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Is the 2023 peak shipping season over already?

Signs suggest that the 2023 ‘peak’ came early this year. All eyes are now on the build-up to the Golden Week holidays in China.
Signs suggest that the 2023 ‘peak’ came early this year. All eyes are now on the build-up to the Golden Week holidays in China.
20 September 2023 •

The 2023 peak container shipping season has proven something of an enigma. Rate movements have been irregular, demand signals have been unclear and volume levels have been lower than expected.  

So, what exactly transpired this summer, and is the peak season over already? The Wall St Journal noted that the 2023 peak season appears to have arrived early, ending quickly with volumes at lower levels than expected. Moreover, instead of a steady build-up to the Golden Week holidays in China at the start of October which usually boosts freight rates, spot markets on key East-West trades were tapering downwards in early September. 

Although freight rates received a minor boost from the 1 September rate hikes, Linerlytica reported that market sentiment remains poor with the Shanghai Containerized Freight Index (SCFI) giving up all of its gains in August in a repeated pattern of early month rate gains followed by rate cuts as the month progresses. 

While trans-Pacific rate gains were proving more resilient than on the Asia-Europe trade in early September, even there, the momentum was dissipating quickly. 

One positive is that Panama Canal transit limitations due to El Nino-driven drought and low water levels in the region are not proving disruptive, not least because container traffic is being given priority. 

The El Nino drought is expected to last into 2024 which could see more vessels transiting the Suez Canal as the year progresses, adding an extra 1,800 nautical miles on the Shanghai-New York tour (5 days at 15 knots). 

Routing more vessels to the US East Coast via the Suez Canal could help carriers absorb the large number of delivered ships. DHL’s September Ocean Freight Market Update reported that some 300,000 TEU of fresh capacity was delivered to carriers in June alone, with MSC, the world’s largest container line by capacity, accounting for 38 percent of the new ships. 

“Ship deliveries will remain high over the next months,” said Niki Frank, CEO, DHL Global Forwarding Asia Pacific. “But while the new CII (Carbon Intensity Indicator) and EEXI (Energy Efficiency eXisting ship Index) environmental regulations have created some tonnage demand through mandated slow steaming, cargo volumes will likely not grow enough to absorb all new deliveries.”

Heightened inventory levels

According to Jason Miller, Professor of Supply Chain Management at Michigan State University’s Eli Broad College of Business supply-chain management department, the sharp decline in US containerized imports from Asia in 2023 compared to H2 2020-H1 2022 resulted from reduced demand and inventory drawdowns.

Indeed, on top of logistics companies coping with tepid volume and low freight rates, Miller argues that the US is currently experiencing the largest inventory correction cycle in modern economic history. Import-centric wholesale and retail trade firms are burning off excess inventories built up in response to less demand in 2021, and over-ordering in late 2021 into the first half of 2022”.

In sectors like toy wholesaling, he expects this to continue for “another nine to 12 months” before inventories return to regular levels.

With US retail inventory levels still elevated and sales slowing, Judah Levine, Head of Research, does not expect significant restocking or a freight market rebound until mid-2024. “Taken together, these trends support projections that import volumes likely reached their peak for the year in August,” he noted.

The situation in Europe is slightly better with container import levels at key ports declining in the first half of the year and rates subsiding in late August.

S&P Global reported that eurozone manufacturers remained under severe pressure in August with new orders and new export business both plummeting. At 43.5, the headline index was up from July’s 38-month low of 42.7, but still indicative of another sharp worsening in the health of the euro area manufacturing economy.

Manufacturing downturn reversing?

There are now some positive signs that the global manufacturing downturn might finally have bottomed out. For example, the J.P. Morgan Global Manufacturing PMI rose to a three-month high of 49.0 in August, from 48.6 in July.

Bennett Parrish, Global Economist at J.P. Morgan, said August PMIs signaled to remain below the 50-mark. However, he added that the improvement in August owed almost entirely to a large 2.4-point jump in the China output index.

“Excluding China, the global output PMI declined nearly one point in August and is stuck at a level that does not point to much, if any momentum lift in the manufacturing sector,” noted Parrish.

Interestingly, despite the downturn in rates ahead of Golden Week, there are no signs that carriers will resort to their usual strategy of mass blanked sailings. Looking at the current combined trans-Pacific capacity reductions for the 4-week Golden Week period (counted as Golden Week plus the following three weeks), Sea-Intelligence reported at the end of August that carriers had scheduled capacity reductions of only 3 percent, compared to a 12.4 percent reduction in 2019, and a 2017 to 2019 average of 10 percent.

According to Linerlytica, rates will come under increasing pressure through September, as transpacific carriers are already withdrawing peak season surcharges even before the Golden Week holidays in October.

“Carriers are aware that belated attempts to schedule blank sailings from the end of September will do little to address the imbalance in the absence of concrete service withdrawals,” noted Linerlytica.

Still, shippers should be prudent in their planning for capacity, in lieu of possible seasonal fluctuations.

“Given the stabilizing freight rates and demand and capacity conditions, we foresee that utilization will likely remain balanced for the rest of the year. But while we may not be anticipating a peak season surge in the fourth quarter, shippers should still prioritize adaptability and plan ahead in advance to address any possible surge in volumes toward the year-end,” concluded Frank.