After a period of uncertainty over the past few years, the container market has been notably lackluster this year.
Initial expectations for the freight market were not great at the beginning of the year, but there was some hope of rebounding after the second half – that was what every analyst and shipping experts were anticipating. This potential turnaround has not materialized.
After a very interesting and unconventional contract period in May, spot container freight rates for Asia eastbound have been moving up and down between $1,000 and $1,500 per 40hc levels. Carriers did what they could to push rates higher with periodic GRI and PSS announcements but rates went right back where they were after only single sailing.
However, there has been a recent shift in this trend.
Compared to the beginning of summer, spot rates have risen almost 40% which is quite surprising. This is interesting to see given the absence of any major increase in demand or significant market catalysts.
Inflation pressures in the U.S. as well as economic uncertainties, fluctuating consumer spending patterns, and other Covid-related effects have collectively subdued the demand for ocean shipping which in return has resulted in excess shipping capacity. Although carriers have been very disciplined with blank sailing programs, where we have seen a huge number of blank sailings since the beginning of this year, it alone doesn’t help carriers to push and maintain rates at higher levels due to again weak demand and excess capacity.
Another factor contributing to the subdued market is the lack of significant improvement in Chinese factory orders.
There is no major improvement on Chinese factory orders. The Purchasing Managers’ Index (PMI), which measures manufacturing activity, has been decreasing for four consecutive months. This indicates that manufacturing and factory production have been on the decline.
These combined challenges have increased competition among ocean carriers, which has ultimately led to lower rates.
If you have consistent cargo to ship, you can get all kinds of different deals at the moment. Long-term contract rates are there and bigger BCOs have been trying to hold on to those in the hopes of maintaining their relationship with carriers. However, if spot rates are continuously lower than those long-term contract rates, how long they will continue to ship with them will be a question mark. In general, it is meaningfully larger BCOs that invested in the relationship with the carriers and didn’t get much back during the Covid pandemic – that is a sensitive topic to delve into.
All of the above is leading to increased competition among carriers and pushing rates down.
The alliances haven’t looked weaker for a very long time, as well. We are seeing multiple different rate tiers amongst carriers even if they belong to the same alliance. Alliances were not meant to have the same rate levels, but this was almost the norm in the past few years. It is interesting to observe that there are multiple spot rate tiers in the market.
Elsewhere, Maersk’s short term rate policy has added another layer of complexity to the market.
Offered to few companies with hefty penalty clauses, these short-term rate deals did nothing but pulled the market down. NVOCCs that were offered those short-term competitive rate deals were scrambling to fulfill the contract and not paying the extremely high shortfall penalties. Due to this, we have observed that a lot of under-cost selling has happened in the market. The short-term rate deal seemed to be a good one considering the big unknown in the market back in May during contract negotiations. However, in my opinion, it has created a lot of unfair competition and it did not serve its purpose.
Currently ocean freight rates are at five-month highs. However, this will be short lived.
The upcoming largest catalyst I am seeing is the upcoming Golden Week in China at the beginning of October. We will see some increased shipping activity which may be reflected on ocean freight rates, but it will be short lived. Unless access capacity is absorbed and U.S. economic conditions start to improve, the status quo will remain the same.
Towards the end of the year, we may see some gradual recovery.
However, a lot of different complexities have to align for rates to remain at their higher levels which does not seem likely at the moment.
