Date: Wednesday, April 21st, 2021
Finally, a bit of good news — or at least, less-bad news — for beleaguered U.S. importers. The latest data shows a moderate retreat in the year-on-year increase in long-term contract rates.
Norway-based Xeneta collects long-term contract rate data, using millions of inputs per month from shippers and non-vessel-operating common carriers (NVOCCs).
“Now, you can see a few minuses,” said Xeneta CEO Patrik Berglund during a market update on Tuesday, referring to contract-rate evolution in some trade lanes over the past three months.
Rates still rising, but by less
Annual contracts in the U.S. market are generally concluded by June. As of Tuesday, Xeneta pegged the average long-term contract rates for Asia-West Coast cargo at $2,030 per forty-foot equivalent unit (FEU), up 33% from a year ago.
That sounds bad, but during a presentation a month ago, on March 23, the number was much worse: Xeneta listed that day’s average Asia-West Coast rate as $2,640 per FEU, up 50% year on year.
The same moderation can be seen in Xeneta’s Asia-East Coast estimates: $2,866 per FEU as of Tuesday, up 19% year on year. On March 23: $3,659 per FEU, up 28% year on year.
Berglund also displayed Xeneta’s data for the evolution of long-term contract rates over the past three months. This dataset confirmed the easing of rates from early 2021 highs: for Asia-West Coast, down 22% compared to 90 days ago; for Asia-East Coast, down 18%.
“Though we might have reached a plateau here, rates really remain at record-high levels,” he emphasized. “There is clearly a substantial upward movement on both short-term and long-term rates on a 12-month basis. That means contracts signed a year ago and expiring now — particularly a lot of trans-Pacific contracts — will be facing substantial increases.”
Historic spread between rates
The spread between the individual rates that make up the averages is wider than ever before. “There is an unprecedented spread in the market,” said Berglund. “There are companies paying substantially lower rates [than the average].”
That’s a big plus for the very largest shippers that can negotiate such deals. However, even those shippers face “challenges to get enough volumes to move on those rates … [and] don’t get their full volumes moved against those rates. In today’s market, you have valid rates sitting far lower [than average], but carriers are pushing as much volume as they can over to the short-term market.”
The largest shippers also face steep year-over-year price increases, albeit off a much lower base.
Berglund pointed to the Asia-North Europe market, where both spot rates and contract rates are far above the trans-Pacific (and unlike the trans-Pacific, have increased over the past three months). The spread in this trade between the low end of the long-term contact rate and the spot rate is around $5,500 per FEU.
“That is unprecedented. But even though those rates are substantially lower [than average], if you look at the percentage increase over the last 12 months, it’s up 85% for the really big-volume players that regularly fill the vessels for the carriers.”
Long term-to-spot correlation
According to the Freightos Baltic Daily Index, Asia-West Coast spot rates (SONAR: FBXD.CNAW) were $4,854 per FEU as of Monday and Asia-East Coast rates (SONAR: FBXD.CNAE) were $6,226 per FEU. Xeneta’s assessments are lower, at $4,045 and $5,031 per FEU, respectively.
“Historically, we’ve seen a correlation between the short-term and long-term market,” explained Berglund. “So, if you have a 100% increase in the short-term market, you will see an uptick three to six months later in the long-term market, although by far less [than the short-term increase]. This means that if the short-term market plateaus and slowly starts to go down, it will take time before we see a corresponding move in the long-term market.
“Even though we see this plateau [in short-term rates], the market dynamics don’t really support a massive drop,” he added. “Maybe there will be a slower drop-off in Q3 or Q4. It remains to be seen — especially given that carriers have proven that they’re far more savvy at adjusting capacity to demand.”
According to the guest speaker of the Xeneta presentation, Jochen Gutschmidt, vice president of advisory services at Copenhagen-based Sea-Intelligence, “The question I’m asked almost daily is: Are these rates sustainable? I always answer: No, I don’t think they are.
“Every company has profitability targets. And when we see the financials of the carriers, obviously all of the shareholders have a big smile on their faces, but I don’t think the carriers would ever realistically define long-term targets that equal the profit realities they have today. Nobody would accept that.”
Gutschmidt does not believe the current rate peak will last until 2022. “This is not the reality we will see a year from now — or even, I think, six months from now,” he predicted. “I would almost bet that at the same time next year, you would not be spending $9,000 for a dry box from Shanghai to Rotterdam. That will not be the rate.”