The chaos in the supply chain and the standstill in the ports could drag on into 2023

The timetable for a correction in container shipping is receding further and further into the background.

The first forecasts for a downturn were for October 2020 after the Golden Week holiday in China. Then it was after Lunar New Year 2021, then mid-2021, then late last year, then after Lunar New Year 2022.

With Lunar New Year 2022 now underway and container freight rates, ship charter rates and port congestion still at or near all-time highs, the mood is turning to 2023.

“Forecasts for a market correction were repeatedly thrown overboard,” Alphaliner said on Tuesday. “A growing consensus now suggests that the current supply chain chaos will continue at least until 2022.”

Confidence in the persistence of the shipping boom has pushed the container ship sale-and-purchase market to record levels. “The number of container ships changing hands hit an all-time high in 2021 after shipowners appeared willing to pay almost any price to secure tonnage,” said Alphaliner, noting the growing consensus of prolonged market strength could “justify”. [2021] Purchases with delivery postponed to this year.”

Alphaliner reported that 572 container ships were sold last year, “equivalent to a staggering 1.94 million TEU [twenty-foot equivalent units]’, 26% higher than the previous annual record in 2017, a year in which sales were boosted by the spectacular collapse of the Hanjin shipping company.

It’s not just the S&P market. In the charter market, rates have risen to new all-time highs in 2022, with “a growing trend towards scheduling well into the future, with some vessels being extended or repaired nearly a year before delivery,” Alphaliner said.

Proof of industry confidence in 2023: MSC has reportedly renewed its charter of the 6,493 TEU MSC Bosphorus for five years at a cost of US$50,000 per day, with that renewal not even starting until this December. Alphaliner also reported that MSC has extended contracts for several Danaos (NYSE: DAC) 8,500- to 9,500-TEU vessels, some of which will not come into effect until next year. Danaos confirmed it has extended some charters with launch dates to April 2023.

Stronger for longer

Matthew Cox, CEO of Matson (NYSE: MATX), said last month that he expects trans-Pacific congestion and increased consumption trends to “broadly persist, at least until the October peak season and increased demand for our China service.” [to remain] most of the year.”

During a recent analyst panel presented by Capital Link, DNB analyst Jorgen Lian said, “Things are looking great and they’ve been looking strong for longer than we thought.”

Lian pointed to “significant fleet growth coming to market in 2023 and 2024,” but added, “We’ve been toying around with a bull case idea: if you don’t see the congestion problems go away before you get them.” [newbuild ship] Deliveries in 2023 and 2024 you have 15% more queued capacity in the same ports and then suddenly it becomes a port problem, not a shipping problem.”

That’s already the case in the current cycle, Lian said. “It’s not just about the shipping record. It’s about what happens to the land-based side of logistics.”

One of the earliest proponents of the 2023 stowage thesis was the ocean freighter Zim (NYSE: ZIM). What once sounded self-serving now sounds more mainstream.

During an August 2021 conference, Zim CFO Xavier Destriau argued that the threat of overcapacity from newbuilds delivering in 2023 is low, in part because “congestion on land infrastructure, particularly in the US, will continue to hurt fleet efficiency. U.S. operational constraints are likely to remain in place,” and “shore-side bottlenecks” would “partially offset the net fleet growth reflected in the increased backlog,” he claimed.

Booking Volume Index. 100 = January 2019. Chart: FreightWaves SONAR (To learn more about FreightWave’s SONAR, click here.)

What if there’s no switch to flip?

The Biden administration and ports remain focused on easing the supply chain crisis. The question is whether significant progress can be made until US import demand falls significantly.

“There are a few different theories,” Flexport chief economist Phil Levy commented in a recent interview with American Shipper. “One of them is that we have this ongoing, increased demand that is driving this. That’s my view. Another one I call “Who forgot to flip the switch?” Theory – that something is wrong with the supply chains and someone was asleep and if we just flip the switch everything will be better. That we simply have to solve these temporary supply chain problems.”

If the sustained demand theory is correct and there is no US economic downturn to reduce demand in 2022, the argument that supply chain pressures and port congestion will continue into 2023 seems increasingly credible. This in turn means a longer period with much higher transport costs and much longer transit times for freight shippers.

The congestion situation in US ports is now much worse than it was a year ago.

In the ports of Los Angeles and Long Beach, which handle 40% of US imports, as of February 1, 2021, 40 container ships were lying idle offshore waiting for berths. A year later it was 101.

Chart: American Shipper based on data from Marine Exchange of Southern California

On the bright side, the number of LA/LB queues has plateaued so far in 2022, averaging 101 per day since early January and peaking at 109 on January 9th.

However, with the backlog still massive, the prospects of eliminating the queue before 2023 seem increasingly unrealistic.

Last year the queue dropped by 30 ships between early February and the third week of June, after which seasonal imports inexorably pushed the queue count up into the year-end holiday season. In 2022, to reach the same late June launch point before the peak season, the queue would need to be reduced three times faster than last year over the next 15 weeks.

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