Container shipping’s ‘big unwind’: Spot rates near pre-COVID levels

Wednesday, 04 January 2023

The billion-dollar question for container shipping markets at the beginning of 2022 was: “Party on or the big unwind?”

It turned out to be the big unwind. As this year draws to a close, the party is pretty much over. Many of the COVID-era market gains are gone. The rest will be in jeopardy in 2023. 

Asia-West Coast rates back to normal

The Freightos Baltic Daily Index (FBX) assessed China-West Coast rates at $1,378 per forty-foot equivalent unit on Monday. The index has been relatively unchanged since Nov. 23 and is down 93% from its all-time high in September 2021.

It has now done a full round trip since the beginning of the COVID-induced consumer boom — it’s back where it was at this time of year in 2019.

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The weekly Drewry World Container Index (WCI) assessed Shanghai-Los Angeles spot rates at $1,992 per FEU as of Thursday. It has been roughly flat since Dec. 8. It’s down 84% from its peak in November 2021, although still $557 per FEU above where it was in late December 2019.

Container shipping spot rates are also assessed by Platts, a division of S&P Global Commodities. Platts put North Asia-West Coast spot rates at $1,300 per FEU as of Monday, $50 per FEU below its assessment at this time in 2019.

he U.S. West Coast market “may have reached bottom,” said Platts.

Asia-East Coast rates head toward pre-COVID levels

Asia-East Coast spot rates held up much better than West Coast rates this year due to higher demand as shippers sought to avert West Coast labor uncertainty, boosting East Coast port congestion.

That congestion is finally clearing. There were 10 ships in the queue off Savannah, Georgia, on Monday, down from almost 50 at one point this summer.

FBX put China-East Coast spot rates at $2,905 per FEU on Monday, down 87% from the peak in September 2021, albeit still up $295 per FEU or 11% from pre-COVID levels. Unlike FBX’s West Coast index, which plateaued this month, the FBX East Coast index has slid 16% since Dec. 1.

The Drewry WCI Shanghai-New York index was at $3,889 on Thursday, down 76% from the all-time high in September 2021. According to the WCI, spot rates in this lane are still $1,391 per FEU or 56% above where they were at this time in 2019.

chart of container shipping spot rates

Spot rates excluding premium surcharges in $ per FEU. Blue line: 2022. Orange line: 2019. (Chart: FreightWaves SONAR)

East Coast-West Coast price spread normalizes

During the 2020-22 container shipping boom, Asia-East Coast spot rates reached an unusually high premium versus Asia-West Coast rates. Prior to the pandemic, this premium hovered around $1,400-$1,500 per FEU. During the boom, it shot as high as $6,000 per FEU.

The exceptionally high spread persisted well into 2022 as volumes shifted to the East Coast. As recently as early September, it topped $4,500 per FEU, according to FBX indexes. But by the last week of December, it was down to $1,527 per FEU, near its traditional level.

Daily premium in $ per FEU of FBX China-East Coast vs. China-West Coast rates. (Chart: FreightWaves SONAR)

Platts reported the same normalization pattern in its own indexes. “The spread between East/West Coast import rates is now at $1,525 per FEU, nearing the pre-pandemic average, which was upset in 2022 as many cargo owners adjusted import behavior to favor the East Coast,” it said on Tuesday.

Trans-Atlantic rates still almost triple pre-COVID levels

Other parts of the container shipping market remain far from normal. One is the westbound trans-Atlantic market.

The FBX Europe-East Coast assessment was at $5,693 per FEU as of Monday, 2.9 times its level at this time in 2019. The latest Drewry WCI Rotterdam-New York assessment was $6,989 per FEU, also 2.9 times pre-pandemic levels.

Spot rate in $ per FEU. Blue line: WCI Rotterdam-New York. Purple line: FBX Europe-East Coast. (Chart: FreightWaves SONAR)

According to Sea-Intelligence, this remaining bright spot for carriers is about to get snuffed out. Sea-Intelligence CEO Alan Murphy said carriers are injecting “serious amounts of capacity on this trade lane.” That capacity infusion should depress spot rates.

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Murphy explained, “From mid-December 2022, operated capacity on North Europe-North America East Coast will shift from being roughly at the same level as in 2019 to being 20% higher. And as we get into mid-February 2023, this is poised to jump even further, to 30% [higher]. Capacity from the Mediterranean will grow at an average of 25% over 2019 in January-February 2023.”

Contract rates poised to reset much lower in 2023

Another market that has not reverted to normal — one that is key to ocean carrier profitability — is the annual-contract market. Ocean carriers move the majority of their volumes on contracts, not spot. While falling spot rates eventually bring contract rates down, there is a lag.

Most Asia-Europe contracts reset on Jan. 1 and most Asia-U.S. contracts on May 1. Even before those dates, average contract rates have fallen due to contracts negotiated outside of the normal cycles as well existing terms being renegotiated lower mid-contract. Nevertheless, average contract rates remain well above 2019 levels, explaining ongoing resilience in ocean carrier profitability.

Long-term rates are tracked by Xeneta. Its long-term contract index held fairly steady in December after falling sharply in November. Xeneta’s global contract-rate average is still up 70% year on year this month, and its contract-rate assessment for U.S. imports remains 130% higher.

“This is really just the quiet before the storm,” said Xeneta CEO Patrik Berglund on Thursday. “As more and more long-term contracts expire in the new year, expect the [Xeneta’s long-term index] to post far greater month-on-month declines.

“All indicators point toward considerable rate drops from today’s levels, with several of the major Far East trades pointing toward new long-term contracts that are much closer to the currently far lower spot-rate benchmarks.

“We’ve seen a golden age for the carriers since the beginning of the pandemic, but those days are all but gone now,” said Berglund.

Source :https://www.freightwaves.com