. It is to be noted that this rate is below the long term growth rate of about 7 per cent over the previous three decades. On the supply side container shipping seems to have entered an over capacity phase. (UNCTAD Review of Maritime Transport, 2023)

In 2023 world shipyards delivered 350 new container ships with a total capacity of 2.2 million TEUs (Twenty foot equivalent units), beating the previous record from 2015 when 1.7 million TEUs were delivered.

But in 2024, 478 container ships are expected to be delivered with a capacity of 3.1 million TEUs beating the 2023 record by 41 per cent. Thus, the container fleet capacity is expected to grow by 10 per cent in 2024. In other words, the fleet strength of container ships has reached 6,115 ships with a capacity of 27.8 million TEUs as on January 1, 2024 (Clarkson’s Research-2023).

Over capacity

A few years ago, many had predicted that liner shipping would run into a massive over capacity situation in 2024-but so far the market has absorbed all the new capacity fairly well. “Alphaliner” noted in its most recent weekly report that vessel diversions via the cape of Good Hope and additional slow steaming due to stricter environmental regulations have “artificially” created fresh tonnage demand.

To manage over capacity, container ship operators implement many devices like blank sailing, lowered sailing speed, reroute ships and idle some excess capacity. In the first quarter of 2023, the average sailing speed slowed down by 4 per cent year-on-year and could drop by 10 per cent before 2025 (Chambers, 2023).

Lay ups and recycling are also likely to increase. By the first quarter of 2023 idle container ship capacity reached 3.2 per cent of the container fleet, up from 2.2 per cent in the previous quarter (Clarkson’s Research, 2023).

The year 2022 began at very high levels for container freight rates – a continuation of the 2021 trends. This was primarily driven by sustained pandemic-related demand and port congestion which held up container ship capacity and reduced effective supply.

Despite the challenges faced in the second half of 2022 and market weakening, container carriers have generated record breaking profit of $296.3 billion in earnings in 2022 before interest and taxes due to high freight rates and strong demand in the first half of the year (Drewry Maritime Research 2023).

After a year of high profits the decline in freight rates now is creating financial challenges for carriers. Hyundai Merchant Marine saw revenues drop by 58 per cent to $1.6 billion in the first quarter of 2023(Journal of Commerce 2023). Maersk’s ocean segment also saw revenues fall by $5.7 billion to $9.9 billion in the first quarter of 2023.

The Red Sea crisis and disruption in global shipping seem to have come to their rescue as they are able to deploy their excess capacity.

The writer is former acting chairman of JN Port, Mumbai