Ocean Carrier Update: Steady as she goes

To say that these are tense times in the ocean shipping world is a gross understatement, as the industry continues to be pummeled by events out of its control. Most notably, global freight rates are being severely affected by changing freight demand and environmental/geopolitical events such as the Panama Canal drought and attacks on ships in the Red Sea.

In fact, fourth quarter 2023 revenues revealed that most carriers lost money for the first time in five years. “OOCL revenues and volume figures are down in the first quarter of 2024 compared to fourth quarter of 2023,” says Stefan Verberckmoes, an analyst at Alphaliner. “Maersk and Hapag Lloyd are drowning in red.”

Hapag-Lloyd’s annual report for 2023 indicated an expected, but significant decrease in earnings. “We’ve got the current financial year off to a satisfactory start, but the economic and political environment continues to be volatile and challenging—especially in view of the current situation around the Red Sea,” says Rolf Habben Jansen, CEO of Hapag-Lloyd AG. He expects to see an overall decrease in earnings in 2024.

Seasonal goods’ use of West Coast portsback to pre-pandemic level

And just when carrier executives were examining negative earnings reports and contemplating the future impact of changing freight demands and surging freight costs, a ship hit the Francis Scott Key bridge in Baltimore, further reminding shippers of unforeseen dangers that can suddenly affect supply chains.

Unstable world

Having the greatest immediate impact on global shipping are geopolitical and environmental events. Houthi attacks on ships in the Red Sea have upended worldwide shipping lanes causing vessels that would normally transit the Suez Canal to take the long route around South Africa’s Cape of Good Hope.

This has resulted in carriers having to increase rates to account for the extra cost of fuel and time they have incurred in rerouting vessels. “And the higher rates are not enough to get carriers out of the red,” Verberckmoes notes.

Consequently, carrier executives are trying to anticipate freight volumes two to three years out to manage operations. “But no one can predict geopolitical events,” says Verberckmoes.

Meanwhile, environmental concerns continue to grow. Disruptions caused by the severe drought caused by El Nino resulted in the Panama Canal witnessing a staggering 49% decline in volumes, reports global procurement and supply chain consultancy Proxima.

“It plummeted from more than 1,300 monthly transits to just over 600 monthly transits,” says Hollie Prouse, senior consultant at procurement and business services consulting firm Proxima. “Furthermore, the Panama Canal auction system, which was once a lifeline for securing timely slots, now risks inflating costs beyond reason.”

As sea freight routes expand to mitigate disruptions such as those in the Red Sea and Panama Canal, Prouse notes how the consequential rise in carbon emissions is stark. “A 1% increase in speed for a container ship equates to a 2.2% surge in fuel consumption, compounding ecological concerns,” she says.

Compounding issues

Additional concerns regard potential overcapacity caused by an unprecedented number of new ships that are coming online. Many were ordered when carriers were flush with cash from profits made during COVID.

Mediterranean Shipping Co. (MSC) has the largest vessel orderbook, with 125 ships on order as of May 31, 2023, followed by CMA CGM with 103 ships on order, and Evergreen Line with 49 ships on order, reports Statista.

Baltic and International Maritime Council (BIMCO) figures show that this year, a staggering 478 container ships with a capacity of 3.1 million TEU are scheduled for delivery, beating 2023’s record by 41%.

Another 83 ships larger than 15,000 TEU are expected to be delivered in 2024, adding 1.4 million TEU to the segment’s capacity, thereby doubling its capacity in just four years.

As a result, BIMCO estimates the container fleet capacity will grow by 10% in 2024. Sources reported last year that MSC had already doubled its fleet size in a record eight and a half years. The recycling of ships is also expected to increase in 2024, reports BIMCO. The fleet could grow by nearly 2.8 million TEU, and by year’s end exceed 30 million TEU for the first time in history.

Currently, however, some carriers are struggling to keep weekly services due to pressures caused by the situation in the Red Sea. “The Red Sea has soaked up all the excess capacity,” says Verberckmoes.

According to S&P Global Market Intelligence, 79% of container ships now transit around the Cape of Good Hope. The U.S. Energy Information Agency states that a journey from the U.S. Gulf Coast to Chiba in Japan through the Suez Canal adds about 17 days, while the journey around the Cape of Good Hope adds about 21 days, compared with going through the Panama Canal.

Shake ups

Further shaking up the industry is continuing shuffling, realignments, and surprise cooperations between container lines. Industry observers fear what impact this will have on the future composition of the container shipping industry.

Shippers have long been critical of cooperations and alliances, accusing them of being too concentrated and powerful. Even governments have been critical, as was evident in the 2022 reform of the U.S. Ocean Shipping Act.

However, in April, Maersk and Hapag Lloyd made a surprise announcement that they plan to launch a new alliance called Gemini Cooperation, effective February 2025. The new alliance coincides with Hapag Lloyd ‘s announcement in January that it will withdrawal from THE Alliance, effective January 2025. That same month the MSC-Maersk 2M cooperation will end and MSC will operate as a standalone. Originally, Maersk also had planned to operate as a standalone.

Both companies have spent the past year positioning their operations. “We didn’t see this [latest] announcement coming,” says Verberckmoes. “Hapag-Lloyd and Maersk have totally different operational concepts compared to the other carriers.”

Maersk and Hapag Lloyd stress that Gemini is a long-term operational cooperation and will not change the strategy of either company. Maersk will continue to pursue its vision of integrated logistics that offers solutions from one end of the supply chain to the other. Hapag Lloyd will focus on improved service quality, transit times, and access to a widely connected network of ocean hubs for transshipment.

“It will limit its calls to major ports and work with feeder calls for smaller ports,” says Verberckmoes. Meanwhile, executives from both carriers emphasize that the new cooperation will deliver a flexible and interconnected ocean network with a focus on reliability. “Both want to increase their reliability and sail on time,” he adds.

Hapag Lloyd will operate a new network from Europe to the Far East with calls from Rotterdam and Hamburg. A lot of cargo will be fed from Tanger Med (TPMA) by vessels capable of carrying 8,000 TEU to 9,000 TEU. The goal is by eliminating the number of port calls, the risk of port delays is limited, thereby negating a cascading effect of which carriers cannot catch up.

Still, Verberckmoes sees MSC’s position as a standalone as having an advantage. As of November 2023, MSC operates more than 790 container vessels with an intake capacity of 5,505,417 TEU. The fleet is positioned to grow even larger. Over the last year, MSC has been positioning itself by placing the largest orderbook for new vessels of any liner in the world.

Meanwhile, other alliances and carriers are reacting to industry changes. For example, to make up for lost capacity from the withdrawal of Hapag-Lloyd, THE Alliance partner HMM is increasing its vessel capacity and market share.

HMM is drawing up a mid- to long-term strategy that calls for increasing its container capacity by more than 66% from 920,000 TEUs in 2024 to 1.5 million TEUs by 2030. And in April, HMM announced that it will resume one of its services from the Far East to the U.S. East Coast.

“But, because of the Red Sea situation, it does not have enough ships,” Verberckmoes says.

In addition, Ocean Network Express (ONE), also a member of THE Alliance, recently introduced a two-pronged 2030 strategy to invest in sustainable shipping that includes development of terminal and inland services as well as investing $25 billion in its fleet to add close to 1.2 million TEU in capacity, taking its standing fleet to 3 million TEU.

“ONE should realize an annual fleet growth of around 10% by 2030 to reach its goals,” says Verberckmoes. “That’s a very ambitious plan in a market where moderate growth and overcapacity is expected.”

Further, the Ocean Alliance, a partnership between CMA CGM, COSCO, Evergreen, and OOCL, does not renew until 2032. In April 2024, Ocean launched its “DAY 8 Product” that partners say marks a commitment to continue offering the highest quality of service.

That product involves the deployment of 321 container ships, including 119 vessels for the CMA CGM Group, with a total capacity of approximately 4.5 million TEUs, and 35 services on important global trade routes.

How all of this shakes out is yet to be seen. Given tenuous events accruing around the world, and the state of the global economy, which appears to be improving in the United States, the second half of 2024 could present a totally different picture. But for now, the ocean sector has hit rough seas and it’s best to keep that bottle of sea sickness pills nearby.