Spot rates falling faster and faster
Over the past month, spot prices on some key trade routes have not only fallen, but in some cases even risen. However, this does not yet mean the market is normal - the overall SCFI index, which covers 13 different export routes from China, is still 215% higher and the average level in 2019 - before the pandemic.
Rate development: the past five weeks
Looking at the trend in spot prices published by the World Container Index (WCI) over the past 5 weeks (from 11 August to 8 September), we see the following trend:
The biggest drop is seen in the Pacific - from Asia to the west coast of the US. The spot price has fallen 32% in five weeks. In the past week alone, it has fallen 14%.
Trade routes from Asia to Europe also decreased, but only 17% to northern Europe and 19% to the Mediterranean.
Until recently, freight rates from Asia and northern Europe to the east coast of the US remained stable. But that has changed in recent weeks. In the week to 1 September, rates from Asia to the US east coast fell 3%, followed by a 4% drop in the week to 8 September. The Atlantic spot rate experienced a similar decline. First by 1% and then by 2% in the last two weeks.
These decreases are, of course, much smaller than the recent large decreases, but that will change in the future. What you see here is a lag effect, mainly due to bottlenecks on the US East Coast. As this gradually improves, the price decline will increase.
Reason for declining rates
This is one of the two main reasons for the drop in spot prices. As bottlenecks improve, more capacity is entering the market. In January 2022, nearly 14% of the global fleet was in short supply because ships were stuck in long queues. The latest figures for July 2022 show that "only" 9.3% of capacity is stuck, and since then some bottlenecks have improved further. In the Los Angeles/Long Beach port area, queues of more than 100 ships have almost disappeared by early 2022.
The result is thus a rapid increase in additional capacity on the main trade lanes, lowering the tariff.
A decrease in freight volumes
In terms of cargo volume, new data from Container Trade Statistics shows global growth of 0.6% in July. But this is an overestimate of real growth. Major long-haul routes declined, while the number of containers transported increased mainly on shorter routes within Asia. Therefore, measuring growth in TEU*Miles (rather than just TEUs) shows that cargo volume decreased by 1.7% in July 2022 compared to July 2021. It also shows that cargo volume decreased by 1.6% compared to July 2019 before the pandemic.
This means that as more capacity is added, freight volumes fall, reducing capacity utilisation on the main trade routes.
The result of this development is clearly visible in spot prices and will lead to the next development in the coming weeks and months.
We will start seeing cancellations until November
We will see an increase in empty sailings from the major shipping lines. Some have already announced a series of cancellations, and we are likely to see more. It is normal for cancellations to increase in early October because of the Chinese Golden Week holiday that falls then. This time, cancellations are expected to extend well into October and November.
In the short term, these cancellations could slow the rate of decline (especially on the Asia to Europe route), but they will not halt the rate decline. It will be less effective on the Pacific to the west coast of the US, as relatively much capacity operates outside the three major alliances.
So, the base case assumes steadily falling rates in the coming months, with a risk factor that could change this temporarily.
Still no collective labour agreement USA container terminals
The collective labour agreement between port workers and container terminals on the US West Coast expired on 30 June and there is still no new agreement. Until now, operations have been largely unaffected by the lack of a new contract, and that is one of the reasons why bottlenecks for ships at Los Angeles/Long Beach could be reduced.
However, there are increasing sounds in the market that this situation may not last unless a new agreement is reached soon. Should a strike on the US West Coast come into play, conditions could quickly return to those of 2021. Should this happen, it should be noted that any such strengthening of tariffs would be temporary. Once the situation is resolved, fares will return to their rapidly declining levels as capacity will again exceed cargo volume.
Finally, it should be noted that spot prices are not representative of the whole market. Large volumes of cargo are carried based on contracts concluded earlier in the year.
If we avoid a strike in the US and other potential disasters, and if demand remains weak, freight rates will continue to fall and eventually culminate in a price war between some shipping lines. So there will be no soft landing, where the extremely high rates of recent years will gradually fall to a new normal. Instead, we will see rates temporarily dip below the new normal, after which they will rise again to the new normal.
