The "three crazy years" of the container shipping industry have become a thing of the past, and a new era will begin in 2023. Are the liner companies ready?
However, the volume and price of the container shipping market have both fallen recently, but there is no suspense in 2022 when the liner company will once again achieve a record revenue performance. However, this may also bring an end to the "three crazy years" in the shipping industry.
For the market outlook in 2023, industry players are generally cautious. This is mainly due to the fact that in 2023, the container shipping market is facing changes in environmental protection, supply and demand, and shipping-cargo relations.
The tide has receded, and the real test has just begun.
New regulations for environmental protection
Entering 2023, the first thing that liner companies will face is the test from the new environmental protection regulations.
In order to improve the energy efficiency of existing ships and achieve the preliminary strategic goal of greenhouse gas emission reduction established by the International Maritime Organization (IMO), the 76th session of the IMO Marine Environmental Protection Committee (MEPC 76), adopted the "On Mandatory Implementation of Target-based Technology and Operation". Measures to reduce the carbon intensity of international shipping", the amendments to MARPOL Annex VI propose the relevant mandatory requirements for the existing Ship Energy Efficiency Index (EEXI), Operational Carbon Intensity Index (CII) and Ship Energy Efficiency Management Plan (SEEMP).
Specifically: All applicable ships of 400 gross tonnage and above need to complete the EEXI verification at the first initial survey, annual survey, intermediate survey or renewal survey (whichever is earlier) on or after January 1, 2023 ;For applicable ships of 5,000 gross tonnage and above, the CII calculation and rating (A-E) of ships shall be carried out in combination with IMO fuel consumption data collection (DCS) in 2023 and every year thereafter; In the existing SEEMP, add relevant parts related to CII calculation, reporting, practice, etc., and complete the verification before January 1, 2023; ships with CII rating E or D for three consecutive years must formulate energy efficiency rectification in SEEMP Plan to show how to achieve a C grade or higher.
It can be said that 2023 is the year of the big test for the energy efficiency of operating ships. Ships need to be fully prepared for the performance of the contract in terms of hardware transformation, operation management, technical documents and other aspects.
Whether it is the already effective global sulphur cap, nitrogen oxide emission limit, or the upcoming mandatory requirements for ship energy efficiency index and operational carbon intensity index, the environmental protection regulations of the container shipping industry will only become more and more strict. At the same time, cargo owners' demand for emission reduction in the supply chain is also forcing liner companies to speed up the pace of green shipping.
COSCO SHIPPING Lines, a subsidiary of COSCO SHIPPING Holdings, and OOCL have launched carbon emission calculators as early as 2010 to help global customers calculate carbon dioxide emissions in their supply chains. In addition, COSCO SHIPPING Holdings continues to track and study fuel oil technology and market development trends, explore high-quality fuel applications, implement and promote monitoring of fuel oil use, fuel-saving measures for sailing, and shore power transformation to improve the effectiveness of fuel management and control.
In 2022, Maersk set a 2040 decarbonization target for all operations to achieve net-zero greenhouse gas emissions, 10 years earlier than previously committed. At the same time, the mid-term goals for 2030 have also been determined, which mainly include: the emission of a single container of the ocean-going container fleet will be reduced by 50% compared with 2020; the absolute emission of terminals with full control will be reduced by 70% compared with 2020.
CMA CGM has set up a special energy fund of US.5 billion in 2022, and plans to accelerate the comprehensive decarbonization of the global shipping and logistics business through a five-year investment plan and a dedicated team.
The environmental protection test in 2023 will not be a hindrance, but a booster for liner companies that have already made a forward-looking layout. However, those companies that have not yet formulated environmental protection goals and paths will be eliminated at an accelerated pace.
The new normal of supply and demand
The implementation of the new environmental protection regulations will not only further accelerate the decarbonization process of the container shipping industry, but also have a profound impact on market supply and demand. A batch of container ships over 10 years old will be banned from sailing because they do not meet the requirements of EEXI; a batch of container ships will be required to slow down due to the low CII level. This may become a major factor constraining capacity supply in 2023.
In 2021, a large number of new capacity ordered by liner companies during the peak demand period will enter the delivery period in 2023. At the same time, demand has fallen rapidly from the high point in early 2022 under the pressure of multiple factors such as sluggish economic expectations, increasing inflation pressure, repeated epidemics, and geopolitical tensions. The industry is not very optimistic about the supply and demand prospects of the container shipping market in 2023.
However, Xiao Junguang, secretary of the board of directors of COSCO SHIPPING Holdings, said recently that after the new international environmental protection regulations such as the ship energy efficiency index and the operational carbon intensity index come into effect, there will be certain constraints on the effective supply of the container shipping industry for a long period of time. Xie Huiquan, general manager of Evergreen Shipping, also believes that in order to meet new environmental protection regulations, old ships must be slowed down or eliminated to reduce carbon dioxide emissions.
A notable new development is that liner companies are starting to scrap ships again. A few days ago, a 1248TEU container ship built in 1990 was sold for dismantling. This is the world's first container ship to be sold and dismantled in 2022, and it is seen as a landmark event for market changes.
In the "bull market" of more than two years before, in order to meet the demand growth that exceeded expectations, liner companies put all their old ships into operation. However, in recent months, the freight rate in the container shipping market has plummeted. In order to reduce the capacity and bring the supply and demand back into balance, some liner companies have begun to cut their capacity. Some people in the industry believe that a new wave of ship demolition will begin.
Alphaliner forecast data shows that at least 250,000 TEU of container ships will be scrapped in 2023. In 2021, only 19 container ships of 16,500 TEUs will be dismantled. The Baltic International Shipping Council (BIMCO) also believes that the implementation of new environmental protection regulations may absorb 10% of the shipping capacity in the market.
In Xie Huiquan's words, the increase in actual supply in the container shipping market in 2023 is "not as serious as imagined." However, the demand side of the container shipping market will be sluggish in 2023, and there is no suspense.
The World Trade Organization (WTO) lowered its forecast for global trade growth in 2023 to 1% in October, down from 3.4% forecast in April. At the same time, the global economy is expected to grow by 2.3% in 2023, which is also 1 percentage point lower than the previous forecast. In addition, the Organization for Economic Cooperation and Development (OECD) expects the global economy to grow by 2.2% in 2023. The International Monetary Fund (IMF) forecast is 2.9%.
The WTO believes that import demand will decrease as growth in the world's major economies slows. High energy prices caused by the conflict between Russia and Ukraine will squeeze European household spending and push up production costs for companies. Tighter monetary policy in the U.S. will hit interest-rate-sensitive spending areas such as housing, autos and fixed investment.
It is foreseeable that the container shipping market in 2023 will change from the previous boom in supply and demand to tight supply and demand: the demand has dropped significantly, but the old shipping capacity will gradually withdraw from the market. Under the influence of supply and demand, freight rates will gradually return from historical highs and stabilize within a "normalized" range.
There are also views that under the background of shrinking global trade, the adjustment of the capacity structure of major liner companies has ushered in an excellent opportunity. Sealing up and eliminating a batch of transport capacity that does not meet the new environmental protection regulations is a powerful means to maintain market balance.
At the same time, orders for green energy ships will increase.
At present, green methanol fuel has won the favor of many liner companies, including Maersk, COSCO Shipping, CMA CGM and other liner giants, all of which have placed orders for large green methanol fuel container ships. Zhiyuan Shipping, a "new player" in the trans-Pacific route, also made it clear that the new shipbuilding plans to use the same green methanol fuel as Maersk.
Maersk Chief Fleet and Technology Officer Palle Laursen analyzed: "Green methanol is the most scalable green fuel in the next decade, and we are delighted to see more liner companies taking this route."
new cargo relationship
The change in the relationship between supply and demand also affects the delicate and sensitive relationship between shipping and cargo.
In the past two years, the tight supply chain and the sharp increase in transportation demand have rapidly brought closer the relationship between cargo and cargo. On the one hand, cargo owners who have experienced "one cabin is hard to find" and "one box is hard to find" hope to obtain capacity guarantee by directly signing long-term contracts with liner companies; Large cargo owners achieve long-term cooperation, stabilize cargo volume and lock in profits. The two parties hit it off and entered the "honeymoon period".
However, the high-priced contract in 2022 is still being implemented, but the market spot freight rate has continued to plummet like a roller coaster, even lower than the contract freight rate. Liner companies and cargo owners have been unable to sit still.
The latest news is that Taiwan's three major liner companies have considered re-contract negotiations with cargo owners.
Evergreen Shipping revealed that according to the needs of different customers, there are indeed individual negotiations. Yang Ming Shipping said that some customers proposed to renegotiate due to lower quotations provided by other shipping companies, and the company will "make necessary adjustments" depending on the situation of different customers. Wan Hai Shipping said some customers did ask to renegotiate contract prices, and may offer short-term discounts depending on market conditions.
This is the epitome of a new stage in the relationship between cargo and cargo. 2023 has also become a year to test the relationship between shipping and cargo.
According to a recent customer survey by freight benchmarking platform Xeneta, 71% of respondents said they would renegotiate long-term contracts if the market changed sharply, 11% said they did not want to perform, and only 18% said they would renegotiate long-term contracts. % of respondents replied that no matter how the market changes, it will be executed according to the established contract.
If the freight rate is lower in 2023, what about the contract freight rate? Will the owner fail to perform the contract? In order to stabilize the cargo volume, can the liner company accept lower contract freight rates? How can liner companies stabilize the cooperative relationship with large cargo owners?
These problems are not far away, but whether the market is rising or the market is turbulent, for liner companies, they should not only pursue short-term profits, and stable contracted cargo volume is an important guarantee for enhancing anti-risk capabilities.
In 2023 and 2024, there are "clear downside risks" to liner companies' profits, according to a new research report by HSBC, which has slashed its profit forecast for liner companies by 51%. In this market environment, the willingness of liner companies to stably cooperate with cargo owners will be stronger.
Aside from the transportation cooperation between the ship and the cargo, a new change is binding the ship and the cargo more closely together from another level.
On September 6, 2022, seven companies including the world's largest liner company Mediterranean Shipping, the world's largest container ship owner Cespan and oil giant Shell jointly established a new alliance. The alliance is dedicated to exploring and developing green solutions and green technologies.
This is not the first time that shipping companies have gathered under the banner of environmental protection, nor will it be the last. With the goal of building a new supply chain ecosystem, it is believed that the two sides will also have more foundations for cooperation.
