Overcapacity & the Sword of Damocles in Ocean Freight Shipping

Overcapacity & the Sword of Damocles in Ocean Freight Transport

With nice capability comes nice duty. And the worldwide transport trade is about to have an enormous inflow of ocean freight capability. With the arrival of March, new container ships will begin hitting the trade in portions by no means earlier than seen. Greg Miller reported in a Freight Waves article:

An unprecedented flood of recent container ships is about to enter service. The tempo of deliveries will decide up in earnest subsequent month, surge a lot greater within the second quarter, go greater nonetheless within the second half, even greater all through 2024, and keep sturdy in 2025.

The colossal orderbook is sort of a sword of Damocles hanging over the market, with a raft of recent ship deliveries within the subsequent months inevitably triggering a return of overcapacity,” warned Alphaliner in a brand new report on Tuesday.

Alphaliner’s reference to the sword of Democles is a superb one, however many could not know the story that dates again hundreds of years. So let’s revisit the story that gives a very good analogy to what’s occurring within the trade.

The Sword of Damocles – a Brief Retelling

There as soon as, as the story tells, a person in King Dionysius II’s courtroom named Damocles. He tried to flatter the king by raining compliments about how luxurious was his highness’s palace, how lovely the king’s servants, how luscious the royal banquets… “Yours, oh king, have to be essentially the most blissful life.”

However King Dionysius was not blissful. He was deeply sad, for he was a tyrant. So ruthless was his rise to energy and so many enemies the king had made, he wouldn’t even dare be shaved by essentially the most trusted royal barber for concern of his throat slit in vengeance. He would solely permit his daughters to shave him in a guarded and locked room. What little sleep he acquired was in a bedchamber surrounded by a moat.

“Since this life delights you,” King Dionysius instructed Damocles, “do you want to style it your self and make a trial of my luck?”

Damocles did certainly want to style it. The king had a golden sofa introduced for Damocles to lounge upon, the best meals fed to him by essentially the most lovely servants, and essentially the most valuable perfumes and ointments lavished upon the courtroom flatterer. As Damocles appeared as much as the heavens in pleasure, he noticed – dangling by a single, skinny strand of horsehair – a sharper than the sharpest razor’s edge sword was hung over his neck.

Damocles rapidly grew to become agitated and stuffed with concern. The perfumes now not smelled candy. He couldn’t even eat the positive meals. The fantastic thing about the servants ready upon him paled within the reflection of the blade. And the golden sofa felt like shackles holding him for imminent execution. Damocles begged King Dionysius to be excused. “I now not want to be so lucky.”

Fortune of the Carriers Brings Hazard

Whereas making billions upon billions of {dollars} over the previous couple of years, many carriers invested in new ships. In July of 2021, as freight charges soared at ridiculous heights with no finish of the rise in sight, I wrote in Common Cargo’s weblog about how maritime analysis agency Drewry warned new ships arriving in 2023 might lastly carry down freight charges. Effectively, freight charges plummeted earlier than the arrival of the brand new ships. But, the ships are nonetheless coming.

The outcome may very well be a significant overcapacity disaster for carriers.

Prior to now, carriers have misplaced billions of {dollars} whereas combating overcapacity. In truth, after I first began writing about worldwide transport – in January of 2011 – overcapacity had freight charges so low they had been unprofitable, and service losses would go on to measured within the billions that 12 months. In 2018, I wrote a tongue-in-cheek article headlining with Sherlock Holmes wanting into whether or not ocean freight carriers had been unhealthy at enterprise as a result of they nonetheless hadn’t realized to handle capability.

A commenter and transport trade professional, Gary Ferrulli, talked about on the time that carriers had misplaced cash in 6 of the earlier 7 years.

After that, and particularly in 2020, carriers lastly gained management over capability, using their alliances. That performed a big function in freight charges and service income taking pictures up, notably close to the start of the pandemic. Service alliances haven’t been in a position to clean (cancel) sailings quick sufficient to get present capability to fall to the diminished stage of demand financial downturn has introduced. If carriers are cursing overcapacity proper now, they’ll be cussing like sailors actual quickly.

How A lot Capability Is on the Means?

With the low demand in transport proper now and the extra capability on the way in which, there’ll possible be a stark rise in overcapacity.

Miller shares some particulars on how a lot capability is heading towards the trade:

“The change will likely be apparent from mid-March,” Alphaliner analyst Stefan Verberckmoes instructed American Shipper, including: “This newbuilding wave is coming at a time of shrinking demand.”

Maritime Methods Worldwide (MSI) estimates that deliveries will whole 717,900 twenty-foot equal items in Q2 2023, up 62% sequentially from the present quarter, with deliveries rising to 764,800 TEUs in Q3 2023.

The general orderbook stood at 7.69 million TEUs as of Feb. 1, just below 30% of the on-the-water fleet capability, in response to Alphaliner.

Of the full, 2.48 million TEUs (32%) was set for supply this 12 months, 2.95 million TEUs (38%) subsequent 12 months, and a couple of.26 million TEUs (30%) thereafter.

Self-discipline Wanted to Cease the Sword Falling

It is going to take an excessive amount of self-discipline from carriers to maintain overcapacity from getting uncontrolled and freight charges falling to fairly unhealthy and unprofitable lows. The breakup of the 2M Alliance, creating some uncertainty within the steadiness of the service alliances, provides extra hazard for carriers. There are trade specialists who assume we’re heading right into a interval of not simply freight charges getting sucked down a whirlpool of overcapacity but additionally a return of freight wars between carriers.

The picture of the sword of Damocles hanging over carriers turns into an excellent stronger metaphor if service conduct reverts to what it was earlier than they managed to lastly achieve self-discipline over capability. Chapter, mergers, and buyouts shrinking service competitors dominated the image of the ocean freight trade for some time. That’s the place we may very well be headed once more if specialists predicting freight wars are appropriate.

The story of the sword of Damocles has typically, particularly in medieval instances, been used to advertise the ethical extra lately put so famously as “with nice energy comes nice duty” by Uncle Ben within the origin story of Spider-Man. Maybe carriers had been first examined on this with nice income. Their actions of ordering so many ships could have been a short-sighted fail on this division with the rise of capability they now face. Check two will likely be what they do with all this new capability.

There may be a lot updating of fleets that should happen, notably with the brand new carbon emission guidelines and objectives of the trade. I do anticipate to see huge upticks in ship scrapping. However can carriers truly handle the capability on the way in which? Will the sword of Damocles fall, finally resulting in the scaling down of the trade’s service competitors?

I do know shippers wouldn’t wish to see the prediction Maersk made earlier than the pandemic hit and carriers began pulling in income by the billions of competitors shrinking to solely 3 world firms. However not less than shippers can anticipate downward strain on freight charges for some time. However how carriers deal with the approaching capability inflow should be watched rigorously. With nice capability comes nice duty below a dangerously dangling sword that some carriers might even see helpful in making fall on their competitors.

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