Q4 2022
The big question for many as we reach the end of another turbulent year in container shipping is where long-term rates are headed. The question is relevant given their importance to the overall spend in container shipping and the collapse we have seen on the spot market.
Average rates for all valid long-term contracts are coming down, as reflected by the largest month-on-month decline in November's global XSI® for the contract market.
The index is still considerably higher than it was a year ago. Considering all the newly signed long-term contracts, the average rates are still lower than last year on many trades.
The average long-term rate for contracts starting in Q4 this year on Xeneta's top 13 trades is down by 7.4% compared to Q4 2021 and lower than any other quarter in 2022.
However, this recent decline still leaves long-term rates considerably higher than what shippers can get on the spot market. This leaves plenty of room for long-term rates to fall further.
Many shippers are well aware of this situation and wondering how to best use it to their advantage. Shippers do not want to miss out on lower freight rates by prematurely signing a contract for the whole of 2023.
For some, the answer to this dilemma is to index-link their contract. Another option is to add trigger points to fixed-rate contracts to ensure they aren't fully isolated from savings opportunities if the market continues to fall.
Some shippers are choosing to reconsider their tender schedule instead. They are either extending expiring contracts or are moving onto the spot market to wait for long-term rates to be low enough to sign new contracts.
For most large BCOs, relying entirely on the spot market is not an option. They need to transport essential goods under well-known conditions. However, their volumes are so high that it would require huge resources to put them on the spot market.
Xeneta data also reflects a decrease in the average length of new contracts being signed. The decline in contract length is driven by shippers looking for guarantees offered by the long-term market but are keen to profit from lower rates regularly.
In Q4, the average length of new long-term contracts signed on Xeneta’s top 13 trades fell to 5.6 months, exactly half the average length of contracts signed in Q4 2021.
Looking at the Far East to North Europe, the average length of new contracts has fallen to 4.1 months, with 82% of the new contracts in Q4 lasting six months or less. No contracts lasting two years or more have been registered in Q4 this year, while in Q4 2021, about one in five contracts were for two or more years.
The importance of long-term rates to some carriers’ revenues has meant more reluctance to lower rates at the same pace as on the spot market. On the spot market, the key aim has been to secure volumes for some carriers at whatever the price.
Spot rates from the Far East to the US West Coast are now just USD 300 per FEU from where they were in December 2019. As operating costs have increased since then, these levels suggest that the services and carriers most exposed to the spot market are operating below breakeven.
Even with plenty of money in the bank, carriers will likely push for GRI implementation to get spot rates above their new breakeven level as we approach the Chinese New Year.
Though some trades are still sticking out without the same dramatic falls in the spot market, carriers will not be able to keep certain trades so high above others when it comes to profitability. Capacity will chase higher profits, bringing rates on these trades back in line with the rest of the world.
