Container freight is poised for a downcycle – putting downward pressure on rates and carrier revenue – starting in 2026 as an unprecedented wave of new vessel capacity enters the market. But despite signs of overcapacity in 2025, carriers continue ordering new vessels and holding onto older ships.
In a recent Freightos market update webinar, Parash Jain, Managing Director, Global Head of Transport & Logistics Research at HSBC shared his analysis of this state of affairs: This seemingly counterintuitive strategy reflects carrier lessons learned from recent disruptions and longer-term strategic positioning, at the cost of rate and revenue challenges for carriers in the coming years.
Key Takeaways
There’s a reason vessels aren’t being retired. Despite overcapacity concerns, carriers are maintaining older vessels as insurance against unpredictable disruptions, the “known unknowns” of global shipping – like COVID and the Red Sea crisis –- for which available capacity has helped carriers keep containers moving and maximize volumes and revenue.
Pandemic-era profits have both allowed carriers to pay down vessel debt – reducing pressure to scrap ships – and enabled them to prepare for the future now via newbuilds
Individual carriers have to make vessel purchase decisions based on their own needs and strategies, not on the aggregate capacity level in the market – likewise contributing to vessel order growth despite industry overcapacity
Expect a cyclical pattern of sharp rate dips followed by periods of recovery through capacity management in the near term, though overall rate levels will likely trend lower than 2025 through the downcycle. In the long-term, the larger fleets will make the market more resilient (should carriers choose to activate them when the going gets tough).
An oversupplied market: Trends in overcapacity
One of the biggest factors likely to impact container rates in 2026 is the growing global fleet.
Since 2021, carriers have been plowing their record profits earned from record revenues during the pandemic years into a record number of orders for new vessels – some of which started being delivered in 2023. According to S+P, an estimated ten million TEU of container ship capacity – the size of a third of the current active fleet – is now on order and will be delivered over the next few years.
Source: S+P in JOC.com
As demand eased post-pandemic and new vessels started being delivered, Freightos Baltic Index spot rates fell sharply with transpacific pricing to the West Coast (FBX01) dipping below $1,000/FEU in March of 2023. When the Red Sea crisis began however, the longer sailing times for Asia – Europe voyages and the extra vessels deployed to maintain departure schedules on these lanes absorbed that excess capacity, pushing freight rates up to their highest levels since COVID.
But new vessels continued to enter the market in 2024 and 2025. And even with Red Sea diversions continuing throughout 2025, the growing supply pushed East – West long haul rates down by 45% year on year, with transpacific rates slipping to $1,400/FEU in October 2025.
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Driving a Downcycle
The current orderbook size means the fleet will continue to grow significantly over the coming few years, such that even with demand growth, most observers project a container market downcycle: capacity is expected to outpace volumes putting persistent downward pressure on freight rates, reducing carrier revenues and even spurring losses.
Carriers maintain that they will pull all the capacity management levers – blanked sailings, idled vessels, service suspensions, slow steaming and scrapping – to balance supply with demand and minimize or avoid periods of losses. But despite the current signs of overcapacity, the current idle fleet is minimal and very few older ships have been scrapped. What’s more, carriers continue to order more vessels to join the already overstocked fleet.
Why no scrapping? The “Known Unknown”
Lessons learned and profits earned in the last few years may be motivating carriers to hold on to older ships even at the risk of oversupply.
More Capacity for Better Resilience
Though it may not have seemed that way as delays mounted and freight rates spiked, the slack capacity available during the pandemic did help carriers keep containers moving. Post-COVID, as noted above, overcapacity was one factor to loss making rates at times in 2023. But by December, carriers were diverting away from the Red Sea, and vessels that had just been considered oversupply were now key to carriers (mostly) maintaining departure schedules despite the much longer voyages. Available capacity was key to helping shippers keep their orders coming while also allowing carriers to maximize volumes and revenues even with the disruption.
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And the list of examples of disruptions for which having excess capacity available has helped carriers adjust –- the Russia-Ukraine war, Panama Canal drought, Baltimore bridge collapse, port strikes, and tariff frontloading – since the pandemic is a long one. This list makes a compelling argument that the next unpredictable disruption – the “known unknown” – is out there, and makes keeping older, extra vessels active despite the overcapacity risk make sense.
Pandemic-era carrier profits are also playing a part in the decision not to scrap older vessels. In previous downcycles, carriers have been incentivized to scrap vessels and use the proceeds to pay down debt or cover losses from sinking revenues. This time though, carriers have already used those record profits to pay down almost all debt on their vessels over the last few years and still have cash on hand to cover losses if they arise.
But why are more container ships on the orderbooks in 2026?
The above factors make a case for keeping paid off vessels in circulation, but if these also increase the risk of overcapacity, why are carriers continuing to order vessels after the 2021 to 2024 spending spree?
Because even if the industry is oversupplied, individual carriers can’t make ordering decisions from a market perspective. One carrier’s capacity gain doesn’t address another’s needs. So one investing in new vessels doesn’t mean a competitor won’t continue to order too, even if in the aggregate it pushes the market (further) into oversupply.
Different carriers have had different fleet renewal strategies and – especially given the low rate of new vessels ordered from 2016 to 2020 – some carriers are still playing catch up in a market where shipyard capacity is limited and vessels take a long time to build. Finally, the COVID profits mean carriers have the opportunity now to invest in new, more efficient and lower carbon ships and prepare for the next twenty-five years, even if it means contributing to a downcycle.
Can capacity management prevent downcycle losses?
Much to the surprise of long time observers, in recent years carriers have demonstrated the ability to manage capacity effectively and keep rates up in times of demand collapses – first during the initial volume drop in the first months of the pandemic, and more recently during the month and a half in 2025 when US tariffs on China stood at 145%.
If carriers kept rates level when demand evaporated, why can’t they do the same when capacity grows?
When demand collapses were abrupt, like in 2020 and 2025, carriers were able to make a proportionate response – in many cases just simply keeping vessels wherever they were at the time – and keep rates level.
But when the imbalance is structural, gradual and sustained – like in a supply-drive downcycle – the process of rebalancing can be much more challenging and prolonged. As the examples of the supply-driven rate slides in 2023 and late Q3 through October of 2025 show, it is harder to maintain that discipline when the drivers are a trend instead of a shock. And since incremental costs of taking on additional containers decrease once a vessel is already mostly booked, the economics of container shipping can also sometimes help push carriers into low or loss making rate environments.
But both instances of extremely low spot rates in 2023 and 2025 were followed by periods of rate recovery through capacity reductions even as demand continued to ease, and further price increases as seasonal demand picked up.
This pattern is likely the one we’ll see repeated over the coming years as capacity continues to grow: overall downward pressure on rates with levels likely lower than in 2025, and periods of very low spot prices followed by rate recoveries via capacity management or increases in demand.
All things being equal, this scenario should be a big driver of rate and revenue levels in the container market until a rebalance of supply and demand spurs the next upcycle.
On to the next known unknown?
But of course, the known unknowns that will shake up this pattern are out there: It is known that carriers – at some point – will resume Red Sea transits, which will at first trigger congestion that will absorb capacity, but then release even more supply once the delays unwind, increasing the overcapacity challenge. And geopolitical disruptions that could close shipping lanes, or sudden trade war shifts that could drive sudden demand spikes (or collapses) are all too plausible.
If these or other disruptions arise in the next few years, shippers will lament higher prices, but also be grateful that carriers have the available capacity to keep containers moving nonetheless.
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