Long-term box rates begin to follow the trend set by the spot market

Date: Wednesday, August 31, 2022
Source: Splash 24/7

Long-term box freight rates continue to climb but are finally showing signs of coming under pressure.

Data from online platform Xeneta shows that long-term rates increased 4.1% in August, standing 121.2% higher than this time last year.

“[D]espite softening spot rates, uneven demand and on-going supply chain issues, the world’s leading carriers remain on course for another bumper year of profits,” an update today from Oslo-based Xeneta stated.

Nevertheless, there are signs that new long-term contracted rates are actually starting to drop on key trading corridors However, due to the fact they’re replacing expiring agreements with considerably lower rates, the average paid by all shippers is still climbing.

“There’s no doubt the major carriers have had it their way in negotiations for some time,” noted Patrik Berglund, Xeneta CEO. “The spectacular results they saw in 2021 will no doubt be repeated, and even bettered, this year, as seen by the huge profits that defined many Q2 financial reports. But there is a sense that change is in the air.”

Multiple liner analysts have suggested that cumulative liner profits this year could top $200bn, a record that marks container shipping as one of the most profitable industries in the world.

Long-term rates were inevitably going to follow in the wake of the declining spot markets, with many liner CEOs suggesting of late that the market is heading towards normalisation in the coming months.

CMA CGM’s chairman, Rodolphe Saadé, told Bloomberg last Friday, “What we’ve been seeing now for many weeks is a decrease of freight rates in almost all sectors. We expect that decrease to continue. I don’t think we’ll see a strong drop but rather a soft landing.” His comments have been echoed by many of his peers recently.

Xeneta’s Berglund cautioned today: “Volumes are dropping and, as expected, long-term rates are beginning to follow the trend set by the spot market.”

The latest spot rate data published by Drewry’s World Container Index shows an accelerating trend in terms of rate declines on Shanghai to Los Angeles and Shanghai to Rotterdam.

The Shanghai to Los Angeles rate dropped 6% last week, and has dropped 10% over just two weeks. Prior to that it had taken five weeks to accomplish a 10% rate decline.

Shanghai to Rotterdam rates dropped 5% last week and have dropped 9% in total over the past two weeks. Prior to that it had taken eight weeks for the rate to decline 10%.

Likewise, last week’s 275 point drop on the Shanghai Containerized Freight Index (SCFI) was one of the largest in its history.

“This clearly signals a weakness in the market, especially as we right now ought to be in the midst of the peak season prior to Chinese Golden week in a month’s time,” commented Lars Jensen from Vespucci Maritime.

Hard data available in the market increasingly supports the “light at the end of tunnel” hypothesis for hard-pressed shippers, argued Sea-Intelligence in its latest weekly report.

Schedule reliability has consistently been improving since January 2022 – gradually releasing more capacity into the market, Sea-Intelligence pointed out, adding: “Spot rates continue to slide, underpinning the notion that the market no longer suffers from an acute lack of supply.”

The end-to-end transportation time measurements from Flexport also show material improvements, especially to the US, and has done so for several months now.

“All in all, there is ample data-driven support that this is truly the path back to more normal conditions that the market is on,” Sea-Intelligence concluded.

Not everyone is convinced with this hypothesis however. Online platform Project 44 suggested in a recent market update that shipping lines will continue to use blanking as a tool to keep freight rates high, arguing that prices are unlikely to keep falling and will assume a floor soon.

Parash Jain, HSBC’s global head of shipping and ports research, maintained that liner shipping now has a stronger bargaining position thanks to consolidation.

“Going forward, we argue that after years of consolidation and the formation of mega shipping alliances, the shipping lines have learnt the capacity discipline and while there might still be volatility in freight rates, the rock-bottom level of freight rates seen in the past decade might no longer persist in the future,” Jain told Splash earlier this month.


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