Photo: Wolfgang Fricke, CC BY 3.0, via Wikimedia Commons

Sea freight rates have abated, but shipping lines have other matters to worry about

After significant increases in December and January, container freight prices have calmed down significantly. Meanwhile, shipowners face several challenges that may cause the drop in prices to soon be forgotten.

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Earlier this year, disruption to international sea freight caused by the Red Sea crisis has pushed container rates to their highest levels in nearly a year and a half. In February this year, Transport Intelligence’s global maritime rates index increased by 173.8% during the previous 3 months. From November’s $1,411 for a 40-foot container, the price jumped to $3,864 in February. However, it is worth noting that the strongest price increases are already behind us.

While the first week of January brought a dynamic increase of almost 87%, week to week, in the next five weeks, the average price increase was only 5.9%. As Vicky Keckarovska, freight team leader at Transport Intelligence, emphasises, this flattening may result from the end of the pre-Christmas period before the Chinese New Year.

This trend is confirmed by data from the consulting company Drewry Maritime Consultants. The latest reading from March 14 this year shows that the global WCI index was at the level of $3,162 (for a 40-foot container). That’s 4% less week to week. At the beginning of December, before the outbreak of the crisis in the Red Sea, it was $1,661.

However, at the end of January, the index level was clearly higher than today and amounted to approximately $3,800. The index for the Shanghai-Rotterdam route was $3,473. For comparison, at the end of January, the index was $4,984. In mid-December 2023, it was approximately $1,400 for a 40-foot container.

The Calm Before the Storm

In turn, the factor that increased freight prices in the first weeks of the year was the inclusion of maritime transport in Europe in the ETS emissions trading system. However, analysts from Transport Intelligence claim that the current high rates are unlikely to be maintained in the long run. Moreover, experts do not rule out that just as the price increase was dynamic and sudden in December and January, their decline may also be strong and sudden.

The crisis in the Red Sea brought a sharp increase in prices, but in recent weeks, it has not had such a strong impact on sea freight. Shipowners have become accustomed to the new reality.

If the crisis ends abruptly, prices could fall sharply as this event would mean the introduction of significant additional capacity into international waters. We should also remember the significant number of ships ordered in the wake of the pandemic boom, which will enter the oceans this year.

“There is a belief among many shipping companies and shippers using their services that the last weeks and probably the next will be the 'calm before the storm,’ before the market will adjust the rates downwards,” we read in the latest report.

US records slight increase in cargo volumes

While the end of the year brought a significant jump in sea freight prices, cargo volumes increased only marginally. In the third quarter of 2023, they were 1.6% higher than in the same period of the previous year. In the last quarter of 2023, volumes improved by 1.2% compared to the July-September 2023 period.

The growing volume of cargo may seem to be a positive signal during the economic slowdown. It is worth emphasising, however, that this increase is noticeable primarily in the Asia-Pacific region and between Asia and North America. In the former, volumes in Q4 2023 were 4% higher than a year earlier.

Demand for goods produced in Asia remains relatively high in the United States. Additionally, American demand also supports volume growth between countries in Asia. Factories located on the continent receive components and raw materials from other Asian countries. And the finished products sail to the other side of the Pacific.

However, it looks completely different in demand from Europe, especially the crisis-ridden German economy. Unlike American consumers, Europeans are buying much less.

As Vicky Keckarovska says, “Europe is not providing any support for demand in the container freight market.” Paradoxically, weak consumer demand on the Old Continent could have helped contain disruptions in supply chains caused by the Red Sea crisis.

This time, there were neither dramatic delays in deliveries nor gigantic congestions in ports, as during the pandemic or during the Suez Canal crisis in March 2021. Back then, with high demand from European consumers, supply chains were going through difficult times.

What will the influx of ships bring?

We mentioned the implementation of orders for new ships, which are to be completed this year. In February, the available space resources on container ships were 6.2% higher year on year. This process is clearly intensified – in January and February 2024, compared to the same period last year, transport capacity increased by 12%.

As TI experts explain, the degree of transport space utilisation is still high among shipowners, and although profits have dropped significantly compared to the record years of 2021-2022, shipowners are still in the black.

This means that shipping companies are still able to absorb additional ships before their results are hit hard. As TI stresses, historically, in periods of prosperity, shipowners usually ordered excessive numbers of ships, which in the long run led to falling prices. “And today the order list for new ships is the largest in almost a decade,” the report reads.

Traditionally, these price declines have led to financial problems for shipowners and a process of takeovers and mergers in the market. Currently, this market is already highly consolidated. The question is whether there will be another consolidation and whether the current market giants will be able to control both prices and the availability of transport capacity.

No expected fireworks

Shipowners, logisticians, and shippers surveyed by Transport Intelligence, all expect a fairly calm year without any major price or demand spikes. It is expected that rate increases will begin to flatten out in the coming quarters. While in the first quarter of this year, they expect a clear quarter-to-quarter increase, already in II rates have slightly grown.

And prices are expected to stagnate in the last two quarters. The opposite trend is expected in consumer demand. As long as the first two quarters of 2024 bring only slight increases in orders, everyone expects an improvement in consumer activity in the second half of the year.

Despite the expected improvement in consumer sentiment, demand from the industry remains much to be desired. It will remain more or less at the same level this year, say those surveyed by TI. Only 2025 would bring an improvement in demand from the manufacturing sector.

Photo: Wolfgang Fricke, CC BY 3.0, via Wikimedia Commons