Shipping revival? Morgan Stanley doesn't believe it!

The Red Sea crisis has intensified the tight shipping capacity, causing shipping market prices to soar.

In a report on the 24th, Morgan Stanley pointed out that the disruption of shipping capacity in the Red Sea crisis has led to a shortage of capacity on European routes. In addition, the new deliveries of vessels cannot fully compensate for the capacity shortage, leading to a surge in shipping prices.

From the end of March to May 17th this year, the Shanghai Containerized Freight Index (SCFI) has cumulatively risen by 46%, with freight rates on European and Mediterranean routes increasing by 53% and 32% respectively, and rates on the US West and East routes rising by 47% and 36% respectively.

Morgan Stanley stated that the short-term rebound in freight rates may be strong and could last for 1-2 quarters. The disruption in the Red Sea has only delayed the arrival of the shipping industry's downturn cycle.

Soaring Shipping Market Prices, Red Sea Crisis a Key Factor

The strong recovery of the shipping market is inseparable from the impact of the interruption in the Red Sea route. Morgan Stanley pointed out:

Currently, the number of container ships passing through the Suez Canal has decreased by about 90% compared to December last year, with most ships diverting to the longer Cape of Good Hope route.

This rearrangement of routes has affected about 30% of global container trade, leading to an approximately 30% increase in the transportation distance of related routes. In other words, if the Red Sea disruption continues, it will consume an additional 9-10% of global container shipping capacity.

Is the Turmoil in the Red Sea Bringing Short-Term or Structural Impact to the Shipping Industry?

Morgan Stanley previously believed that the rebound in the shipping market caused by the Red Sea turmoil would not last long because:

In terms of capacity, the total TEU capacity of the container fleet has increased by 17% compared to the end of 2021, with an annual growth rate of about 7%;

From the perspective of the supply chain, global supply chains have recovered after the end of the epidemic, and port congestion has significantly eased;

Moreover, it is expected that container ship speeds will increase after the epidemic. According to our analysis, ship speeds are usually positively correlated with spot freight prices, so we believe that ships can speed up again to reduce the capacity loss caused by detours.

However, Morgan Stanley quickly discovered that this judgment deviated from the actual situation because the capacity shortage caused by the interruption of the Red Sea route is likely a structural shortage.

From the supply side, Morgan Stanley pointed out:

1. Currently, the newly delivered vessel capacity cannot meet the demand of all routes. Vessels with a capacity exceeding 8000 TEU have only increased by 21% compared to the end of 2021, unable to compensate for the 30% capacity loss on European routes due to route adjustments.

2. Due to emission reduction requirements, some newly delivered vessels cannot effectively increase speed The ports in the European region have started to experience congestion again.

From the demand side:

1. Due to the extended shipping distances, this year's peak shipping season is earlier than expected.
2. The demand for replenishing inventory in the United States is stronger than expected, leading to a shortage of capacity on the Americas route.
3. The increase in trade volume between China and emerging markets such as South America and Africa has driven the growth of freight volume on related routes.

The downturn cycle of the shipping industry will eventually come, and the disruption in the industry has only delayed the arrival of the downturn cycle.

The short-term strong performance of the shipping market has exceeded the previous expectations of Morgan Stanley. Although both supply and demand currently support this round of shipping rebound, Morgan Stanley remains pessimistic about the shipping industry in the long term, as the fundamentals of the shipping industry differ from the upward cycle during the pandemic:

1. From 2022 to April 2024, capacity has increased by 17%.
2. Now that the supply chain has recovered, the likelihood of simultaneous congestion at global ports is low.
3. It is believed that there will be an annual increase of 8-9% in new capacity between 2024 and 2025.

Morgan Stanley stated that the short-term rebound in freight rates may be strong and could last for 1-2 quarters. The disruption in the industry has only delayed the arrival of the shipping industry downturn.

If the disruption disappears, the shipping industry will quickly return to a downturn cycle; however, if the disruption persists, the downturn cycle may arrive in the next 2-4 quarters.

Lastly, Morgan Stanley mentioned the potential impact of global economic growth and trade changes on shipping:

Generally, the growth in global trade demand is closely aligned with the growth in global GDP, with an overall growth rate of 3-4%. Considering supply chain diversification, such as China shifting production capacity overseas or transferring low-end production to other emerging markets, global trade growth may exceed global GDP growth. However, the likelihood of global trade growing at a compound annual growth rate of over 5-6% is considered low.

Morgan Stanley expects stable global economic growth in 2024-25, with China's export growth rates in 2024 and 2025 at 8% and 6% respectively. This also implies that the shipping industry may experience a brief upturn in 2024-25, and once the disruption disappears, container shipping will return to a cyclical downturn