Extreme spot rates in container shipping have lasted for months now. On some routes, rates will rise again in May. Can this continue?
Drewry believes that we should start using the term “extreme” to more accurately define this period of freight rate development, rather than the somewhat tired and overused term; “unprecedented.”
“extreme freight rates” are rates which are at least 50% higher than the 5-year historical average, provided they last for at least 3 months (so as not to confuse them with peak-season freight or one-off rates).
The chart and table below - based on the Drewry World Container Index - show that Shanghai-Los Angeles and Shanghai-New York rates have been in the “extreme” zone since Q3 2020, the Shanghai-Rotterdam and Shanghai-Genoa since Q4 2020 and Rotterdam-Shanghai entered the “extreme” zone in Q1 2021 and are just about to reach the 3-month threshold.
Additional insight from Drewry shows that the number of Asia-to-Europe/Mediterranean cancelled sailings will jump to 9 sailings during week 18, following the delays caused by the Suez Canal blockage. This means that 6% of scheduled sailings will not happen, according to the Drewry Cancelled Sailings Insight.
Drewry predicts that Asia-to-Europe spot rates will rise again in May, having declined slightly for several weeks (but remaining at 'extreme rate' levels).
There is also a phenomenon of contagion, where extreme freight rate spread from trade route to trade route. This happened last year, when extreme rates on the Transpacific spot market were followed by extreme rates on Asia-Europe. There is strong evidence that the Transatlantic trade spot market is next in line.
Port congestion at US ports, combined with container equipment shortages, reduce the supply side of the market. Price is also driven by carrier expectations, as they are able to make a fortune on the other trade routes and look for a price incentive to allocate scarce equipment to trade routes like the Transatlantic and Europe-to-Asia.
In the Drewry Container Forecaster, we maintain that spot rates will fall in 2022. Our rationale is that the current extreme freight rates are driven by a big increase in traffic volumes coinciding with large operational disruptions to the port and vessel networks.
Drewry expects these operational disruptions, port congestion and equipment shortages to decline substantially during Q4 2021. We do not believe that the problem will go away materially during Q3, because the industry will then have to handle extra peak season volumes.
Therefore, based on available insight and industry dynamics, our opinion and forecast is that “extreme freight rates” will last for at least another 3-5 months.
If correct, this means that such extreme freight rates will have lasted for more than a year on the Transpacific and some 10 months on Asia-Europe.
For carriers, this means a profit bonanza.
Drewry believes that carriers are set up for at least another two years of “extreme” profits.
For shippers, this means that spot rates should be avoided at all costs, if there are alternatives. As “extreme” rates become a medium-term issue, some shippers will also consider sourcing from locations requiring less expensive transport costs.