Shipping Giant MSC And U.S.-China Trade Bellwether Aren't Talking About A Recession

As the world's largest ocean freight line, MSC, Mediterranean Shipping Company, told Trade Algo in an interview that it is anticipating positive economic outcomes as a result of a trade demand, but it will be several months before the economy begins to recover.

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There has been a big drop in global demand over the last few quarters, as well as significant supply chain disruptions that are affecting the market, but MSC's CEO Soren Toft tells Trade Algo the shipping giant is confident about the remainder of the year. “I think it is fair to say that we have a moderate optimism that things will resume in the world soon. We're probably going to start seeing some movement in trade when we reach the middle of the year,” according to Toft. “It is my belief that when we get through the second quarter and into the middle of the year, we will start to see some positive signs emerge."

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It is widely considered to be a barometer of global trade, the Swiss shipping company owns 17.5% of the market share for container traffic, according to Statista, making it one of the biggest players in the industry.

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Although inventories are still too high in North America and Europe, driving down trade volumes, Toft believes that once inventory levels start to drop, freight orders will rebound once the inventory levels start to decline.

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“The U.S. remains in a very positive state,” according to Toft, who spoke at the conference. "It is a net exporter of energy... The job market is very strong, and inflation has been reduced slowly. The economy is basically at full capacity. Therefore, we continue to view the U.S. positively."

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As Toft pointed out, he has also begun to see signs of strength on the China-Europe trade route, which is an indication that consumer demand is on its way up.

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“The return to work following the Chinese New Year has been positive,” according to Toft. “In terms of exports from China to North Europe, we are seeing very good healthy volumes now. In that sense, we hope and believe that this will be a trend in the months and years to come."

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China's manufacturing economy has seen a rebound from contraction to expansion according to the latest data released.

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There has been a slow recovery in global freight orders post-Chinese New Year, according to SONAR FreightWaves data. It is normal for orders to pick up in the coming weeks due to the pent-up demand for orders.

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Ocean carriers normally reduce the number of sailings from China during the Chinese New Year due to the holiday and the fact that less freight is moving out of the manufacturing plants during this time. Trade Algo has been informed by logistics managers that some Chinese manufacturers are opening in stages this year to avoid any Covid-related closures, with some of them having welcomed their employees back in early March.

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There is a direct correlation between ocean freight bookings and manufacturing orders. The retail sector in the U.S. had pulled back manufacturing orders by up to 40% as a result of softening consumer demand and a record level of warehouse inventories. Due to a lack of warehouse space, rates are also at all-time highs, an inflationary force that is passed on to consumers by the lack of warehouse capacity.

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The ocean freight rates, which were the largest inflationary pressure on products prior to the pandemic, have dropped sharply back to the levels they were at pre-pandemic.

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Ocean carriers have been forced to cancel sailings due to a combination of dwindling demand and low prices. By limiting the number of sailings on a vessel, shippers reduce the amount of space available on a vessel that can be packed with a container. In the past months, there has been an increase in rejections for ocean freight, which means that containers filled with products for the current or upcoming season have been delayed. There is considerable concern among logistics managers that this will create a bottleneck in the supply chain of their organization.

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According to a recent note sent to clients by HLS Transpacific, carriers are now being forced to consider suspending services from Asia because demand is particularly weak and there is no sign of improvement in the outlook anytime soon.

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Nevertheless, Toft stated, “We are very close to having the markets return to a more normal state.” The analyst added, “You may also be able to see a spike up and a spike down depending on what is happening with the demand.”

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It's not surprising that MSC has responded to the decline in ocean freight orders by increasing the size of its fleet at a time when ocean carriers are increasingly canceling sailings as a result.

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The container fleet of MSC has been expanding through a combination of both new-built vessels and second-hand and charter vessels that have been acquired over the years.

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“In the last few decades, MSC has been building lasting relationships with a long list of satisfied customers,” said Alan Baer, CEO of OL USA. “The current strategy seems to be one of protecting the customer base of MSC by taking an aggressive stance as far as pricing and capacity are concerned. It is common for businesses to lose customers and then have to go to great lengths to regain them." 

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Recently, MSC announced that it plans to end its ocean carrier alliance with Maersk, called 2M, at the end of 2025. Maersk is investing a significant part of its profits into land-based transportation and warehouse expansions. There has been a drop in freight prices over the past week, and two of the ocean alliances, along with 2M, are canceling sailings to try and prevent this from happening again.

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Toft says that he does not see the age of alliances as coming to an end. “In terms of the partnership with Maersk, we were very happy to continue working together, but Maersk wanted to go in a different direction and it was their right to do so. Now, that does not mean we won't work with anyone in the future, but it does mean that we won't work with anyone in the future. We may have to decide in some cases to go our own way, and in others, we may need to form certain alliance-type structures instead of going our own way."

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According to him, alliances had led to a lot of efficiencies and significant benefits being passed along to customers as a result.

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Long-term US, and Asia freight outlook

Investing in ports, warehouses, and trucks is part of MSC's active expansion across the United States in order to expand the company's footprint.

A subsidiary of the MSC Group, Terminal Investment Limited (TIL), is expanding its American East Coast port portfolio with the opening of new container terminals in the ports of New Orleans and Baltimore.

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There was only a matter of time before MSC invested in the Port of Baltimore, according to Bill Doyle, executive director of the Port of Baltimore.

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It is the port investment and the customer base of an ocean carrier that dictates how it diversifies its ports," said Doyle. “The increase in freight coming into MSC's port is the result of our investment in order to handle the larger vessels efficiently, and as a result, we have seen an increase in freight arriving into the port.”

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The Port of Baltimore has seen what Doyle called a 'bonanza of distribution centers that have been built in the past decade - Amazon, Floor and Decor, Home Depot, Wayfair, FedEx, Starbucks, to name just a few - that have been built there. “There is a possibility of doubling stacking on the CSX rail line running from Baltimore to Chicago in 2025. Ocean carriers want ports that can grow along with trade as their business expands," Doyle said in an interview.

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As part of its near-shoring or "friend-shoring" initiative, MSC is also investing in the development of terminals at ports in countries such as Vietnam, one of the prime beneficiaries of the manufacturing relocation from China to countries like Vietnam. Reports have emerged that Apple plans to move its MacBook manufacturing to Vietnam in the near future.

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The company announced over the summer that it had entered into a deal worth $6 billion with the Ho Chi Minh City (HCMC) government to build the country's largest port in Can Gio.

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Economically speaking, these deals can be viewed as a reflection of the growth outlooks of freight companies. As a rule, ocean carriers do not build terminals where there is no scope for future growth. It is estimated that the Can Gio port project will be completed in seven phases. The first phase of the project starts in 2024 and is expected to be operational by 2027. It is expected that the port will be fully operational by the year 2040.

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"Vietnam is one of the most important markets for our company," Toft said. “Obviously, Southeast Asia is gaining in importance as a part of the supply chain, and there is no doubt about that.”

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As a result, he stressed that when he is asked whether the era of globalization is coming to an end, he would reply, "Definitely not.". “It is my belief that in the future, we will see a more distributed supply chain where the sourcing takes place in more countries, China, Southeast Asia, and India."