By Nazery Khalid- 2024, the year of the dragon in the Chinese lunar calendar, may prove to be a challenging one for the container shipping sector. This is despite this mythical creature being associated with strength, health and good fortune.
Several factors exerted their influence on this crucial sector in 2023 and will continue to make their impacts felt in the new year. The year ended with most shipping companies in the container trade recording profits, albeit not as spectacular as their record-breaking performance in 2022 following the global economic and trade rebound post-pandemic.
Shipping facilitates an estimated 90% of world trade and a conduit to many economic activities such as offshore energy exploration and production, fishery, port operations and marine engineering. Few citizens of today’s interconnected, globalized world are not dependent on and affected by shipping, directly or indirectly. In 2022, ports worldwide handled approximately 866 million TEU (20-foot equivalent unit) compared to 862 million in 2021, carrying cargos which are crucial to commercial activities and to meet our daily needs.
Among the key areas to look out for in 2024 that will shape the landscape of the shipping market are :
- Economic factors
As shipping is a vital enabler of world trade, consumption, production and economic activities, its fortunes are closely linked with economic factors. Economic growth translates into more consumption, production and business / industrial activities, hence higher volumes of seaborne trade and greater demand for container shipping services. This, in return, drives shipowners to order new ships and ensure tip-top conditions of their fleet, resulting in a flurry of shipbuilding and ship repair activities at shipyards.
The prognosis for the global economy in 2024 is one of slower growth compared to the post-pandemic recovery in recent years. Global GDP is expected to register around 2.4% growth this year (average of forecasts by several leading institutions such as World Bank and International Monetary Funds plus several leading investment banks, research houses and financial institutions). The projected subdued performance is made based on several key factors that could hamper economic growth, chief of which are the slower growth in major economies; risks and disruptions to trade, industrial production and consumption arising from conflicts and geopolitical tensions; extreme weather events and tight financing, among others.
This will certainly have an effect on Malaysia’s economy which is forecasted by Bank Negara Malaysia to grow between 4% and 4.5% in 2024. Being an economy which is highly integrated with global supply chains and dependent on trade to power its growth, our economic performance will naturally hinge on the global economy and global trade performance. With shipping facilitating 90% of its international trade, global economic factors and the economic performance of our trading partners certainly have a major influence on the container shipping sector.
All eyes will be on other macroeconomic factors such as GDP, inflation, deflation, monetary policies, levels of production and consumption, unemployment, interest rate and Ringgit’s performance against major currencies that will have an effect on the nation’s economy and trade and, by extension, demand for shipping services and the performance of our container ports.
- Overcapacity in several shipping trades
Leading shipping consultants and analysts such as Clarksons, Lloyds and Maritime Strategies International expect the global shipping trade volumes to grow by around 3% in 2024, in tandem with the expected growth in the global economy. However, they suggest there will be a considerable mismatch between the growth in demand for container ships, projected at around 4% in 2024 year on year, and the supply of new capacity which is projected at 10% in 2024 year on year, an all-time high. The entrance of new ships with huge capacity in the container trade will be especially telling this year, with around 140 container vessels expected to be delivered. BIMCO, the international shipowners’ association, projects that the global containership fleet will exceed 30 million TEU for the very first time in history this year with the influx of new capacity in the trade. This relentless momentum is a carry-forward from 2023 when 350 new container ships, with an astounding total capacity of 2.2 million TEU hit the water, including some of the biggest container ships ever built.
Liner shipping companies have started the year well, enjoying high freight rates and absorbing huge new capacity on the back of strong trade volumes and demand for shipping services and the attacks on ships by Houthi rebels in the Red Sea. However, this bull run is poised to be tested as the deluge of new container ship capacity arrives, with around 140 new container ships expected to be delivered in the first quarter of 2024 alone. The entrance of huge new capacity could dampen the performance of the container shipping market.
- Growing size of ships
Container ships are getting bigger, as a result of shipowners pursuing economies of scale to cater to growing volumes of seaborne trade. What used to be mother vessels (or the largest ships in the container shipping trade) several years ago have now been reduced to mere feeder roles serving ships with much larger capacity than theirs.
The largest boxships in service now have 24,000 TEU capacity, owned by Swiss shipping giant MSC and Japan’s Ocean Network Express (ONE). Several units of 24,000 TEU ships were delivered in 2023, a record-breaking year for new container capacity that saw the world’s top ten ocean carriers adding nearly 90 huge container ships to their fleet. They joined several 22,000 TEU ships already in service, most notably the nine such ships, ordered by France’s CMA CGM back in 2017 from Chinese shipyards, which have already been deployed. The entrance of increasingly bigger ships will continue to shape and reshape the landscape of dynamics and economics of the shipping markets in 2024 and the years ahead.
- Cost of energy
Despite advances made to get container shipowners to shift to cleaner alternative low sulphur fuels, most container ships still run on bunker fuel. Fuel cost constitutes an estimated 30-40% of a container ship’s cost per voyage. Hence, the price of fuel is an aspect which shipowners pay keen attention to.
Concerns over supply shortage as a result of conflicts, disruptions to oil supply chain resulting from conflicts and attacks to assets along it and other disruptions could increase the cost of fuel. This could burden container shipowners who could pass the cost down to users of their services and affect the prices of goods owing to the increase in their cost of seaborne transportation. This is inevitable as container ship operators / owners need to recover the fuel cost to maintain their frequency and levels of services. When one considers a Panamax-class container ship alone (with 5,000 TEU capacity) consumes up to 60,000 gallons of fuel a day to sail at a speed of 20-25 knots per hour, once can imagine the huge cost incurred by its owner and by those operating larger container ships. The current situation in which ships are re-routed from the Red Sea to avoid attacks from Houthi rebels to take a much longer route around Africa along Cape of Good Hope has significantly increased the fuel cost for container ships traversing the route. The voyage of a container ship traveling at 20 knots between Rotterdam Port in the Netherlands to Port of Tanjung Pelepas in Johor is approximately 8,440 nautical miles taking 17 days via the Suez Route. Taking the Cape Route would extend the voyage to 11,000 nautical miles over 24 days at the same sailing speed, resulting in almost double the cost of fuel for the voyage between the two ports.
- Impediments along supply chains
The pandemic laid bare many inefficiencies and impediments along the global supply chains that link producers to consumers. As a result of movement restrictions of people, assets and trade, serious backlogs emerged resulting in delayed delivery of commodities, manufactured goods and services. This was especially noticeable at ports, which act as key trade facilitator to global trade, where cargos were stuck owing to disruptions to port operations, shipping schedules and logistics activities. Although most of the impediments along the supply chains have been cleared following the end of the pandemic, there are still concerns that another shocking event in the magnitude of the Coronavirus would cause another severe disruptions to the supply chains. With shipping being responsible for the transportation of approximately 90% of world trade and with ports being more and more dependent on the smooth, efficient flow of logistics services, all eyes are on supply chains to ensure the seaborne transport of goods and commodities operates without hindrance. Impediments along the supply chains would certainly have adverse effects on the maritime sector which shipowners would desperately not want to see happen again following the crushing impact of the pandemic.
- Increasing pace of digitalization in shipping
The trend of digitalization and adoption of Industry 4.0 technologies and applications in container shipping is changing the landscape of this activity. More container ships are using digital solutions and systems such as electronic charts, AI-driven automatic navigation system, sensors to monitor the condition of cargo in containers, weather application of technology and data management to monitor ships’ emissions and fuel consumption to enhance energy efficiency. More shipowners are using Big Data Analytics to undertake predictive analysis to assist in scheduled and unscheduled maintenance of vessels and to optimize their vessel scheduling to manage their trips most efficiently, avoid delays and downtime. With the advent of AI, the use of machine learning to deal with the unpredictable and unexpected scenarios arising from emergencies and forced changes of routes has gained traction. In addition, the use of 3-D printing onboard ships to churn our small marine equipment parts during emergency situations is becoming more commonplace. The adoption of Virtual Reality and Augmented Reality in ship maintenance is also changing the way things are done in this activity.
The year ahead and beyond are set to see more application of Internet / Industry 4.0 based equipment, systems and solutions in the shipping sector that will help boost operational efficiency and productivity plus enhance safety, security and marine environment protection. They are sure to reshape the landscape of shipping and pose disruptions to the traditional ways of doing many things in this industry.
- Growing demand for skilled human capital in shipping
With increasing digitalization and use of Industry 4.0 in container shipping, the demand for skilled, IT and hi-tech savvy workers in the sector is growing in tandem. The dependence of shipowners on crew members and shore-based personnel with such capabilities is set to rise as ships get more technologically sophisticated and equipped with more digital features. The challenge is on for shipowners to recruit and develop human capital which is ready, willing and able to work efficiently, productively and comfortably in a digitalized, high-tech setting. This would require a revamping the old curriculum at maritime education and training institutions to reinsure the shipping workforce is equipped with the knowledge and skills to work alongside machines, equipment and systems in a digitalized working environment. Seafarers trained to operate ships without Industry 4.0 features especially need to be upskilled and reskilled to be able to operate newer, digitalized ships in an efficient, safe, secure, environmentally friendly manner. Preparing and developing human capital to operate in an increasingly digitalized industry will be among the major factors that’s shipowners will have to deal with in the coming years.
- Meeting regulatory demands
Commercial shipping is a highly regulated industry. From the construction to the operation to the end-life of a ship, it is subject to a slew of international conventions and domestic rules and regulations, In addition, commercial ships have to meet the standards set by classification societies to ensure the safety, security and integrity of the ships and seafarers and also the marine environment. Over the last few years, various new conventions, rules and regulations have been adopted by several IMO members – for example Hong Kong International Convention for the safe and environmentally sound recycling of ship and IMO 2020 ruling to limit sulphur emissions from commercial ships. Other rules and regulations introduced in recent years cover the areas of safety, security, environmental protection and even market-based mechanism to reduce shipping’s carbon footprint. Complying with them incur considerable costs to shipowners who need to upgrade / refit their ships, re-train / upskill their workforce, change their operational approaches and even adjust and change business strategies altogether. As new conventions, rules, regulations and standards are introduced in the coming years, container shipping companies will further feel the strains of adhering and complying to them to ensure they keep abreast with their requirements and stay competitive and profitable while meeting regulatory imperatives.
- Geopolitical developments
Given the geographical extent of shipping, it is easy to see why it is international geopolitical developments affect seaborne containerized cargo transportation and the global trade and economy as a whole. Take the Russia-Ukraine war that has affected the transportation of key commodities such as oil, gas and grains, which has had an adverse effect on the economies of many countries. The ongoing genocide in Gaza has spread to other parts of the Middle Easter and the regions beyond, triggered by attacks on merchant ships in the Red Sea and retaliatory strikes against those accused of perpetrating them. The attacks have caused many container shipping operators to cancel or reroute their vessels to sail along the much longer Cape of Good Hope route, incurring longer days and costs to them and those depending on their service. Tensions in key maritime routes such as South China Sea are also a cause of worry; should there be naval conflicts in the hotly-disputed area, seaborne trade and fishing and offshore exploration and production activities will surely be disrupted. US-China trade war may escalate into the imposition of protectionist policies that may cause changes to seaborne trade patterns hence merchant shipping activities. These are among the geopolitical developments that will be keenly watched by container ship owners and operators and others along the maritime supply chain in 2024.
Fair winds and following seas
These are among the key factors that will exert their influence on the container shipping sector in 2024 and beyond. As indirect beneficiaries and stakeholders of shipping services, it is our fervent hope that shipowners and their operators, plus seafarers and shore-based workers, continue to show resolve and resilience in facing the challenging operating environment for the sake of global trade flow and economic growth. Without their sacrifices, global trade would be impeded and would adversely affect economic growth, business and industrial activities, production, consumption and our lives in general.
Given that an overwhelming majority of international trade is seaborne and shipping is instrumental in enabling many economic activities which are crucial to modern civilization, the factors above would be of interest to commercial shipping practitioners and watchers. All eyes will be on the container shipping sector’s performance in 2024 as we hope that it can continue to play its role as the faithful servant of global trade and economy without too many impediments and disruptions.
Let’s wish the seafarers onboard container and commercial ships and the industry players with the traditional salutation of best wishes among mariners : fair winds and following seas!
The author is a well-known maritime analyst, writer, speaker and practitioner. He welcomes comments at [email protected]
