in Freight News 20/01/2023

Pakistan could possibly witness fuel shortages in the near future as several oil importing companies face hurdles in securing dollars needed to close import deals, at a time when the South Asian country’s foreign exchange reserves have dwindled to the lowest level in almost nine years.

Sources told S&P Global Commodity Insights that the Oil Companies Advisory Council, members of refineries and oil marketing companies had written to the country’s finance ministry about oil importers facing challenges in opening letters of credit for the import of petroleum products. It could take up to six to eight weeks for import operations to normalize, sources added.

“If L/Cs are not established on a timely basis, critical imports of petroleum products will be impacted, which may lead to a fuel shortage in the country, further deteriorating the demand,” said Sumit Ritolia, a refinery economics analyst at S&P Global.

“The prolonged unavailability of import contracts and L/Cs will be sending negative signals to international oil suppliers, leading to high prices for imports and even it may lead to the forced cancellation of oil cargoes,” he said.

Energy-deficit Pakistan imports approximately 430,000 mt of motor gasoline, 200,000 mt diesel and 650,000 mt crude oil at a cost of $1.3 billion/month, according to the letter from the oil industry to the finance minister.

The banking hurdles already caused delays in the arrival schedule of multiple cargoes as well as led to the cancellation of a few cargoes, the letter said, adding that the situation has severely deteriorated during January.

“If L/Cs are not established on a timely basis critical imports of petroleum products would be impacted,” it said.

Hurdles mount

Attock Petroleum Ltd., the country’s second-largest retailer of petroleum products, as well as Pakistan Refinery and Hascol Petroleum, have written letters to the Oil Companies Advisory Council and the country’s central bank about some banks refusing to honor import documents.

“Local banks have unfortunately regretted to establish our oil import L/Cs on the plea that the State Bank of Pakistan has instructed to do rationing on their L/Cs establishment based on their foreign reserves situation,” said the letter from an oil marketing company.

Pakistan’s central bank reserves have dwindled to $4.3 billion, according to the State Bank. The reserves reached a low of nearly eight years and 11 months, enough to cover imports for only three and half weeks.

The dollar shot up to its strongest level against Pakistani rupee at 240.1 on July 29, 2022, and the exchange rate was last quoted at 228.2 Jan. 16, data from the State Bank of Pakistan showed.

“Reserves are down because of continuous principal and debt payments on foreign loans and drying up of external inflows from bilateral and multilateral sources,” said an analyst.

Pakistan’s ministry of energy and the Oil and Gas Regulatory Authority in a separate letter to the central bank said attention had been drawn toward insufficiency of credit lines and reluctance of banks to open L/Cs for oil imports due to various apprehensions.

They have requested the State Bank to urgently intervene and ask the banks to help open L/Cs for imports of fuels, including lubricants, to avert any risk of fuel shortages in the country, the letter added.

Pakistan’s potential domestic fuel supply crunch closely resembles Southeast Asia’s struggle to procure adequate supplies of middle distillate products during second-half 2022.

The dollar strengthened sharply against several Southeast Asian currencies, including Vietnamese dong and Indonesian rupiah in the fourth-quarter 2022. Many small-scale trading companies in the region struggled to finance dollars from local banks to conduct their import and distribution businesses, S&P Global Commodity Insights reported previously.

Slowing sales

Pakistan’s motor gasoline sales in December fell 11% year on year to 620,000 mt, diesel consumption decreased 15% to 520,000 mt and fuel oil fell by 3% to 120,000 mt, according to data from the Oil Companies Advisory Council.

In the six months ended Dec. 31, 2022, sales of motor gasoline declined 15% year on year to 3.83 million mt, compared with 4.51 million mt during the same period a year earlier. Diesel sales dropped 23% to 3.36 million mt and fuel oil fell 24% to 1.45 million mt, the data showed.
Tahir Abbas, head of research at brokerage Arif Habib, said the country was witnessing a slowdown in economic activity amid weak industrial output, leading to a decline in overall consumption. Higher petroleum products prices, a decline in automotive sales and lower demand from fuel oil-fired power plants had squeezed overall products sales, Abbas added.
Source: Platts

January 3, 2023 Container News

The pandemic-driven surge in demand for ocean imports catapulted global freight – and rates – to new levels of infamy in 2021 and 2022.

According to Freightos, logistics costs have played an important role in spiking inflation and they may play an equally important role in its easing as rates fall and operations normalise.

Transpacific ocean rates to the West Coast have stabilised at 2019 levels for about a month now, and prices to the East Coast are just 12% higher than in December 2019 as demand and congestion ease.

Additionally, Asia – Europe rates have fallen 50% in the last six weeks, but remain 30% higher than in 2019 as blanked sailings increase, and congestion and some recent labor disruptions may be slowing operations.

Carriers are expected to blank about half of all scheduled ex-Asia sailings for the months after the Lunar New Year, while some Asian manufacturers will take the unusual step of shutting down for the holiday as early as the second week of January in another indication of sagging demand.

Freightos reported that Asia-US West Coast prices dipped 3% to US$1,377/FEU. This rate is 91% lower than the same time last year. Asia-US East Coast prices also fell 10% to US$2,924/FEU, and are 82% lower than rates for this week last year, while Asia-North Europe prices increased 11% to US$2,405/FEU, and are 83% lower than rates for this week last year.

Judah Levine, head of research, noted that slowing volumes have led Asia – US West Coast rates to stabilise at 2019 levels for about a month now. Prices to the East Coast have continued to fall on easing demand and congestion – 10% since last week – and though the rate of the decline has slowed in December, the current price is just 12% above 2019 levels.

Moreover, Asia – North Europe rates have fallen 50% since mid-November. However, blank sailings, some persisting congestion and renewed labor disruptions in some ports may be combined to keep prices 30% higher than in December 2019.

Transatlantic prices of more than US$5,600/FEU remain almost three times higher than in 2019, despite the fact that they have declined 30% from their May-to-September US$8,000/FEU peak as carriers add capacity to this still-lucrative lane and congestion eases.

Furthermore, carriers are expected to blank about 50% of all scheduled sailings from Asia to the US and Europe after the Lunar New Year (LNY) holiday – which runs from late January to early February – suggesting they anticipate the slowdown to continue through the typical post-LNY lull months until inventories run down and demand picks up some time in the second quarter of the year at the earliest, or possibly not until next year’s peak season.

Another sign of sagging demand, according to Levine, is the unusual move among some Asian manufacturers to close for the holiday as early as the second week of January.

Easing covid restrictions in China is also contributing to more workers out sick, while other protocols will reduce barge and trucking capacity earlier in the month too, which may also be driving the earlier start to the holiday, according to Freightos analysis.

 Sam Chambers Splash247.com

Liner shipping will make just 5% of 2022’s mega profits, and up to 25% of the massive container orderbook will likely be postponed. These are the headline predictions in a unique survey carried by Splash today looking at how the container sector navigates its way out of its greatest ever boom.

Both Drewry’s World Container Index and the Shanghai Containerized Freight Index (SCFI) have halted their plunges at the cusp of the new year, however, experts are warning carriers will need to brace for some very challenging conditions in the coming months.

“Carriers are starting the year with a weak hand, and I expect they would turn in losses before the year is over,” said Hua Joo Tan, the founder of Asian consultancy Linerlytica.

More bullish is John McCown, whose Blue Alpha Capital quarterly liner profit reports have become essential reading during box shipping’s record earnings run since 2020.
McCown anticipates that the carriers will be profitable in 2023 with a net income to revenue margin in double digits but with aggregate quarterly profit levels below the Q4 level recorded in 2022.

More aggressive capacity management will be a central factor as lines doggedly avoid red ink this year, McCown suggested.

“There are certainly a lot of moving parts and we’re at a fulcrum point right now, but my broad view is that the container shipping sector will be performing better than most think and there has been a fundamental change in sector DNA,” McCown told Splash.

UK consultants Drewry estimate liner shipping made record combined operational profits of $290bn last year, something that will slide to just $15bn in 2023, with shippers enjoying more affordable freight rates and better service reliability.

“2023 will not be just about lower carrier profits,” said Philip Damas, the managing director of Drewry Supply Chain Advisors. Among the other key trends to watch, according to Drewry, are the easing of port congestion and associated operational delays around the world and the return of overcapacity in container shipping.

For Peter Sand, chief analyst at freight rate platform Xeneta, 2023 looks certain to be the second year in a row of falling container volumes, and subsequently the main characteristic of the market to look out for will be the idle fleet. This includes both hot and cold lay-ups in addition to blank sailings.

Making headlines this year for sure, Xeneta expects that 25% of the scheduled orderbook will be postponed, while no more than 10% is expected to be cancelled – and that would probably be options not called rather than outright and expensive cancellings.

Sand reckoned carriers with heavy exposure to long-term contracts rather than spot business will remain profitable this year. Carriers with a full exposure to the spot market are already losing money and will continue to do so for many months to come, he warned.

On top of the worrying amount of new tonnage due to enter the container markers this year and next, HSBC sees downside risks to demand in 2023 as inflation bites into household savings, which the bank said this week could likely trigger another round of price competition.

Scrapping is likely to ramp up over the course of the year, according to Daniel Richards, associate director at UK consultancy Maritime Strategies International (MSI). MSI expects scrapping will reach a year-end total of around 270,000 teu, before increasing even more in subsequent years. Xeneta, meanwhile, is forecasting up to 400,000 teu worth of ships will be torched this year, still some way short of the record 696,000 teu scrapped in 2016.

Attention is now turning to contract rates, with TPM, the industry’s leading business event coming up shortly.

Contract rates are collapsing on most routes, based on early data seen by Drewry.

“Despite a current Tic Tac Toe environment, BCOs will still not be able to play their best hands depending only on the flop. 2023’s longer term ocean freight market requires the skills of a chess grandmaster to successfully check their opponent, the ocean vendors,” advised Steve Ferreira, the CEO of New York-based shipper advisory Ocean Audit.

“The pendulum has clearly swung back towards shippers,” said Richards from MSI, predicting that some shippers will simply hold off from extensive contract commitments unless the rates they are offered end up close to pre-pandemic levels.

“It will likely be a frustrating contracting season where neither side feels it has gotten all it wanted, but also where worst-case scenarios were avoided,” Richards predicted.

For all the very latest container shipping news and market trends check our Splash’s dedicated liner coverage here.

Credit VesselFinderBy 

Martina Li in Taiwan Theloadstar.com

Shanghai Jin Jiang Shipping, the liner subsidiary of Shanghai International Port Group (SIPG), submitted its application for an initial public offering (IPO) to the Shanghai Stock Exchange on Friday.

Commonly referred to as JJ Shipping, the firm will issue 190,412 shares, 15% of its stock to be floated, allowing SIPG, which operates most of the container terminals in Shanghai port, to maintain control.

Currently, SIPG owns 98% of JJ Shipping, the remaining 2% held through another subsidiary, Shanghai Port International Passenger Center.

Guotai Junan Securities is the sole bookrunner for the IPO, first mooted in 2021. No fundraising target or listing timeline was disclosed in the listing prospectus.

Primarily an intra-Asia carrier, JJ Shipping entered the long-haul trades in 2021 after purchasing slots on Alibaba affiliate Transfar Shipping’s transpacific service.

The company says in its prospectus it will use the IPO proceeds to expand its fleet, particularly building smart and eco-friendly ships, and digitalise its logistics services.

Specifically, JJ Shipping plans to build six 1,800 teu and two 2,400 teu ships. Its subsidiary, Shanghai Hai Hua Shipping, plans to spend CNY211m ($31m) on two 1,000 teu ships for domestic coastal services.

Currently, JJ Shipping is the 35th–ranked liner operator, with a total capacity of nearly 40,000 teu on 29 owned ships and 13 chartered vessels. The fleet is dominated by 1,100 teu vessels. It has four 1,900 teu ships on order at Yangfan Group for delivery this year.

JJ Shipping said: “Investing in new shipping capacity will improve our cost advantage and enhance the company’s competitiveness. To suit our expansion strategy in South-east Asia and other markets, the company will expand the fleet size in a timely manner and improve the ratio of owned and chartered capacity of the route, so as to cope with market fluctuations.”

Addressing growing calls for shipping to slash emissions to meet the global target of decarbonisation by 2050, JJ Shipping said it would accelerate the pace of ‘green’ and low-carbon vessel construction.

JJ Shipping added, “We will steadily demolish old ships, prioritising the application of fuels such as LNG and methanol on new ships.”

For its digitalisation, JJ Shipping plans to introduce artificial intelligence to the back-end operations that will apply big data analysis and optimise its digital crew management system.

In 2021, amid record high earnings for the liner industry, JJ Shipping’s net profit more than doubled from 2020, to CNY1.23bn . In H1 22, it saw a net profit of CNY993.46m.

Looking ahead, the carrier said: “As the Covid-19 pandemic gradually normalises, vessel turnover will rebound, and the shortage of shipping capacity will be alleviated.

“Freight rates may drop, and the company’s operating performance may decline, to a certain extent. If there is an excess supply of shipping capacity, there may be a downside risk in market freight rates, which will adversely affect our operating performance.”

Several container lines have filed IPO applications in Shanghai and Hong Kong, including TS Group and Ningbo Ocean Shipping, hoping to attract investors after two years of record earnings. However, others, like South Korea’s SM Line, have withdrawn listing attempts due to lacklustre interest.

© Mr.siwabud Veerapaisarn

By Mike Wackett The Load Star

Ocean carriers do not expect consumer demand in North Europe to recover until at least March, when they hope container freight rates from Asia will also rebound.

Low rates, down to $750 per 20ft and $1,000 per 40ft from China to North European ports, are being touted in the market either directly through local carrier offices, or via forwarding agents, valid until 1 March.

Moreover, for the immediate period after the Chinese New Year, when cargo prospects are looking particularly soft, one of the biggest carriers is offering shippers an FAK rate of $550 per 20ft from Dalian to Felixstowe for a shipment window of 1 to 14 February.

To qualify for this rate, a booking must be made by 15 January.

The container spot market indices are still not reflecting the ‘market’ rates to North Europe, although Xeneta’s XSI was the closest this week, as its component slid by another 8%, to $1,885 per 40ft.

“The supply of shipping space was abundant and the marketing strategy of carriers was still based on soliciting cargo, therefore the market rate dropped,” says the Ningbo Containerized Freight Index (NCFI) weekly commentary.

However, there was better news this week for carriers serving the Asia-Mediterranean tradelane, where “increased demand” prompted 2M partners MSC and Maersk to reinstate a sailing on the AE11/Jade loop that had been voided.

Spot rates on the route, as recorded by Drewry’s WCI index, declined by 4% this week, but remain significantly higher than North European rates, at $2,821 per 40ft.

Meanwhile, on the transpacific, carriers will be encouraged by the easing of inflation, down to an annualised rate of 6.5%, which is expected to result in the Federal Reserve being less aggressive with its interest rate hikes and thus encourage consumers to start spending again.

Container spot rates from Asia to the US west coast appear to have bottomed out, at between $1,300 and $2,000 per 40ft, as carriers cancelled half their sailings on the route ahead of the CNY.

And on the more robust Asia-US east coast tradelane, spot rates seem to be levelling out at around $2,800 to $3,600 per 40ft.

On the transatlantic, the impact of carriers deploying extra capacity and the start of services by market entrants is, unsurprisingly, putting pressure on freight rates.

Maersk announced this week that the 2M would be adding three extra vessels to its transatlantic loops. And UK-based Ellerman City Liners is upgrading its fortnightly service from North European ports to US east coast ports to weekly, after redeploying vessels from its now defunct Asia to North Europe service.

Container rates on the route, as recorded by the spot indices, are still at a highly elevated level of between $5,500 and $6,500 per 40ft, albeit that the weekly declines are accelerating, but ‘market’ rates from say Liverpool to New York are said by a forwarder contact to be “much lower”.

in World Economy News 04/01/2023

2022 was the year when the global economy was expected to recover from the mayhem unleashed by the COVID-19 pandemic. But then, Russia invaded Ukraine on February 24 and the economy was pushed into the throes of uncertainty.

The war in Ukraine and ensuing Western sanctions against Russia stoked geopolitical tensions, sent energy and food prices soaring to record levels and disrupted supply chains, throwing a wrench into the global recovery.

As inflation climbed to multiyear highs, central banks were forced to tighten the money taps at a frenetic pace by increasing interest rates in the face of an already slowing economy, further boosting the prospects of a recession in 2023.

A recession is, however, just one of the economic difficulties that awaits us this year. Here’s a look at some of the biggest challenges likely to confront the global economy.

An imminent recession
2023 is expected to be the third-worst year for global economic growth this century behind 2009, when the global financial crisis caused the Great Recession, and 2020 when COVID-19 lockdowns brought the global economy to a virtual standstill.

Analysts expect the world’s major economies, including the United States and the United Kingdom, as well as the eurozone, to slip into a recession this year as central banks continue raising interest rates to temper demand for consumer goods and services in an effort to rein in raging inflation.

The head of International Monetary Fund, Kristalina Georgieva, has warned that a third of the global economy could be hit by a recession in 2023, which she described as a “tougher” year than 2022.

The eurozone, in the midst of a severe energy crisis as it looks to shed its reliance on Russian fossil fuels, and the UK are likely to witness a deeper recession than their peers.

“The severity of the coming hit to global GDP depends principally on the trajectory of the war in Ukraine,” analysts from The Institute of International Finance wrote in a research note, adding that the conflict risked becoming a “forever war.”

The contraction in advanced economies and a stronger American dollar will hurt exports, spelling trouble for export-oriented Asian economies.

The consolation is that any recession will likely be short-lived and won’t be as severe as initially feared, causing only a modest rise in unemployment.

“Since inflation now seems to be receding all over the world, central banks should be able to take their feet off the brakes before long, allowing a recovery to begin late next year [2023],” analysts at Capital Economics said in December.

Stubborn inflation
Price rises will likely be moderate in 2023, helped by weakening demand, falling energy prices, easing of supply snarls and a decline in shipping costs. However, inflation will stay above central bank target levels, prompting further interest rate hikes. That means more pain for the economy, and it risks worsening a global debt crisis.

Inflation in the eurozone is expected to come down more slowly than in the US. In Germany, the eurozone’s economic engine, inflation is expected to fall thanks to measures like a cap on gas and power prices. But core inflation, which strips out volatile food and energy prices, could remain stubbornly high as a result of the government’s cash transfers to help households deal with higher living costs.

“The resilience of the [eurozone] economy, and particularly the labor market, suggests that inflation could be higher for longer than we expect,” said Andrew Kenningham, chief Europe economist at Capital Economics, adding that core inflation would fall more slowly as strong wage growth keeps inflation in the service sector high.

“There are several obvious risks to that forecast. ‘Known unknowns’ include what happens to energy markets, which in turn depends on the course of the Ukraine war and the weather, and how German manufacturers cope with high energy prices,” he said.

China’s COVID chaos
Just weeks before the start of 2023, China announced an exit from its controversial zero-COVID policy. The swift pivot has left the country’s health care system overwhelmed amid an alarming rise in COVID cases.

Going by the experience of other countries, the deluge of infections is expected to cause short-term disruption to the world’s second-largest economy. This could deal a blow to the fragile recovery in global supply chains. There is also the risk of a new coronavirus variant emerging and spreading to other parts of the world.

While the near-term prospects appear bleak, analysts expect the Chinese economy to end 2023 on a brighter note with a big boost resulting from Beijing’s ditching of zero-COVID and its support for the country’s ailing property sector, which accounts for nearly a quarter of China’s economic output.

“Chinese recovery, combined with the regional reopening, means Asia could have a good 2023,” Christian Nolting, Deutsche Bank’s chief investment officer, said in a note to clients. The recovery could “stabilize the economies of neighboring and many commodity exporting countries (such as those in Latin America) given that China is the dominant commodities consumer.”

An energy crisis
The precarious energy situation, especially in Europe, will continue giving headaches to governments in 2023. Europe might just manage to escape a complete energy crisis this winter thanks to milder-than-normal weather and consumers cutting their energy usage.

The lower demand for heating means the region’s storage facilities, which were filled to the brim last year, might remain well-stocked at the end of this winter. That’s likely to keep gas prices in check next spring, helping to pull down inflation.

The situation could still become challenging ahead of next winter. Having spent hundreds of billions of euros last year scouting for alternatives to Russian energy and shielding consumers, Europe might struggle to once again fill up its storage facilities. The competition for liquefied natural gas will be especially tough as China reopens and traditional Asian buyers like Japan and Korea start looking for more sources of energy.

Nolting said energy remains the main risk factor for the region, “coupled with a possible shortage of gas in winter 2023/2024.”

Geopolitical tensions, technology war
Military and political tensions will continue to remain among the biggest risks to the economy, much like in 2022. While there is no end in sight to Russia’s war in Ukraine, US-China frictions over Taiwan, the world’s top semiconductor manufacturer, and soaring tensions in the Korean Peninsula amid North Korea’s missile testing are likely to keep investors on their toes this year.

“Solutions to end Russia’s invasion of Ukraine remain elusive. This in turn means no solutions to the knock-on effects of this conflict on areas such as migration movements, global supplies of fossil energy commodities and food; and potential geopolitical shifts extending far beyond the region,” said Nolting.

The battle for technological supremacy between the US and China might get more intense in 2023. Last year, Washington banned the transfer of advanced US semiconductor technology to China.

“A trade conflict has now morphed into an effort to set the applicable long-term standards in highly important fields such as 5G, artificial intelligence and chips,” said Nolting. “Success will expand the country’s power base over the long term. So both sides will not want to yield ground easily.”
Source: DW

in World Economy News 19/12/2022

One chaotic, disappointing year is ending. Another one is likely in store. In October, the IMF released its annual economic outlook projecting weak growth across the world in 2023. It placed particular emphasis on three issues: high inflation and central bank tightening, Russia’s invasion of Ukraine, and the continued effects of Covid—especially in China.

HBR asked three experts about what to expect for the economy in 2023, and how things have evolved since October.

Mihir Desai is a professor of finance at Harvard Business School. Karen Dynan is a professor at Harvard and a senior fellow at the Peterson Institute for International Economics. And Matt Klein is an economic journalist and the author of The Overshoot newsletter. We put the same questions to all three; their replies, edited for length and clarity, are below.

Let’s start with inflation and interest rates: Where do things stand as the year comes to a close?

Mihir Desai: We’ve lived through a seismic change in rates that we’re still digesting. Those belated increases, along with improving supply-chain considerations, have done well in improving the inflation outlook. But the effects of those interest-rate increases are still being felt in terms of consumer behavior, firm investment plans, and asset prices.

While the runaway aspects of inflation have ameliorated, we are well below a sustainable rate of inflation. The final push toward sustainable inflation levels will require a longer period of sustained higher rates than people imagine. Said another way: Getting to 4-5% inflation will happen by May 2023, but getting back to 2%-3% inflation will take longer and be more painful, triggering a sustained debate regarding the dual mandate of the Federal Reserve.

Karen Dynan: Inflation is very high no matter how you cut it. I would put the underlying trend in the United States at around 5%, which is way above the Fed’s target and the highest level in four decades. Interest rates have risen sharply over the past year as a result of the higher inflation and the Fed tightening in response. Rates on new mortgages have more than doubled relative to where they were a year ago. They touched 7% in October and November, a level we have not seen since the early 2000s.

Matt Klein: The inflation of the past few years has been attributable to the pandemic and, to a lesser extent, to the Russian invasion of Ukraine. Sudden changes in businesses’ ability to produce collided with sharp changes in the mix of goods and services that consumers wanted to buy, leading to both gluts and shortages across the economy.

The good news is that most of the inflation attributable to these one-off factors seems to be on its way out. Overall inflation probably peaked over the summer. The bad news is that there also seems to have been a modest uptick in the underlying rate of inflation from around 2% a year to 4-5% a year.

What will the labor market look like next year? Are the recent wave of layoffs a sign that a “soft landing” without job losses isn’t possible?
Mihir Desai: The labor market remains remarkably strong at year-end, and it seems inevitable that it will weaken. The only question is the pace and severity of that weakening.

It’s conceivable that the weakening will be slow and moderate, but the larger issue is a possible decline of consumption. Consumers are facing higher prices, higher interest rates, declining savings rates, more borrowing, and lower wealth levels. For now, consumer spending has held up. As the economy slows, we could be facing a longer consumer-driven recession rather than just significant declines in investment and associated losses in employment. These declines in labor demand will likely center on white-collar workers. For that reason, we could continue to feature a relatively healthy unemployment rate (4%-5%) and still have a struggling economy for a longer period of time.

Karen Dynan: There’s a lot of uncertainty about where the U.S. labor market is going. Notwithstanding the news about layoffs at some companies, job growth overall remains robust. The labor market is still really tight, with about 1.7 job openings for every unemployed worker.

All this is creating wage pressures that are feeding through to prices. The Fed’s hope is that bringing labor demand back in line with labor supply—without a lot of job loss—will be enough to reduce inflation back to its target level. But history suggests that won’t be enough. A more likely scenario is that the unemployment rate will have to rise considerably to reduce wage pressures sufficiently to wring the excess inflation out of the system.

Matt Klein: Underlying inflation seems to have accelerated from around 2% a year to 4-5% a year, because the pace of wage growth is several percentage points faster than the long-term pre-2020 growth rate.

There are basically three ways of interpreting this:

• Wage growth has been unusually fast because lots of people were changing jobs, but this churn will go away on its own.
• Wage growth is unusually fast because there is a mismatch between the huge number of open positions and the number of available workers, which means that it might be possible to persuade companies to cut back on hiring without pushing the economy into a deep downturn.
• Wage growth is unusually fast because too many people are employed and feel secure in their ability to find a new job, which means that inflation will only go away if a lot of people lose their jobs.
• The first two interpretations are both consistent with the “soft landing” scenario.

Some perspective is in order: Around 250,000 Americans have been filing for unemployment benefits for the first time every single week in 2022, while around 6.5 million Americans were hired each month. Those hiring numbers dwarf the layoffs that have been announced so far.

How important are Covid and the war in Ukraine to next year’s economic outlook?

Mihir Desai: Unexpected geopolitical events, as always, remain wild cards. Specifically, China’s ability to navigate an exit from “zero-Covid” safely and the European exposure to spiking energy prices remain critical risks. The success of China’s reopening has potentially opposing inflationary effects by lessening supply chain disruptions but also contributing to global demand for commodities and energy.

Karen Dynan: It does not look like Covid shutdowns are going to weigh heavily on economic activity, especially now that China is rolling back its zero-Covid policy. But Covid is still very relevant in the sense that disabilities related to past cases of Covid and ongoing fear of the virus appear to be factors impeding the return of some workers to the labor force. The labor force participation rate for older adults in the United States is still well below its pre-pandemic level. And that’s contributing to the worker shortage that is pushing up wage inflation.

The war in Ukraine also remains a key storyline for the global economy. The most important channel is that the restricted supply of Russian natural gas has created an energy crisis in Europe. This crisis appears to have tipped some European economies into recession, and that has major implications not only for those economies, but also for their trading partners.

Matt Klein: Covid is probably not going to be a major factor for the economy in 2023 unless there are new variants that are extremely dangerous even to those with booster shots. China’s Covid lockdowns this year have had surprisingly little economic impact on the rest of the world, except insofar as they have reduced the pressure on commodity prices. China’s reopening could lift commodity prices next year, although much will depend on how they go about it (and whether they change their mind).

The economic impact of the war in Ukraine for the rest of the world probably peaked back in the summer, if not earlier. The damage that has been done is mostly baked in for everyone outside of Russia and Ukraine. That said, there is room both for positive surprises (a just peace settlement) and negative ones (a major escalation of the war).

What wasn’t on the IMF’s shortlist that you’re watching?

Mihir Desai: I would include:

• The fragility of emerging markets because of rising rates as an underappreciated risk.
• The possibility that companies seeking external financing (either levered companies or high growth, unprofitable companies) will struggle with financing options and trigger financial distress and bankruptcies at a high rate.
• The acceleration of protectionist and autarkic tendencies that will immiserate the world.

Karen Dynan: Higher levels of government debt coming out of the pandemic are potentially a big deal. Most countries ran large budget deficits in 2020 and 2021 because of reduced tax revenues and higher levels of government spending. And with interest rates rising globally, many countries — particularly lower-income countries — are likely to face strains making their debt payments. A wave of defaults on sovereign debt would not only be tough for the countries defaulting but potentially very disruptive for global financial markets.

Matt Klein: A few things:

• How will business investment respond to recent changes in asset prices and the commitment of monetary policymakers around the world to slower growth?
• Will there actually be a big uptick in global defense spending, and if so, what will that do?
• What will the return of industrial policy in the U.S. (with the Inflation Reduction Act) mean for cross-border investment and trade?
• What will be the longer-term ramifications of the sanctions imposed on Russia and Chinese semiconductors for global fragmentation?
• What’s the optimistic case for the global economy in 2023? If we’re looking back in a year and growth has exceeded expectations, what might have happened?

Mihir Desai: The wildly optimistic case is that inflation moderates very quickly, and we return to 2% inflation by early next year, allowing for a shorter period of high rates and without major job loss. This seems fantastical to me although it’s possible to interpret the current yield curve in this manner. It’s remarkable how embedded this view is today.

Karen Dynan: In my view, a soft landing — meaning a taming of inflation without major job loss — would be a really good outcome for the United States. If inflation for 2023 makes it back down to 3% without major job loss, I would consider that a really good outcome.

Parts of Europe are probably already in recession because of their energy crises, but those recessions are likely to be mild if the war in Ukraine comes to an end relatively quickly.

Matt Klein: The best thing that could happen for global economic growth is that underlying inflation starts to subside on its own and that policymakers are nimble enough to recognize this and adapt accordingly.

More generally, things will be better if economic policymakers remember that the goal is finding ways for people to produce more, rather than consume less. If Russia withdraws from Ukraine and unblocks the flow of commodities that would also be helpful.

What’s the pessimistic case? And what downside risks are you worried about?
Mihir Desai: The pessimistic case is persistent inflation above 5% throughout 2023 because of a wage-price spiral that means that rates have to stay high much longer. Equity markets have been undergoing a valuation reset — in the pessimistic scenario, stocks continue to fall because the prospect of declining corporate earnings and persistently higher rates still hasn’t been fully internalized in prices.

Karen Dynan: Most of my concerns have to do with asset prices and financial markets. Tighter financial conditions have led to big reductions in stock prices, but we don’t know how much further stock prices might fall, particularly if the Fed has to tighten more than currently expected.

Home prices soared during the pandemic. We don’t know how much of that increase reflects a fundamental shift in values due to people working from home, as opposed to a bubble, so it’s hard to know how much they will fall as housing credit conditions tightened.

And, as I mentioned earlier, there is a real possibility of financial market disruption from sovereign debt defaults.

Weaker growth in China is also a source of downside risk. Large-scale Covid shutdowns in China may be behind us, but there is a major property slump that threatens to significantly depress economic activity in 2023 there. With China such a big part of the global economy, there could be significant spillovers to other countries.

Matt Klein: The case for pessimism is that policymakers might be too slow to realize that they’ve made a mistake. We’re all trying to interpret the same sets of numbers, and they are hard to interpret. One major downside risk is the Fed recognizing too late that it’s raised rates too high.

The other major downside risk is that the world has to deal with some new unpleasant surprise. The global economy today would look completely different if not for Covid and Russia’s invasion of Ukraine. Who knows what else might happen?
Source: Harvard Business Review, by Walter Frick

Ship Hub

2020 and 2021 were the most profitable two years in shipping history. Seeing the astronomical profits, shipowners decided to order many new vessels. Therefore, we can expect a lot of new container ships in 2023 and 2024 out at sea.

New container ships

Even though we recently experienced a slump in container freight rates, we keep seeing interest in ordering new container ships. However, it may be difficult to absorb all these new ships when they hit the water.

According to the estimates, the current order book represents 30% of the existing tonnage. The numbers broke the previous record in 2008 when 6.6 million TEUs were ordered. As of now, the container ship order book stands at 7.1 million TEUs for 2023-2024. It also means 2.6 times higher deliveries than average.

On-order tonnage:

• 1.1 million TEUs in 2021
• 1.1 million TEUs in 2022
• 2.34 million TEUs in 2023
• 2.83 million TEUs in 2024.

Top operators by TEUs and share of the existing fleet

1. Mediterranean Shipping Company (MSC) – 17.4%; ordered 110 ships (1.5 m TEUs)
2. Maersk – 16.5%; ordered 34 ships (395 thous. TEUs)
3. CMA CGM – 12.9%; ordered 79 ships (698 thous. TEUs)
4. COSCO – 11.1%; ordered 34 ships (586 thous. TEUs)
5. Hapag-Lloyd – 6.8%; ordered 21 ships (402 thous TEUs)
6. Evergreen Line – 6.2%; ordered 54 ships (518 thous. TEUs)
7. Ocean Network Express (ONE) – 5.8%; ordered 30 ships (418 thous. TEUs)
8. HMM – 3.2%; ordered 17 ships (184 thous. TEUs)
9. Yang Ming – 2.7%; no data
10. ZIM – 2%; ordered 46 ships (413 thous. TEUs)

Greg Miller

·Wednesday, October 05, 2022 Freight Waves

Shipping adheres to a time-honored tradition: When shipowners make exceptionally high profits, they order a lot of new vessels. When those newbuilds are delivered by the yards, it kills shipowners’ profits.

Such boom-and-bust behavior has been de rigueur for over a century. As London shipbroker J.C. Gould, Angier & Co. wrote in 1894: “The philanthropy of the shipowners is evidently inexhaustible. The amount of tonnage on order guarantees a long continuance of low freight rates.”

The container industry has experienced the most profitable two years in shipping history in 2021-22. Right on cue, owners ordered more new container ships than ever before. Even now, as freight rates tumble, they’re still ordering more.

“A huge number of new large container ships are going to hit the water at a time of stagnating demand,” warned Alphaliner in a report on Tuesday. “The market could struggle to absorb all these new ships.”

The container-ship orderbook now stands at 7.1 million twenty-foot equivalent units, according to Alphaliner shipping analyst Stefan Verberckmoes. The previous peak was 6.6 million TEUs in 2008. At that point, tonnage on order totaled 60% of the capacity of the on-the-water fleet.

Since then, the global fleet has more than doubled, so the current orderbook — a record in absolute capacity terms — represents “only” 30% of existing tonnage, noted Alphaliner.

Record newbuild deliveries in 2023-24

The majority of tonnage on order will be delivered the next two years: 2.34 million TEUs in 2023 and 2.83 million TEUs in 2024, compared to around 1.1 million TEUs in both 2021 and 2022, said Verberckmoes.

The scale of the upcoming deliveries is unprecedented. Historical delivery data from Clarksons shows that annual fleet growth averaged 970,000 TEUs in 2001-20. Deliveries in 2023-24 will be 2.6 times higher than that average.

The previous single-year record for annual growth was 1.7 million TEUs in 2014, according to Clarksons data, well below what’s to come.

Meanwhile, the current orderbook continues to grow. New orders favor dual-fuel tonnage that can burn both traditional marine bunker fuel as well as liquefied natural gas or methanol. Alphaliner data shows that 29% of capacity on order is dual-fuel.

Maersk announced orders Wednesday for six more 17,000-TEU newbuilds that can run on either traditional fuel or green methanol. All are for 2025 delivery. The new orders bring Maersk’s methanol-fueled orderbook to 19 17,000-TEU vessels.

Alphaliner said that MSC is reportedly near a deal for 12 16,000-TEU newbuilds that can burn LNG; Yang Ming is inviting bids for at least five 15,000-TEU vessels with LNG-fuel capability; Maersk is looking at an additional series of 2,500-TEU ships that can run on methanol; and Cosco is considering orders for six methanol-powered 23,000-TEU ships plus nine conventional 15,000-TEU ships.

Ships in existence vs. ships in service

“The jury is still out on whether the market can or cannot absorb this,” wrote Alphaliner.

Maersk CEO Soren Skou addressed this issue during his company’s Q2 2022 quarterly call. “What matters in our view in container shipping is not so much how many ships exist,” he explained. “What matters is how much capacity we deploy in our networks compared to the demand that we have.

“If you go back to 2020, demand was down sharply, by 15%, in the second quarter. But [freight] prices stayed flat because all of the networks adjusted capacity and idled tonnage that was not needed. Certainly, going forward, that will also be our philosophy. We will provide the capacity our customers need, but we will not sail all the capacity we have unless there’s demand for it.

“That’s what I see for this industry, assuming everybody continues to operate their networks the way they do today,” said Skou. “I see little reason to think people would do something different.”

“Something different” is exactly what happened in the last big downturn. Following heavy newbuild deliveries in 2014, the container industry descended into a price war in 2015-16, leading to the bankruptcy of Hanjin.

Scrapping and slow steaming

“What [carriers] do next will go a long way in determining how much of the gains of the supercycle they get to keep,” wrote Drewry in a report on Tuesday. “Failure here will mean that the industry will be doomed to return to the low-margin pre-pandemic trend.”

Carriers “face an enormous challenge taming the one thing they have control over: supply,” said Drewry. “The problem is there is a lot of it.”

If carriers idle tonnage to compensate for demand weakness in the years ahead, idled ships that are owned would still incur capital costs and idled chartered ships would still incur lease payments.

One way to offset this is for carriers to scrap older vessels. Virtually no container ships were scrapped in 2021-22 because freight rates were so high. Carriers “will look to offload as many older, more polluting ships from the market as quickly as they can,” predicted Drewry. “Our base forecast includes provision for a near-record level of demolitions in 2023.”

But Alphaliner said “it is unlikely that the quantity of ‘scrap-able’ ships will be enough to offset the supply and demand imbalance. Most certainly, younger vessels will likely need to be torched too, to alleviate the pain.”

Carriers could also throttle sailing speed, which would cut fuel costs, reduce emissions and remove effective supply. Skou estimated that environmental regulation-driven slow steaming could reduce global fleet capacity by 5%-15% in the medium term.

Expiring charters will make room for newbuilds

Another big lever for ocean carriers: They can let existing charters expire to offset newbuild deliveries. 

Alphaliner noted that 56% of capacity on order will either be owned or chartered by one of the top five carrier groups: MSC, Maersk, CMA CGM, Cosco and Hapag-Lloyd.

The company’s data also shows that the top 10 carriers have significantly more chartered tonnage in operation today than they have on order. This should allow carriers to make room for newly christened ships via charter expirations.

According to Alphaliner data, MSC currently has 2.5 million TEUs on charter, 68% more capacity than it has on order. CMA CGM is chartering 1.8 million TEUs of capacity, 2.5 times what it has on order. Cosco charters more than twice its orderbook. ONE has 72% more chartered tonnage in service now than it has under construction at the yards, Zim (NYSE: ZIM) 17% more.

In general, Drewry voiced optimism that the carriers could use various strategies to avoid a wipeout when the tidal wave of newbuilds hits. 

Shipping lines are “entering a period of managed decline,” it said. “Following consolidation and alliance restructuring, carriers are better placed now to tackle the ‘danger’ years than ever before” and to “pull the right capacity levers to ensure a soft landing for the market.” 

Photo: Port of LA

A million teu of container line capacity may lay idle in 2023 as demand drops, freight rates fall, and economic confidence worsens.

Gary Howard | Nov 24, 2022 Seatrade Maritime News

Freight intelligence platform Xeneta said in its 2023 outlook that ocean cargo volumes could fall by up to 2.5% in 2023 in an extremely challenging market environment.

Xeneta CEO Patrik Berglund, said: “The cost-of-living crisis is eating into consumer spending power, leaving little appetite for imported, containerized goods. With no sign of a global panacea to remedy that, we’d expect ocean freight volumes to drop, possibly by around 2.5%. That said, if the economic situation deteriorates further, it could be even more.”

Exacerbating the economic troubles facing the market, the global container fleet is set to grow next year, with 1.65m teu of added capacity set to join the fleet.

“Some demolitions will dent that growth, but we still expect an increase in capacity of 5.9%. Even if demolitions double from our current level of expectations, the industry would still be looking at an almost 5% expansion,” said Berglund.

Falling demand and growing capacity is a classic recipe for overcapacity, a factor Xeneta expects will lead to idling of up to 1m teu worth of capacity, “maybe even more,” said Berglund. Current fleet idling is next to zero after companies hunted for ships to bring into service during the recent pandemic-induced high freight market.

“Carriers have proved adept at protecting and elevating rates during COVID, but with too much capacity, and easing port congestion, on most major trade lanes they’ll be fighting losing battles in 2023,” said Berglund.

Spot market rates have already fallen and could hit pre-pandemic levels on some lanes in 2023, said Xeneta, and long-term rates will fall sharply as contracts fixed at the height of the market expire and their replacements reflect the new market reality.

“As far as upcoming contract negotiations go, it’s imperative to keep an eye on the very latest market data to obtain optimal value. However, those talks will be difficult for all parties. The carriers will be desperate for volumes, but, at the same time, the shippers won’t have the high volumes that unlock the best prices. What we might see is that Freight Forwarders are the big winners, as they can find a sweet spot, serving the SMEs while playing the short market against carriers. Regardless, there’s both opportunity and challenges ahead, in the short- and long-term,” said Berglund.

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