March and April are important months for ocean carriers trying to ink annual freight contracts with shippers, together with the world’s largest retailers, however this yr contract season is popping right into a ready recreation.
The $2,500 unfold between spot market charges and long-term freight contract charges for Asia to U.S. West Coast containers has reached its highest degree since September 2021, when the unfold between short-term charges and the long-term charges was $2,900.
This has prompted shippers to hit pause earlier than signing on the dotted line, with ocean carriers trying to signal on the higher spot rates fueled by the Red Sea diversions, and shippers holding out for a steeper decline.
Ocean spot freight charges have tumbled for a sixth-consecutive week because the Shanghai Containerized Freight Index dropped by 6%. Ocean carriers had been unable to push through a mid-March charge improve, and expectations of an April charge hike are fading amid mushy demand.
Peter Sand, chief analyst at Xeneta, tells CNBC that shippers are ready to see if the unfold narrows and to strike a steadiness of how a lot they may purchase on the spot market versus contract.
Earlier than the Purple Sea spike, ocean freight charges and contracts — which drive income for the ocean carriers akin to Hapag-Lloyd and Maersk — had dropped to as little as $1,342 for a 40-foot container in October. The influence of these decrease freight charges had been mirrored in recent Q4 ocean carrier earnings.
The market is at present experiencing a major mismatch between purchaser and vendor worth expectations, in a demand-deficit atmosphere, based on Christian Roeloffs, co-founder and CEO of container buying and selling and leasing platform Container xChange. “There is a significant imbalance between supply and demand price expectations for containers,” Roeloffs mentioned.
The present spot charge atmosphere is benefitting shippers.
“[Ocean] carriers are taking the opportunity to exploit this current market,” mentioned Sand.
In the end, he says time is on their facet.
“Carriers sit in a much more comfortable chair now, and by the end of April, all of the contracts that were signed last year will expire. So as soon as they expire, shippers may need to ship all of that product on the spot market. No large-scale shipper can go all in on the spot market,” Sand mentioned. “Right now, it’s definitely not the preferred option.”
Sand mentioned shippers can handle charges via the phrases of the period of the contract and by bringing in renegotiation clauses.
“I think many businesses are trying to hold off on making decisions,” mentioned Michael Aldwell, govt vp of sea logistics for Kuehne+Nagel.
“Will the Red Sea congestion topic still be there? How serious is that? Do we expect rates to fall further after the spike in short-term freight rates? As we get through the next three, four, five, six weeks, businesses are going to end up making more agreements and I think against that backdrop of all the uncertainty out there, that makes a lot of sense,” Aldwell mentioned.
Full yr 2024 outlook for ocean delivery
Chris Rogers, head of provide chain analysis for S&P International, mentioned the disruptions the logistics world is at present dealing with will proceed for the remainder of the yr, however the prices related to delivery haven’t gone up as a lot because the spot charges did throughout the Purple Sea assaults and the Panama Canal drought points, resulting in the current pricing reversal.
“We’re continuing to see those rates drift down,” Rogers mentioned. “That may continue through the rest of the year.
Lars Jensen, Vespucci CEO, said he expected the spot rate decline to continue, but rates will vary depending on the global trade lane.
“You are going to see will increase, particularly in contract charges Asia to Europe and Asia to U.S. East Coast, as a result of we simply haven’t got the Suez,” said Jensen. “We even have the Panama Canal difficulty. However I’m not that satisfied you are going to see dramatic will increase in contract charges to the U.S. West Coast.”
Zvi Schreiber, CEO of Freightos, a digital booking platform for international air and ocean freight, said even though Asia to West Coast freight rates are lower than the East Coast rates because it’s a shorter route, they have spiked due to both geopolitics and climate change.
“The Suez diversions have an effect on the entire community,” Schrieber said. “The Panama Canal I feel is recovering now, however it’s effectively beneath its full capability due to a drought. They rely on rain there to fill the locks in that canal so a whole lot of importers would like to carry their items into Lengthy Seashore port the place they don’t seem to be depending on the Panama Canal.”
West Coast ports, in general, have seen a bump in volume due to a variety of issues, including the Panama Canal. The Port of Los Angeles announced a 60% increase in container processing for February year over year. It was the seventh-consecutive month of year-over-year growth at the nation’s busiest port. For the two months into 2024, the port has a 35% increase over 2023 during the same time frame.
Another headwind for the East Coast ports is a possible longshoremen strike in the fall.
“Patrons predict worth reductions in weeks to return, whereas sellers are holding off the stock as they count on costs to stay secure as a result of tight capability,” Roeloffs said.
The Red Sea diversions and what can be described as a highly imbalanced trade environment are adding to issues in the container market, Roeloffs said, pointing to China-Russia trade as an example. Chinese exports to Russia grew by 12.5% year-over-year in the first two months of 2024, while imports rose by 6.7%.
These growing trade imbalances have impacted the work needed in the supply chain to reposition empty containers.
“We will see there’s a rise in the necessity to transfer empty containers of 20%,” said Alan Murphy, co-founder and CEO, of Sea-Intelligence. “We’re not seeing the ramifications but as a result of these empty containers haven’t began getting repatriated again. The query is, is that surplus of empty containers in Asia, or is it caught throughout North America or throughout Europe? When you have got longer transit instances you lengthen the availability chains, and you’ve got extra tools tied up in that provide chain. So, that might be a downstream consequence of the Purple Sea disaster that might push charges up once more.”
