DATEMARCH (TLs ONLY) 2021 2021 CONTAINER SHIPPING OUTLOOK Carriers have a chance to break the cycle. Will they take it? For at least three decades, the container shipping industry has been locked in a recurring boom-and-bust loop. During times of strong macroeconomic growth, shipping rates would soar and container ship operators would reinvest their profits in new, ever-larger vessels. Then the economy would slide into a downturn, demand would plunge, rates would tumble, and operators would find themselves burdened with heavy debt and idle vessels. As overcapacity kept a tight lid on rates, leverage would expand, revenues would fall, and ship operators would tumble into bankruptcy—or stay out of court, thanks only to amend-and-extend agreements with their creditors. Today, however, the fundamentals that would support a breakaway from that cycle are in place. The industry is enjoying a boom phase, with global alliances have helped increase pricing leverage. Fuel costs container freight rate indexes topping $5,000 per 40-foot remain low despite strict new regulations aimed at reducing container in February 2021 after climbing steeply and sulfur emissions as a prelude to additional measures steadily since May 2020.1 And this time, with a few notable intended to decarbonize the industry. One effect of those exceptions, carriers aren’t flooding the world’s shipyards new regulations has been to limit capacity growth. with orders—yet. Instead, carriers have to date successfully managed capacity, keeping rates stable even as demand A sustainable departure from boom-and-bust, however, slipped by 5% during the first nine months of 2020 while requires carriers to exercise discipline over their pricing and overall capacity increased by just 2%. Meanwhile, idle order books, as rates make their eventual and inevitable capacity, which rose to 11% in May 2020, retreated to 3% by regression toward the mean—discipline that carriers the third quarter of the year because the industry increased historically have been quick to abandon when profits were blank sailings and suspended service on some routes. climbing. In a sign that such discipline may already be Carriers also cut sailing speeds, which fell 1.8% in 2020. fraying, a number of carriers recently placed large orders for new vessels—but further additions to fleet capacity Merger-and-acquisition activity continues apace, furthering could severely dilute any pricing power that carriers have the industry’s consolidation: seven global carriers now been able to establish. each control at least a 5% share of the market, and three 1. Drewry World Container Index AlixPartners 2021 Container Shipping Outlook 2 a sudden drop in demand occurred while both capacity the past, demand shocks hit orders just as increasing new vessels were for levels, cycle or elevated in already the at latest compelling evidence achange of in the industry dynamic can on data be shipping in the found latest capacity: whereas in For the moment, most carriers restraint in improving the exercising face are market fundamentals. of Some the most- of place orders to opted new vessels, for the the industry rest of soon suit, followed perpetuating the boom-and-bust cycle. industry appeared on entering the aperiod verge of sustained of capacity control and consolidation, but carriers after a few timediscipline any they believe at doing so serve would their It example, interests. happened has for the In2014, before. Despite adifferent signs that dynamic across the prevails now industry, carriers could cast aside pricing and capacity units (TEUs) and in the longer term, capacity offered the greater promise of control. part left that carriers launched aconsolidation four the of top wave in 2013 global in control 46% of 20-foot-equivalent of counter the record-setting capacity buildup 2004 of 2008. to Several lines under went or acquired got in the aftermath— Although hold their operators in of fleets 2010. take idled reducedand 10% sailing speeds, to those too came late moves plunged more by than 50% in 2009 and then, abrief rebound, following dropped 50% again by when arecovery failed to In 2009, after rising profits, several years rates, of and capacity,Recession the Great struck and demand Rates cratered. problemswhose much ones greater the too familiar were of capacity little and too demand. linerof operators boost forming to supply-side prices Fuel but low were carriers, pricing offered only to relief power. limited because sales. The shippers to relative their low industry inventories kept had become highly fragmented, with no alliances starting were offand rates fall the table. to The up vessel overcapacity, new builds which drove further got aggravated good—startingwere and through the delivered bubble the in 1999 before early demand just as burst—were months 2001, of bubble asudden led to drop-off in demand, alengthy by shipping spell low Ships followed of rates. ordered when times 2001 2003years of to and the subsequent economic recovery. A recession brought the on bursting by the first of dot-com The container shipping industry long adistinct has pattern. followed Consider the industry’s actions during the recession W FIGURE 1: TE 20-foot-equivalent unit HISTORY REPEATED ITSELF IN SOME RESPECTS IN THE PERIOD FROM2015. 2009 TO WILL CARRIERS SEIZE THE OPPORTUNITY? THE SEIZE CARRIERS WILL REPEATING HISTORY - - 1 2 3 4 5 6 7 1 2 0 0 0 0 0 0 0 0 0 0 o TE trade growth ear over ear r l d 1999 C o n CAPACITY IS UNDER CONTROL—FOR ACHANGE t 2000 a i n e r 2001 T r a 2002 d e ( T 2003 E U ) 2004 O r d 2005 e r book E as apercent total leet o 2006 2007 2008 and 2009 1). orders (figure low relatively new vessels were for 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 3 AlixPartners 2021 Container Shipping Outlook through 2018 (figure 3). (figure through 2018 slammed on the brakes the aperiod world ship economy, initiated demolitions having intensive of in 2009 persisted that Inthe current work off. cycle,to contrast, by the industry slashing capacity was global when pandemic the COVID-19 the industry aggressively capacity was adding to when demand dried thereby up, creating asupply glut took years that Restrained growth environment. in vessel explaining supply rate the favorable goes Inprevious cycles, toward along way TE 20-foot-equivalent ear over ear unit o FIGURE 3: after2). 2021 (figure current cycle astrong marked is by increase began that in the first quarterof 2020 and has continued the first into quarter the Recession Great following The chronically spikes. marked by was interruptedonly rates, two, low by relatively shallow, dropped significantly during the 2001to 2003 recession rebounding before during steadily therecovery. The period duringUnlike previous demand held disruptions, although up, have current rates certainly are levels unsustainable. Rates S FIGURE 2: 1 1 1 1 1 Fleet rowth o hange in E apacitFleet rowth %) o $ $ $ $ $ 4 4 0 2 6 8 0 2 6 8 1 1 2 2 3 $ h , , , , , 5 0 5 0 5 0 • • • SUPPLY a Y 0 0 0 0 0 0 0 n 0 0 0 0 0 0 o Y In 2009 to 2015, demolitions increased to try to take supply out of the market, andtheeffort supplyoutofthemarket, try take 2018 wascompletedby to to 2015, demolitionsincreased In 2009to of supplyjustasdemanddropped aglut leadingto TEU growth, periodsof high by proceeded were downturnsinrates Both ofthehistorical lows record to TEUs hasdropped in Growth 1996 g g h r 1997 2010 o a w 1998 i t h GROWTH IN TEU CAPACITY HAS TURNED NEGATIVE RATES INCREASEDRATES AS2020 SHARPLY UNFOLDED 1999 S 2000 h i 2001 p 2002 p i 2003 2011 n g 2004 2005 E x 2006 c 2007 h a 2008 n 2009 2012 g 2010 e 2011 S 2012 h a 2013 n 2014 201 g 2015 h a 2016 i 2017 ( e 2018 x 2019 p o 2020 201 r t 2021 ) 2022 C o n t a i 201 n Vessel scrappingVessel emolitions in E apacit 000s) 1 2 3 4 5 6 7 e 0 0 0 0 0 0 0 r 0 0 0 0 0 0 0 0 i D z e e m d o 1996 l i F t 1997 i o r n 1998 201 e s i ( 1999 g T h E 2000 U t ) 2001 I 2002 n d 2003 201 e 2004 x SCFI) 2005 2006 2007 2008 2009 201 2010 2011 2012 2013 2014 201 2015 2016 2017 2018 2019 4 2020 2020 AlixPartners 2021 Container Shipping Outlook materializes as more as and the more population of materializes gets vaccinatedand the pandemic fades. carriers could persist forecasters many the as predict, longer over if, astrong, well term as demand-driven recovery conditions Favorable retailers global as for ship more goodsmonths 2021, of the ahead Chinese of Lunar New Year. million TEU, accordinga record IHS Markit. 1.6 to The imports volume of headed was continued for growth in the early USthe imports restocking already under is way. from Asia in December 2020 up 30% were from their year-earlier level, to imminent, lifting demand shipping for services. Inthe current case, recent container ship activity US at ports suggests sharp drops in the inventory-to-sales theat outset the pandemic. of Typically, arestocking signal that ratio phase is Inventory-to-sales below-average ratios, fallen to meanwhile, have after levels ballooning when economic activity plunged on some routes. reduced sailing speeds, and suspended service because carriers increased blank sailings, have demolished. Capacity management improved has replace several years the to was tonnage that large orders take it new will vessels recently, for Although, noted, several carriers as placed AlixPartners 2021 Container Shipping Outlook Shipping AlixPartners Container 2021 FIGURE 4: STAND HISTORICAL AT LOWS(FIGURE 4).