The global ocean shipping industry is navigating choppy waters as it grapples with a sharp decline in pricing power. This downturn is largely attributed to the frontloading of cargo container shipments in anticipation of tariffs imposed by former President Donald Trump on trading partners. The world's largest shipper, Mediterranean Shipping Company (MSC), has already responded to these challenging market conditions by suspending its U.S. West Coast trade service due to weakening conditions on the Pacific trade route.
Annual negotiations between U.S. companies and maritime shipping giants are underway, with several headwinds that could help U.S. companies recover logistics costs. A significant change in the ocean shipper alliance structure is anticipated, potentially leading to a 9-10% increase in capacity. The reopening of the Red Sea trade route is another factor that could intensify competition to "fill the ship."
AlixPartners reports that approximately 205 new ships are on order for delivery by 2025 across all classes of container ships, while around 84 ships are expected to be scrapped the same year. The Drewry World Container Index has recorded a 10% decline to $2,795 per 40-foot container through the week of February 20. MSC stands out for its potential to be the most nimble and flexible among its peers, given its ability to make independent decisions.
"We saw a surge in January and February," Kent Williams, executive vice president of sales and marketing at Averitt Express, noted.
The spot index from Shanghai to the U.S. West Coast has seen a significant drop from a peak of approximately $5,000 for a 40-foot container at the beginning of the year to around $2,900 currently. Despite these challenges, ocean carriers have added 162 vessels to their fleets in an effort to maintain trade flow and enhance schedule reliability.
Maersk, a Denmark-based integrated logistics provider, reported a 49% increase in freight revenue in its ocean business during the fourth quarter of 2024. The company also highlighted a doubling of capital spending in its ocean business in 2024, rising from $1.9 billion to $2.7 billion.
"This is the first time in approximately 12 years we have seen this go-it-alone strategy for a major player," stated Brian Nemeth, global co-leader of AlixPartners' logistics & transportation practice.
The Red Sea trade route has been closed for several months, and its reopening is expected to drive down ocean freight prices further. Any deal aimed at reducing tensions in the Middle East and restarting the trade route through the Red Sea would likely exacerbate the erosion of ocean freight prices.
"The shift to three alliances plus MSC will reduce market concentration significantly," AlixPartners' report suggests.
A substantial change in the structure of ocean shipper alliances is expected to play a pivotal role in reshaping the competitive landscape. This restructuring could lead to increased capacity and reduced market concentration, impacting pricing dynamics. As shippers adapt to these changes, they will likely seek ways to optimize their operations and minimize costs.
The industry's current predicament is exacerbated by several factors, including geopolitical tensions and fluctuating demand patterns. With many ships on order and others slated for scrapping, the market faces potential overcapacity issues. This situation underscores the need for strategic planning and adaptability among shipping companies.
Ocean carriers are under pressure to find innovative solutions to address these challenges. Companies like MSC are leveraging their flexibility to make quick decisions in response to changing market conditions. This ability to adapt quickly may provide a competitive advantage in an increasingly volatile environment.