Q1 2023
Rates
Normalization of ocean freight rates and its impact on shippers and carriers
According to recent market analysis, ocean freight rates have experienced a sustained downward trend on several key trade routes. In fact, some rates have even dipped below pre-pandemic levels. Despite facing a substantial decrease in demand towards the end of last year and into this year, shipping companies have persisted in scaling down their capacity. Unfortunately, this has proven to be insufficient in halting the progressive erosion of the supply and demand equilibrium. Consequently, carriers find themselves in fierce competition to secure volumes, with cost competition emerging as the primary tactic employed.
Gradually, the current state of ocean freight rates is normalizing, and carriers can no longer impose arbitrary charges on shippers. As a result, the range of freight rates being paid by shippers is significantly contracting. To illustrate, consider the ocean freight rates between the Far East and the Mediterranean. The average spot rate on this trade as of March-end was USD 2,600 per FEU, which represents an 80.9% drop from the previous year. At the peak of spot rates, the gap between the lowest and highest rates paid by shippers hit record highs. Smaller shippers were constrained to pay any price carriers demanded to secure capacity, while larger shippers had greater negotiating power to secure capacity with carriers at better rates.
At its peak, the gap between mid-high and mid-low spot container rates exceeded USD 1,400 per FEU, without even accounting for premium surcharges. As a result, different shippers paid vastly different rates. However, this gap has since decreased to USD 500 per TEU, which is still twice as high as the average difference in rates between mid-low and mid-high in 2019. Today's average spot rate is also around USD 1,000 per FEU higher than the average in 2019.
In the period from March 2019 to the end of March 2023, among the five main trade routes originating from the Far East, the Mediterranean route experienced the greatest increase in spot rates. The difference between then and now is significant, with spot rates being USD 1,150 higher in March 2019 than they are currently. In comparison, smaller rate increases are evident in the routes from the Far East to North Europe and the South American East Coast. However, the rates from the Far East to both US Coasts have decreased since 2019. The rates have gone down by USD 120 per FEU to the West Coast and USD 270 per FEU to the East Coast.
The gap in spot rates between the East and West Coasts has decreased to USD 920 per FEU, making it roughly USD 150 per FEU cheaper than the same time last year. This shift follows a period where the premium for the East Coast was much higher, due to shippers' desire to avoid congestion at West Coast ports and delays in transporting goods across the US. While congestion on both coasts has subsided, some shippers have decided to permanently move to the East Coast, while others are awaiting an agreement between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) on the West Coast. The negotiation process, which began nearly a year ago, has yet to yield an agreement on issues such as automation and wages.
The difference between spot and long term rates on major trades, including those from the Far East, is decreasing. Shippers are opting to delay signing new long term contracts, preferring to move larger volumes on the spot market or opting for shorter long term contracts to avoid being tied to today's rates in a declining market. Although the premium between long and spot rates is still highest for trades from the Far East to the US, this is mainly due to seasonality in contracting, rather than market fundamentals. The US tendering season starts later than that into Europe, with most one-year contracts taking effect in April or May. During this period, it is anticipated that long term rates will become even more similar to spot market rates.
In the last three months, the average rate for long term contracts from the Far East to North Europe is USD 2,300 per FEU, which is USD 700 more than the spot market rates. However, larger shippers or those with more bargaining power can secure long term rates that are equal to spot rates. As of the end of March, the mid-low long-term rate for this trade is USD 20 per FEU lower than the spot rate.
Although there have been significant drops in rates for major trades, it's important to note that not all shippers are benefiting equally. Some smaller back haul trades are actually more expensive now, both in the spot and long term markets, compared to a year ago. In particular, the trans-Atlantic trade stands out as spot rates are still more than double what they were in March 2019. While there has been a 50% decrease in spot rates from the peak, long term rates in this trade have also come down but at a slower pace compared to other major trades.
