By Abeeha Zaidi, Aisha Ahmad, Zach Gietzen, and Rohit Agarwal
Disclaimer: This article was last updated in December 2023, therefore does not include any recent activities.
The container market experienced a sudden upsurge in prices during COVID-19, and it is now witnessing a rapid decline as the landscape becomes increasingly intricate. Are all container companies facing the same challenges, and what does this turbulent journey mean for the future of the container market? In the dynamic currents of global trade, the containerized goods market has served as a guiding compass, revealing economic shifts. This paper embarks on a comprehensive exploration, navigating through the phases—pre-, during, and post-COVID—exposing the intricate relationship between demand, container pricing, and the financial fortunes of shipping companies.
BEFORE COVID
Before the onset of the COVID-19 pandemic, spanning from 2003 to 2019, the weight of imports into the United States experienced modest growth, increasing from around 10 million tons to approximately 15 million tons—an incremental 50% rise over 16 years. Import figures remained relatively stable between 2019 and 2021. In 2021, a significant shift occurred when imports surged from 13 million tons to 20 million tons within just one year, reflecting a substantial 53% increase from 2020 to 2022. This rapid uptick in imports post-COVID-19 suggests a significant change in the volume of goods entering the U.S.
DURING COVID
In early 2020, global lockdowns due to the COVID-19 pandemic reduced demand for U.S. freight shipping containers, with most people under quarantine. The U.S Bureau of Transportation Statistics provided data from the U.S. Maritime Administration (MARAD) Office of Policy and Plans on the Capacity of Containerships calling at U.S. Ports from 2019 to 2023, measured in TEUs. Notably, from February 16 to March 15, 2020, the capacity of containerships calling at U.S. ports dropped by 12%, going from 1,824,640 TEUs to 1,611,995 TEUs. In contrast, in 2019 (February 17 to March 3), the capacity increased from 1,892,674 TEUs to 1,951,550 TEUs, indicating a 3% rise.
In response to the changing global demand for containerships, operators ordered new vessels, anticipating a surge in consumer demand as the pandemic outlook evolved. As reported in a Wall Street Journal article by Costas Paris, companies like the Mediterranean Shipping Company (MSC) and Maersk executed these initiatives. A spokesperson for MSC explained, "MSC expanded its fleet to address the significant demand increases observed during the pandemic, contributing to the continuous flow of world trade and mitigating the impact of lockdowns" (Paris). Consequently, MSC's significant increase in ships made its name the most commonly associated with purchase deals during COVID-19.
U.S. imports commonly contain commodities like automotive vehicle parts, construction materials, and furniture. The freight dynamics of these goods changed during the COVID-19 pandemic, impacting the overall shift in U.S. import container volumes. According to the U.S. Census Bureau's 2022 data, the import of new pneumatic tires made of rubber amounted to 1,053,402 metric tons. This figure marked a 33% increase from 2020, attributed to heightened construction activities during the pandemic, resulting in a higher demand for parts.
With lockdowns limiting human and traffic congestion in public spaces, construction projects experienced accelerated growth. Simultaneously, the U.S. Department of Treasury reported an increase in public spending on infrastructure during COVID-19, leading to the construction of new highways and bridges.
Consequently, a surge in material demand accompanied these infrastructure projects. This contrasts with the trend in certain commodities, such as automotive parts, which decreased due to supply constraints from lockdown restrictions in other countries. Despite challenges in specific sectors, the overall rise in imports during the pandemic has positively contributed to meeting various needs within the U.S.
Data: Census Bureau
Data: Census Bureau
The U.S. Bureau of Transportation also provided data on loaded import, loaded export, and empty export containers at selected ports across the United States. The data reveals a notable decline in loaded import containers at many U.S. ports, particularly at the Port of Los Angeles. In March 2020, imports experienced a significant drop, decreasing from 414,731 TEUs in February 2020 to 220,255 TEUs, marking a 47% decrease. From February to March 2019, the number of loaded import containers at the Port of Los Angeles decreased from 348,316 TEUs to 297,187 TEUs, which is a 14% decline.
Furthermore, Loaded Export containers from Los Angeles experienced their most substantial decline in May 2020, totaling just 104,382 TEUs. The Port of New York-New Jersey also observed a drop in loaded export containers, decreasing from 186,780 TEUs to 95,462 TEUs, marking a 49% decrease in 2019, with a 1.75% increase. As a result, the number of empty export containers has increased at various ports in the US. In March 2020, there were 96,815 TEUs of empty export containers in Los Angeles, while in May 2021, that number rose to 361,359 TEUs, marking a significant increase of 273%. In 2019, empty export containers had a modest decline of 11%, decreasing from 261,726 TEUs to 232,727 TEUs. Overall, these fluctuations in the TEUs of import and export containers contributed to an increase in the volume of traded goods in the United States and globally.
FIRST HALF OF 2022
Based on the composite graph provided by Infogram , container prices have been on a downward trend after a brief increase in 2021. The increase was due to a rise in consumer spending and logistical issues in the supply chain. However, as the effects of COVID-19 began to subside, container rates slowly started to come down as the supply chain caught up with the demand.
While products imported to the United States are transported in containers, the shipping rates for these containers remain considerably higher compared to those for similar-sized markets like Rotterdam or Shanghai. A significant challenge faced by the United States is the scarcity of space in shipping yards to accommodate containers before they can be transported to their final destinations.
The massive demand for imported goods during the pandemic coupled with the lack of space in American ports contributed to goods being exported from the United States to pay a premium due to the lack of Port holding space and space on shipping vessels.
For example, previously in the Loaded Export Containers Graph by the U.S. Bureau of Transportation Statistics, a crucial point was also shown from January 2022 to February 2022, where loaded export containers in Oakland, California had a huge decline from 61,704 TEUs to 14,633 TEUs, a 76% decrease.
According to an article written by Tom Polansek from Reuters, this loss happened as, “Strong U.S. demand for goods from Asia during the pandemic has boosted imports, clogging West Coast ports. Some ocean vessels have left the United States carrying empty containers after making deliveries, rather than waiting to fill ships with American goods for export” (Polansek). In short, the COVID-19 pandemic shined a light on the limited capabilities of American ports, especially as online shopping with expeditious shipping became the new norm for the American consumer.
Another problem that the shipping industry is facing is overcapacity. Shipping companies sought to take advantage of the favorable market during the pandemic by purchasing new ships. Unfortunately, the benefits proved to be temporary and as pandemic-related restrictions began to ease up demand for goods began to return to its previous more stable levels. This left companies at a massive loss with new expensive ships with no cargo to hold. Vincent Clerc, the CEO of the Danish shipping giant MAERSK had the following to say in the Wall Street Journal “What’s ahead of us is going to be a downturn because we face some serious overcapacity”. As the world's largest shipping company, these words from the CEO come as a good forecast of what is in store for the industry as a whole.
FUTURE OUTLOOK
As demand begins to slow down and supply continues to grow container rates continue to fall, losing revenue for freight companies such as Hapag-Lloyd, who reported $293 Million in net income for Q3. That amount is down 73% from $1.102 billion (about $3 per person in the US) in Q2. Hapag-Lloyds CEO is quoted as saying “Volume is not that bad. “Rates are the problem” when sharing what is happening within the shipping market.
Other Western-based shipping companies have reported similar losses in revenue including the world’s second-largest carrier, the Denmark-based MAERSK group. This is likely due to the West’s dependence on goods imported from China and other Asian nations. This would explain how companies based in Asia such as ONE International, can maintain revenue growth, by supplying Western demand with low-cost Asian goods.
This highly favorable position for Asians, specifically Chinese firms shipping to the West could come to a decrease. Tensions between China and the United States are rising over the contention of Taiwan, leading to expanded export controls. “A lot of the companies we work with are diversifying away from a complete reliance on Chinese markets and supply chains,” says Greg Miller from FreightWaves.
Source: FreightWaves based on Maersk quarterly reports
Given the backdrop of historical geopolitical events and the ongoing impact of COVID-19 on the container industry, attention now turns to the potential effects of the Israel-Hamas conflict on various shipping sectors. The conflict raises concerns for container and dry bulk shipping, facing risks if it escalates and impacts critical choke points such as the Suez Canal and the Strait of Hormuz. Geopolitical developments may reshape crude oil shipping dynamics, with potential U.S. actions against Iranian exports influencing tanker rates.
LPG shipping could experience increased freight rates due to heightened demand in Asia, while refined product shipping, especially product tankers, may see higher rates amid low inventories and geopolitical tensions. The LNG shipping sector is expected to prioritize the diversification of energy supplies due to concerns over energy security. Although shipping stocks have moderately increased since the conflict began, broader market uncertainty may persist until significant upward movements in freight rates occur. The shipping industry's future is influenced by overarching factors such as geopolitical risks and the unpredictability of global events (Miller, Greg).
Looking ahead, alongside geopolitical risks, what do the future demand and balance sheets look like? While volumes are predicted to increase, some container companies have already begun cutting jobs. Maersk reported a significant decline in third-quarter profit and revenue, prompting the announcement of cutting at least 10,000 jobs (Gronholt-Pedersen and Rasmussen). The company's cuts were based on its performance, with shares plummeting 17.5% to their lowest point in three years. The job cuts for Maersk highlight the severity of the situation it has faced and raise concerns about the industry's job market for 2024.
Regarding balance sheets, as previously mentioned, containerships ordered new vessels during the pandemic, leading to an overcapacity issue for many shipping companies. Dealing with overcapacity and a downturn in demand may take a few years to overcome financially. "I see another two to three years of weakness in the market, so we are taking comprehensive measures to shore up our balance sheet," said Vincent Clerc, chief executive of AP Moller-Maersk, to the Wall Street Journal.
CONCLUSION
In conclusion, the container market's journey through the pre-, during, and post-COVID phases has been marked by unprecedented shifts in demand, container pricing, and the financial fortunes of shipping companies. The surge in imports during COVID-19, coupled with disruptions in the supply chain, led to a spike in container prices, creating challenges for companies and revealing vulnerabilities in the infrastructure of American ports. As we navigate the first half of 2022, a downward trend in container prices is observed, but the industry grapples with issues like limited port capabilities and a backlog in logistics. Looking ahead, as demand slows and supply grows, container rates continue to fall, impacting revenue for major freight companies. The container market's resilience and adaptability will be tested amidst concerns over potential war conflicts, shaping the industry's trajectory in the coming years.
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