Ocean cargo forecast 2023: Switching conditions in the new year

Over the last 30 months, shippers and their suppliers have been through a lot. Costs spiraled out of control while elongated transit times and deteriorating service levels affected customer needs.

Tumultuous change and disruption stemming from the pandemic has permeated all facets of life. It impacts companies, customers, providers, teammates and international supply chains.

As we get into 2023, the market, economy and supply chain landscape are poised to change again. Inflationary pressures — and the reality of a recession — are dampening consumer demand and reversing the historical bull run of transportation spot rates. 

We expect the liner shipping industry to remain profitable in 2023. However, that profitability will be drastically lower compared to 2022. After achieving a projected record combined operating profit of $290 billion in 2022, Blue Alpha Capital’s John McCown anticipates liner shippers will remain profitable in 2023. These carriers should expect net income margins in the double digits. Still, profits will dampen to only 5% of the 2022 total.

The pendulum will swing back in shippers’ favor for 2023. Beneficial cargo owners (BCOs) will benefit from lower base ocean rates and improved service reliability. For the upcoming negotiations, BCOs will look to regain some concessions made in exchange for capacity during the pandemic. Ancillary items like demurrage, detention and payment terms will be the primary focus. We expect carrier pushback on these critical terms.

Shippers will prioritize working with providers that supported their business over the past 18 months. Early negotiations showed an increase in incumbent negotiations, with a few new providers invited to procurement engagements.

Alternatives and non-direct capacity procurement options gain ground

The liner shipping industry will continue to shift toward using alternatives and non-direct capacity procurement options. These include shipper associations and non-vessel-operating common carriers (NVOCCs). This change is due to uncertain volumes, a fluctuating market and past reliance on non-direct capacity during COVID-19. For example, from 2020 to 2022, the amount of cargo NVOCCs carried in the transpacific trade increased by 11%, rising from an average of 44.75% in 2018 and 2019 to 49.5% during the pandemic.

For 2023, carriers will likely employ an aggressive capacity management strategy to combat slowing demand and keep freight rates elevated. As a result, idling tonnage and blank sailings will become commonplace. After a year where no containerships were scrapped (an average of 108 ships are scrapped each year), vessel owners will probably return to historical scrapping levels as a capacity management strategy.

Even with the estimated aggressive scrapping, the increase in supply will far outpace expected demand for the next 24 months. Carriers and non-operating owners ordered over 900 ships in the last two years. The total order book of 7,495 million twenty-foot equivalent units (TEUs) is 29% of the current fleet. Predictions from ocean and air freight rate analytics platform Xeneta say up to 25% of the scheduled order book will be postponed. However, tonnage additions could trigger another round of price competition. 

Unpredictable conditions demand adaptive supply chain management

Several unknowns could impact supply chain reliability improvement efforts. These include:

• Labor negotiations between the International Longshore and Warehouse Union (ILWU), which represents over 22,000 West Coast port workers, and the Pacific Maritime Association (PMA), which represents port terminals and ocean carriers, remain unresolved.
• Consistent market rumors are that Maersk and MSC — the 2M partners — won’t renew their alliance agreement.   
• California’s AB5 ruling, a law that would re-classify more independent truckload owner operators as employees, could significantly impact drayage capacity.
• For vessel owners, Interternational Maritime Organization’s IMO 2023 will introduce two extra measures to improve vessel efficiency, lower emissions and encourage low-carbon fuel adoption. This could impact a ship’s effective capacity due to vessel slowing. 

Given this uncertainty, supply chain design must incorporate resiliency and flexibility in the face of future disruptions. Shippers must stay on top of changing market dynamics and create a procurement strategy that forms strong bonds with providers. They must also safeguard the ability to be nimble in the face of changing market conditions. These paradoxical requirements aren't easy to achieve, but they’re paramount to success.

Part of this endeavor requires building, and sometimes rebuilding, relationships and trust between shippers and providers, even as this industry steadily moves toward digitization. Previous years have reinforced the value of solid shipper/provider relationships. Trust and partnerships have been tested. To succeed, shippers and carriers must coexist in a symbiotic, dependent relationship. Mutually beneficial procurement leaves all parties constructively dissatisfied and doesn't create a binary win-lose outcome. Transparency in procurement, forecasting and service offerings must improve for both sides to benefit.

John Westwood is Director of Procurement at Gemini Shippers Group.

In 2023, ocean shippers will have both opportunities and challenges. Reach out to us and see how NTT DATA can help chart the best course to your desired destination.

— By John Westwood, Gemini Shippers Group