Freight rates are starting to fall and container rates may have peaked
Recent unrest in the Red Sea has forced shipping companies to divert to Africa, and spot freight rates have risen sharply. The Shanghai Container Freight Index (SCFI) edged down 1.6 per cent to 3,674.86 points last week after rising for 13 consecutive weeks, breaking the previous upward trend. While the SCFI index fell, the Drury World Container Index slowed to a gain of only 1% after jumping 10,000 points in the previous period. Overall, the container market has shown some signs of adjustment after a long rise.
The extraordinary boom in the container shipping market in 2024 appears to be hitting its first turning point as shippers brace for a tough bargaining process. Linerlytica, a consultancy based in Asia, has warned that freight rates may have peaked, a prediction given early validation by this week's fall in freight futures markets (see chart).
In its latest weekly report, Linerlytica analyzed: "Although carriers successfully pushed through the July 1 rate increase, the addition of capacity on the West Coast of the United States, Northern Europe, South America and the Middle East has effectively eased the pressure on these routes, leading to cracks in the ability of carriers to raise rates further." Still, the agency predicts freight rates will remain high until the end of the peak season, which could extend into September.
From the point of view of specific trade routes, the last European container freight rate index (SCFI) assessment of the first weekly decline since mid-April, down 0.5%, mainly due to the average capacity utilization of two consecutive weeks of decline, although the latest European freight rate has rebounded.
Johnson Leung, co-founder of Linerlytica, said rates on Asia-Europe routes were already showing signs of peaking, with freight forwarders gaining more space in new services launched this month. He further explained: "According to the utilization data, the new Asia-Europe route opened last week has led to an unprecedented downturn in the capacity of Asian routes. Utilisation rates on French Peak, owned by CMA CGM, and CGX, owned by Hapag-Lloyd, are well below the recent average on Asia-Europe routes."
Asian shipping industry expressed concern about this, with one shipper bluntly saying that "shipping companies are about to collapse", stressing that this year's shipping boom is fundamentally different from the boom during the COVID-19 pandemic. One non-vessel carrier (NVOCC) executive revealed that while rates remained firm in most regions, rates for space between China and the Middle East had fallen by a third in the past four weeks, while those between Asia and northern Europe were "stagnant".
On the trans-Pacific route, Jefferies, the investment bank, notes that while freight rates from Asia to the US west coast remain at annual highs close to $8,000 per foot of container, market signs suggest booking prices will fall back to about $7,000 per foot of container in late July and August.
A number of experts in the field of container shipping consulting also expressed their views on this. Lars Jensen, CEO of Vespucci Maritime, believes that unless there is a new major breakdown in the supply chain, such as increased port congestion, a Canadian rail strike or a widening of the Red Sea crisis, July is likely to be the peak of the current rate increase. However, he also warned that the impasse in contract negotiations among dockworkers on the US East Coast could trigger a wave of strikes in the autumn, becoming a new round of uncertainty affecting freight rates.
Deutsche Bank analyst Andy Chu said the current container shipping market is in a bubble, and freight rates have risen more than historical levels outside the COVID-19 pandemic, which is difficult to understand.
However, not all analysts are pessimistic. Emily Stausøll, senior shipping analyst at Xeneta, noted that its data suggests that average spot freight rates for key Asian destinations will continue to rise in mid-July, which coincides with record global demand for sea container shipping in May. She believes spot rates will continue to climb as long as shippers feel they have to pay more to secure cargo space.
Simon Heaney of Delury and Dan Nash of Veson Nautical expressed a similar view, saying that freight rates will be affected by port congestion and equipment availability, while current demand remains strong and is not expected to change radically this year.
In addition, congestion at the port of Singapore has continued to ease since May, with vessels waiting for berths significantly reduced, but other regional ports such as those around the Cape of Good Hope have been hampered by adverse weather conditions, further complicating global shipping.
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