May typically sees a slowdown in the international shipping market, but this year presents a stark contrast. Shipping rates have surged to unprecedented levels, doubling overnight, reminiscent of the height of the pandemic.
Since late April, freight rates on Europe and America routes have spiked by double digits, with some routes experiencing nearly a 50% surge. The resurgence of “container scarcity,” shortages, overstocking, and shipment rejections has piled immense pressure on both freight forwarders and foreign trade companies.
In the wake of soaring shipping prices, prices for China-Europe freight trains also saw significant increases in mid-May, with rates on various routes jumping by 10% to 20%.
On May 27th, the Shanghai Shipping Exchange unveiled the Shanghai Export Container Comprehensive Freight Index, reaching 3368.61 points, marking an eighth consecutive ascent. This represents a 39% surge compared to late April, hitting the highest level since September 2022. The index for the US West Coast route (base port) stood at 3082.86 points, a staggering 71.03% increase from mid-April’s 1802.53 points.
(Source: Shanghai Shipping Exchange)
Over the past five weeks, shipping rates (inclusive of freight and surcharges) from Shanghai Port to key ports in Europe have surged by 73.0%. Similarly, rates to primary ports in the US West and US East markets have climbed by 63.4% and 59.2%, respectively, from Shanghai Port. Additionally, rates to major ports in South America have seen a notable increase of 70.1%.
The Drewry World Container Index (WCI) experienced a notable uptick of 16% last week (ending May 23), reaching $4072 per FEU (FEU denotes a standard 40-foot container). This marks a substantial 142% surge compared to the corresponding period in 2022 (adjusted for the particularly depressed market conditions in 2023, for comparative purposes with 2022).
(Source: Drewry)
The data we've gathered is indeed surprising, but the actual prices for purchasing container space surpass these figures significantly.
Reasons Behind the Surge in Freight Rates
New Annual Contract Negotiations
The ongoing round of annual contract negotiations in the shipping market is causing fluctuations in freight rates. While this presents an opportunity for some businesses during contract negotiations, it has led to a significant increase in freight rates from the Far East to the Mediterranean, surpassing 60% compared to last year’s rates.
Panama Canal
The Panama Canal, a crucial passage for container shipping, faces challenges due to a worsening drought crisis, resulting in heightened costs for shipping.
Tensions in the Red Sea Region
Tensions in the Red Sea region have forced many container ships to navigate around Africa’s Cape of Good Hope, adding approximately 3100 nautical miles and 8 to 10 days to transportation time. This congestion reduces container turnover efficiency and leads to a 29% decrease in market capacity, consequently driving up freight rates on alternative routes.
Capacity and Container Shortages
Despite new vessel deliveries, the issue of inadequate capacity persists, leading vessel operators to cancel sailings and raise freight rates. Additionally, increased Chinese export demand has resulted in fewer empty containers returning, exacerbating the shortage of vessel capacity.
Recovery in International Trade and Supply-Demand Dynamics
While the global economic growth has slowed, there are clear signs of recovery in commodity trade, with shipments to Europe and the United States exceeding expectations. According to S&P Global data, the Eurozone's manufacturing PMI rose to 47.4 in May, surpassing market expectations and reaching its highest level in 15 months. Meanwhile, China's cumulative imports and exports for the first four months of the year have reached a historical high.
Meanwhile, China's cumulative imports and exports for the first four months of the year have reached a historical high. In April, trade with emerging markets continued to improve, and trade with traditional markets such as Europe and America shifted from decline to growth.
Rising Prices Prompt Early Shipments and Urgent Exports
As shipping costs increase, downstream enterprises face immense pressure. Concerned about rising prices, cargo owners rush to ship their goods, resulting in a surge in shipments and a shortage of cargo space.
To ensure timeliness, foreign trade enterprises have begun shipping orders for the second half of the year in May and June.
Strike Risks
The potential for strikes on the U.S. East Coast may result in cargo diversion or congestion, leading to increased freight rates at West Coast ports.
Joint Price Increases by Shipping Alliances
The soaring sea freight rates are attributed to joint price increases by shipping alliances. Shipping companies, including Evergreen Marine Corp., have indicated that during periods of high freight rates, there is no incentive for them to control capacity. The current shortage of ships and containers is significantly more severe than in April.
Current Status of Shipping Companies, Container Manufacturers, and Freight Forwarding Companies
As of February 21st, Chairman Zhang Yan-yi of Evergreen Marine Corp. underscored the significance of the crisis in the Red Sea, referring to it as a “lifeline” for the shipping industry. This crisis has played a pivotal role in preventing freight rates from experiencing a steep decline, instead causing them to escalate rapidly.
Since the end of April, major global shipping companies such as Maersk, CMA CGM, and Hapag-Lloyd have all announced price hikes for various routes spanning Asia to Europe, North America, South America, and other destinations. For instance, Maersk plans to adjust its FAK rates from Asia to Northern Europe to a maximum of $5900 per FEU starting from June. Similarly, rates from the Far East to the Mediterranean are expected to reach up to $6800 per FEU, with an additional peak season surcharge of $2000 per FEU imposed on the East Asia to East Coast of South America route.
On May 10th, the world’s largest container shipping company, Mediterranean Shipping Company (MSC), reintroduced its Diamond Service, a guaranteed capacity pricing mechanism previously implemented in recent years. Under this arrangement, the freight rate for each 40-foot container (FEU) to the West Coast of the United States is set at $8000, while to the East Coast of the United States, it is $10000. These updated rates will be effective from May 15th to 31st.
Currently, freight rates for shipments from Shanghai to Rotterdam range between $6000 and $7500, with some carriers even projecting rates to climb as high as $10000.
Maersk forecasts a loss in capacity of 15% to 20% on the Far East to Northern Europe and Mediterranean routes in the second quarter. To address this, they have leased 125,000 containers. Additionally, due to increased fuel consumption resulting from longer voyages, Maersk will impose surcharges on customers to offset the additional costs.
OOCL noted that capacity shortages have sparked a rush for containers, leading to a significant uptick in new container orders. Major container manufacturers’ order books are already filled up to October of this year.
Among the top global container manufacturers, CIMC Group reported a staggering 499.27% year-on-year increase in sales of standard dry cargo containers in the first quarter of this year. They expect container production volume to surpass 3 million TEU this year. Another major player, China International Marine Containers (CIMC), achieved a 39.11% year-on-year increase in revenue from container manufacturing. CIMC highlighted that, influenced by factors like the situation in the Red Sea, major clients such as shipping companies have shown increased willingness to purchase containers. Market demand is rebounding, and it is anticipated that the container market will follow a path of stable recovery in 2024, with overall conditions improving compared to last year.
Freight forwarding companies are grappling with a surge in cargo volume amid a shortage of available shipping space, fluctuating freight rates, and the challenge of container rollovers. Despite offering additional sums ranging from $500 to $1000, securing space remains an arduous task due to the constrained capacity. The recent pressure on freight rates has resulted in a noticeable decline in business volume for freight forwarders, exacerbating their predicament.
Major corporations report that their FOB (Free on Board) model orders are less impacted by the surge in sea freight. These large enterprises maintain long-term contracts with shipowners, and even in the absence of contracts, shipowners prioritize servicing major clients.
It’s evident that small and medium-sized enterprises (SMEs) are bearing the brunt of the situation, with shipowners deciding on space allocation based on the volume of cooperation. Recently, routes to Europe, the United States, South America, and Africa have faced severe container congestion. However, companies shipping light industrial daily products and textiles to Southeast Asia have experienced relatively smaller increases in freight rates, resulting in smoother space booking processes.
The Situation Continues
China-US Transpacific Route
On May 22nd, Dexin published an analysis report forecasting that the ongoing tight capacity situation would extend into the next two weeks, with cargo rollovers remaining prevalent. In response, certain shipping companies have initiated supplementary services to the US West Coast in efforts to ease space constraints. Additional charges for comprehensive rates have been effectively implemented twice this May, prompting shipping companies to contemplate GRI (General Rate Increase) initiatives for early June and peak season surcharges targeting long-term clients. Concurrently, select shipping firms are rolling out premium services offering prioritized space allocation and timed container release.
China-Latin America Route
China-Europe Route
To adapt to the volatility in freight rates, several companies are diversifying their transportation methods, including utilizing the China-Europe rail service and other flexible options, to ensure stability in their deliveries. Moreover, strategic alliances are being formed among companies to pool resources and optimize transportation strategies.
In its first-quarter financial report, French shipping firm CMA CGM forecasts an improvement in global shipping capacity with the accelerated delivery of new vessels, potentially resulting in a moderation of shipping rates. The company's CFO, Fernandez, notes that the situation in the Red Sea has absorbed nearly all the new capacity introduced in the market during the first quarter. He anticipates a reduction in pressure on shipping rates due to regional conflicts and robust consumer demand by the second half of the year.
Although some industry experts predict a continued rise in rates during the peak shipping season over the next three months, they also foresee worsening congestion and container shortages leading to heightened port congestion. Despite these challenges, significant fluctuations in rates are not anticipated, with a possible downturn expected in the fourth quarter of this year.
Comments