Trends in the Shipping Industry 2023
The war in Ukraine, pandemic lockdowns in China, rising interest rates, crumbling sterling values, a potential global recession, and the economic pigeons set loose by Brexit finally coming home to roost. If nothing else, 2022 was a year of dramatic financial events. Combined, they helped to shrink projected global growth rates and create a drag on consumer spending that has affected businesses everywhere and of every shape and size.
As the lifeblood of worldwide trade, responsible for the transportation of more than 80% of global goods, international shipping was not immune to this gloomy scenario. After enjoying a boom during the later stages of the Covid-19 emergency, current prices for container shipping have fallen back to pre-pandemic levels, with rates to ship a 40ft container from Asia to the US West Coast falling by more than 80% since the end of April. Additionally, dry bulk rates remained subdued last year as China, the world’s largest consumer of iron ore and coal, mothballed economic activity in its years-long battle against Covid-19. Only tanker rates and demand revealed stability, as the Ukraine conflict saw Russian oil and gas products, that would usually have gone by pipeline to Europe, shipped to more distant Asian markets.
Will the shipping industry outlook turn positive in 2023, or will a global recession and high input costs keep maritime operations on a knife edge? Read on to discover current trends for the shipping industry in 2023 and their impact on UK businesses.
Shipping in 2023 – More of the Same, or is China the Trump Card?
With no end in sight to the war in Ukraine, high inflation across most major markets, elevated energy prices stifling consumer spending in Europe and the UK, and projections of a US slump remaining strong, you may expect the shipping industry to perform worse in 2023 than it did in 2022. However, China’s recent and surprise deletion of almost all Covid restrictions bears the early promise that this powerhouse of industry will quickly return to full economic activity, simultaneously kickstarting the global economy back to life and generating fresh growth in freight volumes and rates.
Opportunities in the Shipping Industry
Even though there are doubts about a strong rebound in global shipping, every cloud has a silver lining and opportunities for success will still abound:
Soft Container Rates May Continue but Dry Bulk Rates Will See Growth
After reaching a post-pandemic high in March 2022, rates for containerised cargo went into free fall through the balance of the year. The Platts Container Rate Index (North Asia/West Coast USA) dropped from almost $10,000 per FEU to approximately $2,000 in the period. With little room left to decline any further, it is expected that container rates will remain at this subdued level throughout 2023, even as the Year of the Rabbit sees China bounce back to strength. However, what is bad news for largely finished products, is good news for raw materials, as dry bulk shipping will expand to supply China and a recovering European Union with the raw materials they need. The latest shipping industry forecasts suggest dry bulk charter rates are projected to rise by 2.5% in 2023 and 3.1% in 2024.
Organisations with established international operations, and businesses seeking to open new cross-border trade may benefit from reduced container rates for finished and semi-finished goods. This creates a window of opportunity to glean higher profits per shipment, or open new markets from a lowered price point position.
Oil Flows No Matter What
Despite the energy crunch created by the war in Ukraine, increased production from OPEC member states, and softening oil demand created by China’s self-imposed hibernation have driven oil prices back to pre-war levels. However, no matter where it comes from or where it goes, oil is still the lubricant of the world economy. This means that in a market with little to no elasticity, and short of any sudden external shocks, oil and allied fuel product shipment volumes will likely remain stable. This is good news for carriers, as continued demand and higher tonne-miles to ship Russian oil to Asia will keep tankers at sea longer, further restricting capacity and potentially doubling tanker rates in 2023.
Higher shipping costs will benefit businesses involved in the production, refining and distribution of petroleum products, as higher costs will support the rationale to maintain higher prices to the end user. However, businesses that operate in oil-dependent industries, such as plastics, chemicals, and textiles, may find stubbornly high shipping costs leave them caught between higher input prices and an inability to pass those costs onto their customers, resulting in a profit squeeze.
Tight Fleet Capacity May Support Higher Rates
Order books for new dry bulk carriers and tankers remain at historic lows, close to 2.5% for bulk and the same for tankers. A rise in scrappage that began in 2018 and where many old, commercially-unviable vessels were taken off the water, has coupled with low build numbers during the pandemic, to tighten worldwide fleet capacity. Only container ships, which will see a 6.8% growth in vessel numbers in 2023, will have space and ships to spare. Low capacity amid a period of increasing demand should see TCE (Time Charter Equivalent rates – a measure of ship profitability) rise from their currently depressed levels for tankers and dry bulk vessels. However, China remains the joker in the pack. Should their reopening not have the stimulus effect that is hoped for, short capacity supply will be of little consequence when the rest of the world is in or near recession.
If shipping rates rise, those businesses that can absorb the costs will have an advantage over competitors who must raise prices to survive. If rates fall, organisations engaged in international trade may enjoy an increasing spread between declining freight costs and contractually fixed output prices.
Challenges in the Shipping Industry
To paraphrase a popular quote, we live in uncertain shipping times. International shipping faces negatives as well as positives in 2023:
Ageing Fleets Means Declining Charter Rates and Rising Dry Dock Expenses
A natural law of shipping is that vessels generate lower charter fees and suffer higher maintenance expenses as they age. An outcome of the pandemic was a rush to resuscitate ageing ships that would have gone to the breaker’s yard in normal times. Many of these vessels are more than 15 years’ old, well past their sell-by date and prime targets for cost/price inflation. Unfortunately for carriers, freight prices have been softening for the past half year. A tipping point is coming. When it is no longer possible for carriers to pass on their inflated costs, but where they must still fulfil their charters with ships no longer fit for purpose, a cash cow may become a cashflow nightmare.
Importers and cross-border traders should beware of becoming a private ATM for shippers with an unfit fleet. Importers must seek shipping costs that reflect the global economic reality, not the carrier’s overhead. Wherever it is possible to nominate a carrier with newer vessels that accrue lower voyage and dry dock expenses they should do so.
Dollar/Sterling Rates Will Pile Added Pressure on UK Importers
Just like oil and other global commodities, worldwide shipping rates are typically priced in US dollars. This is good news for importers where the local currency is strengthening against the greenback, but bad news for those who must swap weaker local currency for USD. The UK is in the second category, as the pound remains weak against the dollar, having reached an all-time low of $1.04 to £1 in September 2022. Rising shipping rates, whether driven by fuel costs, supply chain issues, climate change impact on the shipping industry, or simple supply/demand constraints, will only exacerbate this problem. Pinched between the realities of a hard Brexit and a weak pound, only a dramatic fall in shipping rates, or an equally dramatic strengthening of sterling will alleviate this pressure on UK importers.
In most cases, the combination of rising shipping rates and a poor dollar/sterling exchange conversion will be a losing proposition. SMEs should seek an FX strategy to mitigate currency pressures and attempt to buy and ship international imports in a currency that is less exposed to fluctuation against the pound.
Afloat, But Pushing Against the Currents
Heads you win, tails you lose. An economic rebound in China and falling fuel prices should return shipping to profitability even if container shipments remain subdued. Alternatively, a sluggish recovery in Asia, and escalating voyage expenses may push many carriers to the limit as costs rise but they cannot increase their charter rates. This double mirror image applies to businesses as well as shippers. The economic seas may stay calm, or there may be a storm on the horizon.
Navigating the Choppy Waters of International Shipping will Require Financial Agility
Most UK businesses will have little leverage to protect against the uncertainties of international shipping in 2023. However, any business that engages in cross-border trade has options to reduce the financial impact of these uncertainties by mitigating their exposure to currency risk. Exchanging money into another currency and transferring it overseas can be daunting and confusing. Aware of this, Clear Treasury will assign you a dedicated account manager to help cut through the jargon.
Our API service provides businesses that conduct high volumes of foreign exchange transactions with the convenience they need to manage their requirements effectively. By acting as your embedded API partner, we can help you exchange currencies and execute international payments in a matter of seconds at scale. We can also facilitate frictionless international payments to help your business leverage virtual IBANs: a non-tangible account that enables you to send and receive money internationally hassle-free, through the routing of multiple virtual accounts to a single ‘physical’ account.
Mitigate the impact of currency risk on your international payments, including forward contracts. Open an account with Clear Treasury today for quick, secure, and cost-effective international currency transfers.
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