Long-term or spot rates? The ocean-freight rate dilemma
Trend of increase in prices continues mainly affected by external factors.
Although spot rates have shown a drop, the truth is month-on-month freight rates continue at historical highs, as well as he long-term contracts. Will this trend ever end? Xeneta specialists analyzed data collected through their platform and delivered their monthly State of the Market webinar – to which MundoMaritimo had exclusive access— with expert insights on schedule reliability, capacity challenges, the long-term rates, and the impact it is having on the industry.
What goes up must come down?
In terms of gravity, yes but apparently this law of physics does not apply to shipping rates. Although the short-term rates (last 30 days) have shown a decrease in the Far East trade (ranging from -9% to -2%), the prices are still ranging from US$7,000 to US$12,000, certainly not something that can yet be considered within the ‘normal’ standards for the industry. “Compared to six months and a year ago, there is also a drop in rates, and this can reflect signs of a stabilizing market. However, in 2021 high prices were a sign of shippers’ desperation to get their containers on board, so they were willing to pay the premium rate, yet this year demand has not grown enough, and shippers are no longer worried about securing space on board,” explains Emily Stausbøll, Market Analyst Xeneta, during the webinar broadcast.
External factors
Therefore, it’s external factors, such as delays and transit times, schedule reliability and port congestion, and bunker surcharges that are affecting rates.
Delays and transit times are affecting shippers’ decision to shift towards air cargo in lieu of sea. After space -or volume capacity- the second most important asset for a shipper is reliability. It’s not just about getting cargo on board anymore it’s about getting to the destination within the time frame. It’s always been that way, except that now the industry is more aware of this because it has become the weakest link in the supply chain, exposed to business-challenging disruptions that have been ongoing for more than two years. So, the gap between the once broad price difference between air and sea shipping is closing… and the longer it takes for sea freight rates to go ‘back to normal,’ the more likely it will be that some shippers will chose to permanently stick to air.
Port congestion and poor schedule reliability have caused a response by shippers to move their cargo to less crowded ports; so, congestion goes down in the formerly crowded areas, improving reliability, but it causes the reverse effect of congestion in the lesser active ports that now are faced with handling higher volumes than they usually do, as is the case with US West Coast versus US East Coast. “Schedule reliability has improved in US West Coast ports as congestion goes down but, at the same time, reliability is compromised in US East Coast who are now handling more volume,” say the experts. “Yes, there is an improvement, it looks like the worst is over, but we are not yet near ‘back to normal’, which is what is affecting the rate levels.”
And bunker surcharges will vary not just from carrier to carrier, but from vessel to vessel and to the shippers’ decision to opt for the environmentally friendly alternative of the low-sulphur fuel or the cost saving of high-sulphur with scrubber.
Short, long or mix
Short-term rates are unpredictable: sometimes they are higher than long-term, sometimes they are lower. So, for the sake of reliability long-term rates provide predictability and a better cost control. But do they? Xeneta data shows a downward trend on the long-term contracts (3- 6 months), but prices are still well above US$6,000 per container. “In the US, for example, demand for containerized goods has not grown. Consumers are forced to spend more money on food and gas, so retailers are not seeing an increase in sales or demand as before,” says the analyst.
In the end, it’s up to the shipper: their cargo, their times, their demand, their markets, and the relationship with the carrier. Currently, shippers are adjusting volumes, and as long as there are no new disruptions –including global economic and politics—, the downward trend on both short-term and long-term rates could continue steadily albeit slowly.
SOURCE: MUNDOMARITIMO.NET