March and April are critical months for ocean carriers looking to secure annual freight contracts with shippers, including the world’s largest retailers, but this year’s contract season is turning into a waiting game.
The spread between Asia to the U.S. West Coast container spot market rates and long-term freight contract rates was $2,500, reaching the highest level since September 2021, when the spread between short-term and long-term freight rates was $2,900.
This has led to shippers pausing before signing on the dotted line, with ocean carriers hoping to sign on to higher spot rates driven by the Red Sea diversion, and shippers holding out and waiting for deeper drops.
Ocean spot freight rates fell for the sixth consecutive week, with the Shanghai Container Freight Index falling 6%. Ocean carriers were unable to push for a rate hike in mid-March, while expectations for an April hike are fading due to weak demand.
Xeneta chief analyst Peter Sand told CNBC that shippers are waiting to see if spreads narrow and balance the spot market with contract buying volumes.
Before the surge in Red Sea rates, ocean freight prices and contracts – which generate profits for ocean carriers such as Hapag-Lloyd and Maersk – had fallen to a low of $1,342 per 40-foot container in October. The impact of lower freight rates was reflected in recent fourth-quarter earnings for ocean carriers.
Christian Roeloffs, co-founder and CEO of container trading and leasing platform Container xChange, said that in a demand deficit environment, the market is currently experiencing a serious mismatch between buyers and sellers’ price expectations. “There is a serious imbalance between supply and demand for containers and price expectations,” Roloffs said.
The current spot rate environment is favorable for shippers.
“(Ocean) carriers are taking advantage of this opportunity to tap into the current market,” Sander said.
Ultimately, he said time is on their side.
“Carriers are now sitting in a much more comfortable chair, and by the end of April, all the contracts signed last year will expire. So once the contracts expire, shippers may need to transport all these products in the spot market” No big shipper can go all-in on the spot market,” Sander said. “It’s definitely not the first choice at this point.”
Sund said shippers can manage rates through contract duration terms and the introduction of renegotiation clauses.
“I think a lot of companies are trying to delay making decisions,” said Michael Aldwell, executive vice president of Kuehne + Nagel Shipping Logistics.
“Will the topic of congestion in the Red Sea still exist? How serious is this? After the short-term surge in freight rates, do we expect freight rates to fall further? In the next three, four, five, six weeks, companies will ultimately achieve more Agreement, I think in the context of all the uncertainty, it makes a lot of sense,” Aldwyer said.
Full-year shipping outlook for 2024
The disruption currently facing the logistics world will continue through the rest of the year, but transportation-related costs haven’t risen as much as spot freight rates during the red period, said Chris Rogers, head of research at S&P Global Supply Chain. Maritime attacks and Panama Canal drought issues have contributed to recent price reversals.
“We continue to see these rates come down,” Rogers said. “This situation may continue for the rest of the year.
Vespucci Chief Executive Lars Jensen said he expected spot rates to continue to fall, but that rates would vary based on global trade routes.
“You’re going to see prices go up, especially contract rates from Asia to Europe and Asia to the U.S. East Coast because we don’t have the Suez Canal,” Jensen said. “We also have the Panama Canal issue. But I’m not so convinced about the U.S. West Coast. Contract rates will rise significantly.”
Zvi Schreiber, CEO of international air and sea freight digital booking platform Freightos, said that although freight rates from Asia to the west coast are lower than those from the east coast due to shorter routes, freight rates have soared due to geopolitics and climate change.
“The diversion of the Suez Canal affects the entire network,” Schrieber said. “I think the Panama Canal is recovering now, but its capacity is well below its full capacity due to the drought. They rely on rainfall to fill the canal’s locks, so many importers prefer to move cargo into the Port of Long Beach where they are not dependent on the Panama Canal.”
Overall, West Coast ports are seeing increased throughput due to various issues including the Panama Canal. The Port of Los Angeles announced that container handling volume increased by 60% year-on-year in February. It’s the seventh consecutive month of annual growth for the nation’s busiest port. In the two months to 2024, the port’s throughput increased by 35% compared to the same period in 2023.
Another headwind for East Coast ports is the potential for a strike by longshoremen in the fall.
“Buyers expect lower prices in the coming weeks, while sellers are holding off on inventory as they expect prices to remain stable due to tight capacity,” Roelofs said.
Roelofs said the diversion of the Red Sea and a highly unbalanced trade environment have exacerbated problems in the container market, citing Sino-Russian trade as an example. In the first two months of 2024, China’s exports to Russia increased by 12.5% annually, and imports increased by 6.7%.
These growing trade imbalances impact the work required to reposition empty containers in supply chains.
“We can see a 20% increase in shipping demand for empty containers,” said Alan Murphy, co-founder and CEO of Sea-Intelligence. “We haven’t seen the consequences yet because of those empty containers. It hasn’t started being repatriated yet. The question is, are there a glut of empty containers in Asia, or are they stuck in North America or Europe? When you have longer transit times, “you lengthen the supply chain and you have more equipment tied into that supply chain.” So that could be a downstream consequence of the Red Sea crisis that could push rates up again.”
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