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Sea freight rates spike with peak season on the horizon

Eye-opening increases in sea freight rates have been ongoing for over two weeks, coming as something of a bolt from the blue. The crisis in the Red Sea, ongoing since December, led to significant increases in rates in the first weeks but then calmed down. So where does the latest price hike come from?

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In the week ending May 24, the Drewry index on the route from Shanghai to Rotterdam increased by 20% compared to the previous week.

In just seven days, it went from $4,172 for a 40-foot container to $4,999. Slightly smaller increases were visible on the route from Shanghai to Genoa. There, in the week of May 24, prices for a 40-foot container increased by 15% to $5,494.

Moreover, the index does not reflect actual prices at all. As The Loadstar website explains, quoting an anonymous source, when the Drewry index showed approximately $5,000 per container, the actual transaction prices were in the range of $6,000-$7,500. The person quoted by the portal said shipowners claim that prices will reach the level of $10,000 per container.

Rising demand, an insufficient supply of ships, and a shortage of containers at major export ports in Asia have contributed to rising prices in recent weeks.

Houthis, weather, and climate regulations

The reason for this is the crisis in the Red Sea that’s been ongoing for over half a year, which means that ships to Europe must sail around Africa instead of through the Suez Canal. This adds 7-10 days to the trip, not to mention that it increases the costs for shipowners, who reflect these costs in their rates.

All this leads to congestion in the most important ports such as Shanghai, Ningbo, Xiamen, and Qingdao. The problem also applies to marinas outside China, including Singapore.

Charges related to climatic requirements also contribute to price increases. Let us remind you that from January 1 this year, maritime shipping in the EU is covered by the emissions trading system, which increases the costs of shipping to ports in the Community. Moreover, promoting alternative drives and green fuels also involves higher costs.

Additionally, at the end of April and the beginning of May, there was unfavorable weather in Asia, which obstructed navigation by stopping many ships in ports or roadsteads waiting to enter. This particularly applies to Singapore, Malaysia, and South China ports. Additionally, because of the weather, ships bypassed many ports; as a result, containers did not return to the main export ports in Asia in sufficient quantities.

In this situation of congestion in ports, shortage of containers, and lack of ships, even a small increase in demand was enough to drive up freight rates significantly. And according to Xeneta’s data, demand for sea transport increased by over 9% in the first quarter of 2024 compared to the first quarter of 2023.

Similar trends are also visible on other transoceanic routes. When rates increased by 15-20 percent at the end of May per week towards European ports, the rate index from China to the West Coast of the United States increased by 13% on the way to New York.

Calm before another storm

Since those crazy increases in May, prices have calmed down a bit. For a moment. In the last week of May, the global WCI index increased only” by 4%. On the route to Rotterdam, prices were 5 percent higher than the week before (and amounted to $5,270 per container). In turn, sailing to the Mediterranean Sea became 4% more expensive than the previous week.

In the first week of June, prices went crazy again and returned to double-digit increases. In the latest reading of Drewry’s WCI index from June 6, from Shanghai to Rotterdam, the price was already $6,032 – 14% more week-to-week. From China to Genoa, the increase was even greater at 17%, up to $6,664 per container.

On routes from Asia to North America, increases were more moderate – 6% to New York and 11% to Los Angeles. In total, the global WCI index increased by 14% to $4,716.

Nevertheless, the increase recorded over the last two months brings to mind the gigantic jumps in rates during the pandemic. Looking at the route from Asia to Northern Europe (currently over $6,000), on April 1, the Drewry index for this direction was $3,349! Year on year, the current rate to Rotterdam is 315% higher and to Genoa by 214%.

Additional factors

The summer peak season is just getting started, which will maintain high demand for transport capacity. However, these capacities are almost exhausted.

As emphasised by the portal Freight Waves, Judah Levine, head of research at the forwarder Freightos, said in April and May many shipowners used ships from other routes to maintain the shipping schedule from Asia to Europe. Levine adds that there is currently no spare capacity to keep shipments and loadings on schedule for extended sailings.

Additionally, experts indicate that the increased global demand for transport capacity also results from the policy of building inventories by American importers. Several factors contributed to this. First, throughout 2022 and 2023, warehouses were being cleared after being filled during the COVID-19 pandemic.

There is currently a lot of spare capacity in warehouses in the United States for the first time since the pandemic. At the same time, there are concerns that there may be disruptions in the transport of goods from Asia in the coming months and quarters. Therefore, importers want to protect themselves now.

These potential events, which in the medium term may affect the availability of transport capacity on the oceans, include new tariffs introduced by the US on goods from China and ongoing negotiations with trade unions in ports on the East Coast of the United States.

Customer frustration

Moreover, many importers complain that shipowners avoid taking contracted cargo at lower prices, focusing on goods taken at the current high spot prices.

Shipowners do not honor anything other than their own profits,” said a manager of a company importing from Asia, as quoted by The Loadstar. He added that this may result in the suspension of production and orders, causing losses for both importers and shipping companies.

The disproportion between long-term contract rates and skyrocketing spot prices also causes shipowners to prioritize certain relationships over others. Generally, small shippers and forwarders are the most affected, having to take into account various subsidies to secure space on the ship for their cargo. The largest shippers do not have to worry about lack of space – shipowners will rather try to maintain good relationships with their best customers.

What awaits us?

The consulting company Xeneta wrote at the end of May that June should bring further increases on the main routes from Asia (to Europe and North America).

Although it is rather unlikely for rates to increase to levels seen during the COVID-19 pandemic [up to $12,000-$13,000], the levels we witnessed during the Red Sea crisis in early 2024 [approximately $6,000 per container] are not impossible,” wrote analysts from Xeneta.

Already in the first week of June, these increases have become a reality.