How Will Falling Container Rates Impact 2023?
Container rates have been plunging over the past few months—a trend which has resulted in some dramatic descriptions of the dynamics involved.
Various experts and industry publications have been using phrases such as an “utter collapse in the market for moving boxes,” the threat of a “hard landing for box lines,” and the “risk of a trans-Pacific rate war” in light of falling spot rates.
Freightos said container freight rates for the first week of December 2022, according to the Freightos Baltic Index, demonstrated a major drop compared to the same week last year:
Global: $2,528 (-74%)
Asia – US West Coast: $1,426 (-90%)
Asia – US East Coast: $3,723 (-78%)
Asia – North Europe: $3,974 (-73%)
North Europe – US East Coast: $6,358 (-12%)
There are several factors contributing to the fall in container rates—including a reduction in consumer demand and increased capacity that will continue to expand as ships on order are introduced into the market.
Here, we’ll dig into recent insights from Xeneta—which touts itself as “the leading freight rate benchmarking and market analytics platform”—about the rapid shifts in container prices and what stakeholders might expect in the coming year.
Gathering “Storm Clouds”
In a November 23 statement, Xeneta said the “rapidly cooling” ocean freight market looks like it will have an “extremely challenging” 2023.
“An in-depth analysis of the latest real-time ocean and air freight rates, combined with expert trend forecasts, suggests that ocean cargo volumes could fall by up to 2.5%, rates will drop ‘significantly’ and weak demand will force increased idling of vessels,” Xeneta said. “The air freight market, analysts predict, will also face a turbulent twelve months.”
In the statement, Xeneta CEO Patrik Berglund predicted “difficult times” for stakeholders across the ocean and air freight value chain.
“The cost-of-living crisis is eating into consumer spending power, leaving little appetite for imported, containerized goods,” Berglund said. “With no sign of a global panacea to remedy that, we’d expect ocean freight volumes to drop, possibly by around 2.5%. That said, if the economic situation deteriorates further, it could be even more.”
He also cited the capacity expansion ahead.
“Allied to dropping volumes, we have a growing world fleet, with a nominal inflow of 1.65m TEU of capacity,” Berglund added. “Some demolitions will dent that growth, but we still expect an increase in capacity of 5.9%. Even if demolitions double from our current level of expectations, the industry would still be looking at an almost 5% expansion.”
He said the combination of weak demand, decreased volumes, and increased capacity will ultimately have a negative impact on rates.
“We expect to see significant reductions,” Berglund said. “Carriers have proved adept at protecting and elevating rates during COVID, but with too much capacity and easing port congestion on most major trade lanes, they’ll be fighting losing battles in 2023. We could see spot rates on some key corridors drop below pre-pandemic levels during the first half of 2023, while long-term rates will fall rapidly as older, expensive contracts expire, and new, far lower contracts are signed. …”
“As far as upcoming contract negotiations go, it’s imperative to keep an eye on the very latest market data to obtain optimal value,” he added. “However, those talks will be difficult for all parties. The carriers will be desperate for volumes, but, at the same time, the shippers won’t have the high volumes that unlock the best prices. What we might see is that Freight Forwarders are the big winners, as they can find a sweet spot, serving the SMEs while playing the short market against carriers. Regardless, there’s both opportunity and challenges ahead, in the short- and long-term.”
The Rate “Role Reversal”
In a December 8 statement, Xeneta described a “role reversal” between spot and long-term rates.
“The ocean freight rates landscape in the Far East has been completely redrawn since the start of the year, with spot rates plummeting by an average of 75% across the six major trading lanes,” Xeneta said. “By comparison, long-term rates are proving more resilient, with a fall of ‘just’ 13%.”
Noting that after hitting historical highs, spot rates have “collapsed” since early summer.
“In January this year, they were at least 2 000 USD per FEU higher than contracted rates on the selected routes,” Xeneta said. “However, they now languish 1 900 USD per FEU below new long-term agreements from the last three months.”
In the statement, Peter Sand, Chief Analyst, Xeneta weighed in.
“This is a jarring reversal of fortunes, with the traditional spot rate premium being completely overturned on key global corridors,” Sand said. “As such, shippers with flexible logistics strategies can really benefit from accessing the short-term market at present, while those locking into long-term contracts find themselves paying more…. And in some cases, substantially so.”
“The difference between short- and long-term agreements here is unprecedented,” he added. “This is currently the largest divide, with long-term rates now USD 5 030 per FEU more expensive than spot rates. That’s a 237% premium. If you go back to January, the shoe was on the other foot, with the spot rates sitting USD 4 900 per FEU higher.”
According to the statement, Sand pointed out that “some routes are yet to experience long-term rate declines,” which made the divide between the two rates categories more dramatic. “The Far East to US East Coast leads the way here, with contract rates sitting 11% above start-of-year prices.”
He also noted that “the US trades are the only two of the six leading corridors where long-term rates are up since January.” For context, Sand explained that “long-term rates to the US climbed more slowly than other trades, with later tendering processes contributing to the fact that ‘they only peaked in Q2.’”
Xeneta’s data indicated that “the biggest change is taking place on the Far East to North Europe trade,” the statement said. “Here spot rates have gone from a position of a USD 5 640 per FEU premium on 1 January 2022 to currently sitting at USD 4 460 below long-term rates on 1 December. This translates to an 83% fall, while long-term rates have restricted their decline to 24%.”
Additionally, “The trade with the smallest premium for long-term rates is the Far East - Mediterranean, where the average long-term rate is ‘only’ USD 1 900 higher than the average spot rate,” Xeneta said.
Sand commented on what price dynamics such as these mean for the industry.
“This is one of only two of the major trades out of the Far East, together with the South American East Coast route, where new long-term rates are less than double the average spot rate in early December,” he said. “This is a stark indication to shippers of exactly where the value lies in the market as we head into the New Year. The short game, it seems, is the one to play right now.”
“Calm Before the Storm”
In its December 22 Container Rate Alert, Xeneta said the year is ending in a “somewhat anti-climactic fashion for long-term ocean freight rates, with the latest data from the Xeneta Shipping Index (XSI®) showing a decline of just 0.1%. Following on from a steep 5.7% month-on-month fall in November, and with weak spot rates defining the market, the development is a largely positive one for ocean carriers.”
However, Xeneta warned that “far worse is set to come in 2023.”
“At first glance, this month’s data appears to stall the negative curve,” said Patrik Berglund, Xeneta CEO in the statement, “but this is a little misleading. Firstly, this is due to fewer long-term contracts being signed at this time of year rather than new agreements coming in with the same rates. When we do see contracts being signed across all trades, we’re seeing them agreed below the current average for all valid rates.”
“So, this is really just the quiet before the storm,” he added. “As more and more long-term contracts expire in the new year, expect the XSI® to post far greater month-on-month declines. All indicators point towards considerable rate drops from today’s levels, with several of the major Far East trades pointing towards 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,” Berglund said, “but those days are all but gone now.”
He added that making “clear-cut forecasts” for the coming year is difficult to do.
“There are so many uncertainties heading into the new year that it’d be unwise to make clear-cut forecasts,” Berglund said. “We’ve all seen how quickly unpredictable global events can develop and influence the markets.”
“However, the fundamentals look weak for the immediate future, and the spot rates have cleared a path for long-term rates to ‘head south’,” he added. “That said, will the rolling back of the most stringent zero-COVID measures in China prompt a slight recovery? What will happen geopolitically? And how will the cost of living crisis evolve in the months to come?”
“It’s a complex and fascinating environment, so keep your eyes on the data in 2023 to make sense of the very latest developments as they happen,” Berglund said.