After a brief respite in October, trans-Pacific container rates continued on their downward trajectory in November. With a tepid demand forecast and more capacity coming on stream, pricing will face ongoing pressure well into next year, according to industry executives and analysts.
After container rates had sunk 25% in the eastbound trans-Pacific market and 9% overall in September, according to UK-based Container Trades Statistics, blanking of sailings by the carriers seemed to steady pricing the following month.
However, the respite proved fleeting within weeks, despite accelerated blankings and the suspension of some services from Asia to the U.S. East Coast, as rates continued to fall from one week to the next, sometimes in double digits.
By late November, they were down 70% year-on-year in the Asia-North Europe corridor and 83% from Asia to the U.S. West Coast, according to Freightos. Rates from Asia to the U.S. East Coast had slumped 67%.
It has been a giddying drop from stratospheric heights at the start of 2022. The head of one freight rate benchmarking platform commented that he had never seen a rate implosion of such magnitude. Forwarders have reported heavy discounting in spot rates by carriers that pushed prices below pre-pandemic levels in some instances, according to some reports.
Pricing discipline appears to have gone out of the window, and carriers have waived detention and demurrage charges as well for good measure, according to some forwarders.
All of this points to growing fear on the carrier side that the long-anticipated market correction could turn into a rout that pushes them back into red figures. While rates imploded, their costs kept surging, from bunker charges to operating costs.
Hapag-Lloyd reported a 22% spike in transport expenses per unit in its report for the third quarter.
To some extent, the slump in traffic was due to moves by importers to bring in cargo for the peak shopping season early to avoid a repeat of last year, when much merchandise was stuck at congested ports and rail terminals, crimping peak season sales.
On the other hand, the widely predicted resurgence of flows from China after the lockdowns in Shanghai was lifted did not materialize, pointing to demand slowing down. Chinese exporters have lamented slow demand as the new export order component of purchase manager indices in major economies slipped into contraction territory.
Freight rates have been pushed lower yet by the easing of congestion at U.S. ports.
By late November, there were no container ships waiting for berth space at the Los Angeles-Long Beach port complex. This freed up capacity, increasing the pressure on container lines to attract more freight in order to offset rising costs.
How much further rates may sink is anybody’s guess. Some observers predict further contraction until the Lunar New Year in late January.
“We expect continuing decrease in rates in the next couple of months, especially trans-Pacific,” said Judah Levine, head of research of Freightos, adding that this could run until late January.
Rolf Habben Jansen, CEO of Hapag-Lloyd, described the market as “quite volatile” rather than in a slump, adding that he did not think the bottom was falling out of it. In an earnings call following the presentation of the carrier’s third-quarter results, he noted that predictions for the global economy in 2023 are for low single-digit growth, indicating rising demand for shipping.
Others are less upbeat. A customer poll carried out by Xeneta found that 39% of respondents expected volumes to decline 10% or more in 2023.
Whereas demand is expected to show sluggish growth at best, capacity is set to surge in the months ahead. Hapag-Lloyd management estimates that vessel supply will increase by 4% in 2023, while demand should rise by 2%. Still, some observers see considerably higher capacity growth, especially when capacity that has been tied up at congested gateways is added into the equation.
The drop in rates has been welcomed by beneficial cargo owners. Still, those or their agents who signed long-term contracts earlier in the year at elevated rates are now facing transportation spending way in excess of market rates while their other costs are rising.
This is pushing the downward rate pressure on the contract market as they try to obtain better deals from the carriers they signed up with.
“Falling spot rates are driving some carriers to agree to renegotiate long-term contracts with shippers that are now above market levels, while they also continue to remove capacity to try and stabilize rate level,” observed Levine.
As their juicy contract margins are also going to slim, the financial outlook for the carriers looks a lot less rosy than half a year ago. On November 20, investment firm Jefferies wrote in a note that it expects the container industry to return to losses in the second half of 2023.
Levine noted that the development of the trunk routes from Asia to North America would have a knock-on effect on other trade lanes. The high margins that the transpacific market offered over the past two years prompted carriers to shift a lot of capacity from elsewhere to this lucrative sector.
Now that capacity is set to return to the areas where it had been previously deployed, pushing down pricing levels there.
By Ian Putzger
Correspondent | Toronto
