Overcapacity leads to a pessimistic outlook for the new ship market

Container market outlook: In 2023, the container market will enter the overcapacity, and the supply will be significantly higher than the demand

The United States is the world's largest consumer, and container transportation is highly relevant to the American economy. Based on the concern about the US recession, in December 2022, the International Monetary Fund predicted that the US GDP growth rate in 2022-2024 would be 1.6%, 1.0% and 1.2%, which would be significantly slower than that in 2021. Due to the gradual repair of the global supply chain, but the gradual weakening of downstream demand, the inventory of wholesalers and retailers in the United States has risen rapidly in 2022, and the current destocking pressure is greater. Overall, concerns about economic recession and channel destocking pressure may lead to sluggish demand for containerized trade in 2023, Clarksons predicts that the growth rate of global containerized trade in 2022-2023 will be -3.2% and 0.6% respectively.

New orders and orders in hand are at a record high, and concentrated delivery periods are expected to lead to significant capacity growth over the next three years. The 2020-2022 consolidation super cycle has brought huge profits to shipowners, which directly drives the demand for new ships to update the capacity of shipowners. At the same time, the IMO decarbonization target requires shipowners to update their capacity to LNG, methanol and other clean fuel powered ships. In 2021-2022, the number of new orders received by container ships has reached a record high. According to Clarksons, new global container ship orders for 2021-2022 total 6,928,021TEU, equivalent to the total new orders for 2015-2020. At present, the shipbuilder's orders for container ships reached 7,403,279TEU, which has exceeded the peak of the previous cycle (2005-2008), and the proportion of orders in hand is close to 30% of the existing capacity. Global new orders in 2021-2022 will be delivered in 2023-2025, and the supply of transportation capacity will increase significantly.

Declining spot earnings, an ageing fleet and IMO's decarbonisation policy are expected to drive a peak in old ship dismantling. The age of container ships continues to age, according to Clarksons data, as of December 2022, the average ship age is 14.2 years, and continues to hit a record high, and the hot market in the past two years has delayed the withdrawal of old ships, and almost no container ship dismantling in 2021-22. As of December 2022, the immediate earnings of container ships have fallen by nearly 66% from their peak, and the downward trend has not slowed down, while the existing Ship Energy Efficiency Index (EEXI) and Carbon Emission Intensity Index (CII) environmental conventions introduced by IMO came into effect on January 1, 2023. We believe that the continued decline in spot earnings, the aging of the fleet and the implementation of IMO environmental policies are expected to contribute to a significant increase in the number of old ships dismantled in 2023.

In 2023, the container market will go from peak to flat. In 2020-2022, the supply chain disorder caused by the epidemic and the monetary easing policy led to the substantial growth of consumer demand in Europe and the United States contributed to this consolidation super cycle. With the gradual recovery of the supply chain, the gloomy demand prospect caused by the recession in Europe and the United States, and the mass delivery of new ships, the container ship capacity growth will be significantly faster than the demand growth. We predict that in 2023-2024, the growth rate of global container traffic turnover will be -0.3%, 3.1%, and the growth rate of effective capacity will be 7.0% and 8.0% respectively, which means that the container traffic market will enter the overcapacity in the next two years, and the supply will be significantly higher than the demand.

Container ship market outlook: The performance of shipowners is under pressure, and the outlook of container ship market is pessimistic

It is expected that the performance of shipowners will be under pressure in 2023, and the willingness to buy new ships will be significantly reduced. It is expected that in 2023, the container ship capacity growth will be significantly faster than the demand growth, which means that the container market will enter the overcapacity in the next two years, the supply and demand relationship will continue to deteriorate, and the performance of shippers will face greater pressure. Spot income has been adjusted ahead of the new ship price index, the rise in the price of new container ships lacks support, and the increase in the order volume on hand has also formed a clear divergence from the rapid decline in spot income. The rapid decline in freight rates has led to greater pressure on shipowners' performance, while concerns about the continued deterioration of supply and demand will significantly reduce shipowners' willingness to purchase ships, and the implementation of the existing ship Energy Efficiency Index (EEXI) and carbon Emission Intensity Index (CII) environmental protection conventions introduced by the IMO in 2023 May become the only driving force for shipowners to replace new ships.