Idled Ships, Empty Containers. Ocean Shipping Faces Its Biggest Slump in Years.

China’s exports fell nearly 10% in December from a year ago, the third straight month of declines and the biggest drop since Beijing locked down the port city of Wuhan in early 2020. The falling volumes have pushed global ship freight rates into a downward spiral, with the cost of sending a box from China to Los Angeles dropping to $1,238 this week from $15,600 this time last year, according to the Freightos Baltic Index. 

Manufacturing activity in China increased in February at the fastest pace in more than a decade and export orders increased for the first time in nearly two years.

Global shipping boomed earlier in the pandemic, when soaring demand for goods led to lines of more than 100 vessels off the Southern California coast. Since then, rising inflation has sapped demand for many products as Americans shifted more spending to food, fuel and services, leaving retailers with a glut of goods. 

“There are 16,000 registered truck drivers here but only 3,000 are now working,” said Gao Chiang, a driver who had just unloaded a container filled with kitchen cabinets at Shenzhen’s port, one of China’s biggest export gateways. “This year will probably be one of the worst we’ve ever seen because the Americans stopped buying Chinese goods.”

Giant liners such as A.P. Moller-Maersk A/S and Mediterranean Shipping Co., which made record profits earlier in the pandemic, have been thrust into a new reality. Over the past three months they have held back up to a third of scheduled capacity from Asia to the U.S. and 20% from Asia to Europe, canceling the sailings of dozens of ships.

The industry also has idled around 7% of global vessel capacity, according to box-ship operators. Those ships are either parked at shipyards undergoing extended maintenance or anchored in the waters outside Malaysia and other locations in Southeast Asia with only a few crew members onboard. 

Idling or “laying up” vessels is a practice adopted by the industry at times of stress such as the 2008 financial crisis and in 2016, when a wave of consolidation cut the top dozen global players by half.

The shipping industry now faces the same uncertainty that surrounds its biggest customers such

Amazon.com Inc.,

Target Corp.

and

Home Depot Inc.

If American consumers keep spending, bloated inventories will be drawn down and demand for imports will resume. But if the economy contracts, freight rates are expected to fall below break-even levels and kick off a new series of price wars among carriers that in the past led to multiyear losses.

“Inventory levels are still extremely high,”

Soren Toft,

chief executive of Geneva-based MSC, said in an interview at the Trans-Pacific Maritime conference in Long Beach, an annual gathering for the shipping and logistics industries that was held in February. “I believe they will deplete a little bit in the second quarter and we’ll see some growth again in the second half.”

Mr. Toft said MSC, the shipping industry’s biggest player with more than 700 vessels, will return up to 60 chartered ships to their owners and scrap a number of older vessels to control capacity. It has ordered around 130 new ships that will be added to its fleet over the next 3½ years.

“Nobody really knows, but from what I can see we are not going into recession territory,” Mr. Toft said. “We still believe that globalization is here to stay, global trade will grow with more modest figures, but that’s good enough.”

Others in the industry believe a turnaround will take longer.

Vincent Clerc,

Maersk’s chief executive, said in February that American importers were ordering well below normal levels and that it would be six to eight months before demand started to grow again. He said earnings this year will be lower than in 2022.

The National Retail Federation estimates that U.S. sea import volumes fell 12% in February compared with January, and will be down 26% from a year ago.

Analysts say carriers will likely start undercutting each other in coming weeks on pricing to attract new customers or keep existing ones.

“They should have canceled twice as many sailings as they did,” said

Lars Jensen,

chief executive of Denmark-based consulting firm Vespucci Maritime. “The collapse in demand we have seen over the past five months is leading to price wars, which nobody wants.”

As the quest for customers intensifies, Maersk and MSC said in January that in 2025 they will end their 2M Alliance, a partnership formed in 2015 to help them reduce costs by sharing cargo on major ocean routes. 

Rivals formed similar partnerships, creating the Ocean Alliance and THE Alliance. The three groups account for about 75% of global container-shipping capacity, according to data provider Alphaliner.

Big cargo owners are securing long-term ocean freight rates that are about one-third less than last year’s contracts, according to people involved in the talks. The TPM conference is the main venue where long-term shipping rates are negotiated every year.

Shippers at TPM said that they are getting lower rates and no longer facing extended delivery delays.

Shippers traditionally negotiate freight rates that run for a year. But at this year’s TPM conference, they are negotiating contracts as short as two or three months, which is unprecedented, according to Peter Sand, chief analyst at shipping data provider Xeneta.

“The tide has turned completely and cargo owners now have the upper hand in contract talks,” said Mr. Sand. “There will certainly be more freight rate hardship for carriers this year.” 

Write to Costas Paris at [email protected]

China’s exports fell nearly 10% in December from a year ago, the third straight month of declines and the biggest drop since Beijing locked down the port city of Wuhan in early 2020. The falling volumes have pushed global ship freight rates into a downward spiral, with the cost of sending a box from China to Los Angeles dropping to $1,238 this week from $15,600 this time last year, according to the Freightos Baltic Index. 

Manufacturing activity in China increased in February at the fastest pace in more than a decade and export orders increased for the first time in nearly two years.

Global shipping boomed earlier in the pandemic, when soaring demand for goods led to lines of more than 100 vessels off the Southern California coast. Since then, rising inflation has sapped demand for many products as Americans shifted more spending to food, fuel and services, leaving retailers with a glut of goods. 

“There are 16,000 registered truck drivers here but only 3,000 are now working,” said Gao Chiang, a driver who had just unloaded a container filled with kitchen cabinets at Shenzhen’s port, one of China’s biggest export gateways. “This year will probably be one of the worst we’ve ever seen because the Americans stopped buying Chinese goods.”

Giant liners such as A.P. Moller-Maersk A/S and Mediterranean Shipping Co., which made record profits earlier in the pandemic, have been thrust into a new reality. Over the past three months they have held back up to a third of scheduled capacity from Asia to the U.S. and 20% from Asia to Europe, canceling the sailings of dozens of ships.

The industry also has idled around 7% of global vessel capacity, according to box-ship operators. Those ships are either parked at shipyards undergoing extended maintenance or anchored in the waters outside Malaysia and other locations in Southeast Asia with only a few crew members onboard. 

Idling or “laying up” vessels is a practice adopted by the industry at times of stress such as the 2008 financial crisis and in 2016, when a wave of consolidation cut the top dozen global players by half.

The shipping industry now faces the same uncertainty that surrounds its biggest customers such

Amazon.com Inc.,

Target Corp.

and

Home Depot Inc.

If American consumers keep spending, bloated inventories will be drawn down and demand for imports will resume. But if the economy contracts, freight rates are expected to fall below break-even levels and kick off a new series of price wars among carriers that in the past led to multiyear losses.

“Inventory levels are still extremely high,”

Soren Toft,

chief executive of Geneva-based MSC, said in an interview at the Trans-Pacific Maritime conference in Long Beach, an annual gathering for the shipping and logistics industries that was held in February. “I believe they will deplete a little bit in the second quarter and we’ll see some growth again in the second half.”

Mr. Toft said MSC, the shipping industry’s biggest player with more than 700 vessels, will return up to 60 chartered ships to their owners and scrap a number of older vessels to control capacity. It has ordered around 130 new ships that will be added to its fleet over the next 3½ years.

“Nobody really knows, but from what I can see we are not going into recession territory,” Mr. Toft said. “We still believe that globalization is here to stay, global trade will grow with more modest figures, but that’s good enough.”

Others in the industry believe a turnaround will take longer.

Vincent Clerc,

Maersk’s chief executive, said in February that American importers were ordering well below normal levels and that it would be six to eight months before demand started to grow again. He said earnings this year will be lower than in 2022.

The National Retail Federation estimates that U.S. sea import volumes fell 12% in February compared with January, and will be down 26% from a year ago.

Analysts say carriers will likely start undercutting each other in coming weeks on pricing to attract new customers or keep existing ones.

“They should have canceled twice as many sailings as they did,” said

Lars Jensen,

chief executive of Denmark-based consulting firm Vespucci Maritime. “The collapse in demand we have seen over the past five months is leading to price wars, which nobody wants.”

As the quest for customers intensifies, Maersk and MSC said in January that in 2025 they will end their 2M Alliance, a partnership formed in 2015 to help them reduce costs by sharing cargo on major ocean routes. 

Rivals formed similar partnerships, creating the Ocean Alliance and THE Alliance. The three groups account for about 75% of global container-shipping capacity, according to data provider Alphaliner.

Big cargo owners are securing long-term ocean freight rates that are about one-third less than last year’s contracts, according to people involved in the talks. The TPM conference is the main venue where long-term shipping rates are negotiated every year.

Shippers at TPM said that they are getting lower rates and no longer facing extended delivery delays.

Shippers traditionally negotiate freight rates that run for a year. But at this year’s TPM conference, they are negotiating contracts as short as two or three months, which is unprecedented, according to Peter Sand, chief analyst at shipping data provider Xeneta.

“The tide has turned completely and cargo owners now have the upper hand in contract talks,” said Mr. Sand. “There will certainly be more freight rate hardship for carriers this year.” 

Write to Costas Paris at [email protected]