Container Shipping Market Faces Uncertain Future Amid Capacity and Demand Fluctuations

The container shipping market is currently perched precariously at the top of a sharp pyramid, making it exceedingly difficult to predict what freight rates will do over the next six months. This uncertainty is driven by two potential scenarios that lead to vastly different outcomes.

To comprehend this delicate balance, it is essential to consider the underlying market dynamics, which can be visualized as multiple layers.

The first layer is the baseline fundamentals. Over the past five years, demand growth of around 8% has been significantly outpaced by fleet growth of 25%, resulting in substantial overcapacity. Although some of this capacity has been absorbed through slow-steaming, the market still faces overcapacity. This situation is expected to worsen as an additional 1.5 million TEUs of capacity are projected to be injected into the market by the end of 2024.

The second layer involves the Red Sea crisis. The necessity to reroute vessels around southern Africa due to disruptions in the Red Sea has led to a significant increase in demand when measured in TEU miles. The existing overcapacity is just enough to handle these new routes, provided vessels increase their speed and there are no further disruptions.

The third layer concerns increasing port congestion. Over the past several months, port congestion in Asia and the Western Mediterranean has gradually worsened. This issue has gone largely unnoticed until recently, when it reached a critical point. The situation in layer two left no excess capacity to address new problems, resulting in insufficient capacity in the global supply/demand balance.

The fourth layer is a sudden sharp spike in demand, which has caught many by surprise, including carriers. This spike is possibly an early onset of the peak season, driven by shippers’ concerns about potential disruptions on the US East Coast due to labor negotiations. Additionally, an earlier peak season is expected for services diverted around Africa. Interestingly, while container shipping has seen this sharp demand increase, air freight has not, suggesting the spike may not be due to a sudden consumer buying rush.

This sudden surge in demand has exacerbated the capacity shortage. The current market scenario echoes the early pandemic disruptions, where insufficient capacity led to unprecedented rate increases. If the market continues at this heightened level of demand, and especially if this is not a temporary early peak season but a sustained boom, we could see a repeat of the pandemic-era rate spikes.

However, if the Red Sea route reopens — an unlikely but possible scenario in the coming months — it would recreate the substantial overcapacity that the market faced at the end of 2023, potentially causing a sharp drop in spot rates.

For shippers, this creates a challenging environment for planning supply chains and managing freight budgets for the remainder of 2024. The two most likely scenarios are starkly different: one could see rates spike to pandemic levels, while the other could result in rates plummeting back to the lows of late 2023.

The key variable is the reopening of the Suez route. Continued sporadic attacks by the Houthis in Yemen have made global carriers cautious, with CMA CGM being the only major carrier to route some Asia-Mediterranean vessels through the still-risky passage. Predicting the reopening of this route is crucial to determining which scenario will unfold.