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Shanghai is reopening, but will the market follow the rules? Are we in for the rates meltdown or a rebound?
According to the officials, restrictions in Shanghai will be lifted by May 20, but what consequences this lockdown has had on the market? As for now, the shipping volumes to the US dropped by 20%. Happag Lloyd has reduced its volumes by 20-25%, and the experts predict that it will take up to eight weeks for the operations in Shanghai to resume properly. Everyone from shippers to manufacturers is desperately waiting for the reopening, and the latter have been voicing their frustrations about how poorly the government has been dealing with the Shanghai outbreak since the early days. Even with the companies that have already resumed production, their output is still less than 30% of capacity. Although the industry players want to stay in the Chinese market for the rebound, the circumstances are throwing shade on these plans, and experts warn that if the situation persists, it will drive people out of the country. It is reported that nearly 28% of foreign employees are ready to leave.
After the reopening, the Chinese rebound will be temporary, although it makes sense for getaway terminals in the US and Europe to brace up for the whiplash effect when the surge of queuing ships will come with new force. Despite that, the demand will soon start decreasing - even to the level prior to clearing of congestion - which will offset the gains of the reopening and peak season.
The elevated levels of congestion do not prevent spot rates from a further drop, and the market predicts a significant decline to occur in the second half of 2022. That being said, companies are betting on long-term contracts to safeguard their earnings. Carries are also opting for blank sailings in order to manage the drop, but neither of these actions prevents spot rates from falling even more. Although it might seem paradoxical, but even with the present congestion, rates are particularly weak out of China. Why paradoxical? Traditionally, congestion drives spot rates higher by reducing effective transport supply (and this is what the world saw before), but now it is the opposite (low rates, how congestion) because of the softening demand. Experts call it a transitional period:
- Drewry’s container index has fallen by 0.9% to $7,657.20 per 40ft container but it still remains 33.7% higher than a year ago.
- Spot rates from Asia to Europe and the US west coast have dropped by more than 20%
The slide is expected to stop eventually as soon as capacity stabilizes. Some of the forecasts anticipate it happening in the coming weeks, however, Hapag Lloid foresees a different scenario with spot rates going below long-term rates way later, in 2023. What is also expected next year is that the container-ship newbuilds will hit the water. New orders were being placed all the way through Q1, pushing the orderbook to fleet ratio to around 25%. Therefore, next year, the capacity influx will consequently increase. Taking these factors into account, it can be concluded, as for now, that the peak of the freight rates’ growth may pass already in the first quarter and the market can expect a decreasing dynamic afterward.
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A hot-red market is a profitable playground for some and a shaky ground for others. But the Regulator’s grip is tightening around even the biggest players.
Depending on the side of the word, the number of blank sailings has been significantly volatile. If in the Asia-North Europe part, they have been increasing, in the Asia-Mediterranean direction blank sailings have been bouncing back and forth.
As for Asia-North America West Coast and East Coast, the spike in blank sailings occurred almost at the same time, just with a difference of a couple of weeks. Experts fear that the number of voided voyages may be about to snowball. The risk might be mitigated with the re-opening of Shanghai.
Spot rates follow the unstable pattern and, although WCI has demonstrated a 0.5 percent to $7,727.84/40ft decline, it still remains elevated almost by 41% compared to last year.
● A 2% drop has been observed in freight rates on Shanghai–Rotterdam. The new rate is now at $9,987/FEU.
● On the other way round, Rotterdam–Shanghai, rates went up by 2% to $1,451/FEU.
● Shipments to the UK are still commanding a premium of about $1,000 per 40 ft.
● The biggest plunge of 19% occurred on the Asia-US West Coast direction where the freight rate dropped to $12,596/FEU. However, it is still sky-high, representing a 104% increase than it was at the same time last year.
● Asia-US East Coast freight rate has shown a less steep decline of 7 % to $15,973/FEU. In comparison to the same period last year, it is 144 % higher now.
● For several years, Europe to the US East Coast rates used to be the most convent - setting the bar at $1,900 per 40 ft, and then over a year, they climbed to $3,500 per 40 ft. The current situation has shown that the mentioned increase is not the limit. They have gone further up by 5% hitting $8,991.
However, even despite these increases and big discounts that shippers reportedly have been offering on spot rates from China recently, it is the long-term contracts that companies are favoring the most. As shippers scramble to secure their supply chains ahead of the peak season, carriers are collecting huge first-quarter profits with to intention to give up the influential position in the hot-red market. Everyone is anticipating the re-opening of Chinese ports. The sector learned it from past mistakes when after the ease of the first lockdown, players couldn’t buy a slot for their cargo at any price for weeks. Now they are trying to secure the spots no matter the price tags.
Since the situation remains in favor of the shipping lines facilitating the increase of their influence, federal regulators demand the submission of more transparent pricing policies and comprehensive capacity data. The regulation aims to protect companies from the anti-monopolistic reign and anti-competitive rates and service. The FMC seeks to establish a uniform way for the alliances to report their activities including the movement of cargo on the major trade lanes. Shppers want the FMC to go further and take control over skyrocketed demurrage fees charged by ports and railroads at ocean terminals. Otherwise, according to them, they are being penalized for congestions that they are not solely responsible for. The initiative has already seen the light: Wan Hai has already been fined $850,000 over unfair detention and demurrage charges levied on containers between May 2020 and April 2022.
The problem of the unreasonable fees is worldwide. In Australia, shippers report that they are paying more than one billion dollars a year in international shipping fees, in addition to record high freight rates and a spate of surcharges. They are applied in a difficult time when shippers have no other choice but to deal with vessel bunching, limited operating hours, delays in biosecurity releases and inspections, extreme supply chain labor shortages, and much more.
Without a doubt, it seems like navigating through the current frenzy is rocket science. However, MAXMODAL provides concrete, up-to-date overviews of the logistics and transportation market.
Sign up now to stay tuned. MAXMODAL is a multimodal network that digitally connects routes and rates worldwide to automate sales and operations. Join to innovate.
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The railway at the port of Rotterdam recently experienced problems again. Due to emergency repairs, fewer freight trains could run, which caused a nuisance for carriers.
