Freight Rate Trends in Container Shipping - Market Overview 2022

October 5, 2022

What's in this article?

  1. Historical freight rate trends in the container shipping industry
  2. Developements in post-Covid era
  3. Factors driving the increase in freight rates in post-Covid era
  4. Trans-Pacific trade
  5. Trans-Atlantic trade
  6. Outlook for 2022 and beyond

Historical freight rate trends in the container shipping industry

Apart from being inherently cyclical in nature, the container shipping industry is also particularly sensitive to global macroeconomic and geopolitical events, which influence freight rates.

Since the mid-2000s, the industry has become increasingly commoditized, which has only intensified through competition. Matters were compounded by the infusion of additional tonnage and deployment of mega-vessels, which resulted in supply far exceeding demand.

Carriers were therefore compelled to resort to price undercutting to retain their market shares and ensure reasonable vessel utilization levels.

Consequently, freight rates on all major trade lanes were under pressure and remained at subdued levels for most of the current decade until the Covid pandemic in 2020.

The gravity of the situation can be gauged from the fact that carriers had to resort to cost reduction initiatives to maintain profitability.

On the Trans-Pacific trade, the average rate for Shanghai to US West Coast in 2017 was USD 1,485/ FEU, down from the average rate of USD 2,308 in 2010 and fluctuating for the major part of the decade within a narrow range of USD 1,272 to USD 2,308. 

 

Developments in the post-Covid era

The rapid spread of Covid in early 2020 and prolonged lockdowns imposed initially gave rise to fears of a severe downturn in the shipping industry. However, as events unfolded, the shipping industry defied such doomsday predictions and witnessed a spectacular bull run from the second half of 2020 onwards.

In an astounding turn of events, freight rates started shooting up to previously unheard of levels. On the Trans-Pacific trade from Shanghai to US East Coast, rates shot up from an average of USD 2,500/ FEU in 2019 to over USD 15,000 in September 2021, while there also were instances of Carriers charging more than USD 20,000.

Similar developments were seen in the Trans-Atlantic trade and other major trades, which soon cascaded down to the secondary and tertiary trades as supply chain disruptions spread globally.

Shippers were left staring at extremely high ocean transport procurement costs, affecting their bottom lines and sometimes the entire business model.

Low-value commodities were the hardest hit, with the export of household items, toys, and t-shirts being rendered economically unviable due to freight costs per unit level increasing from around 5% of sourcing costs to more than 20%.

This ultimately affected consumers in the form of higher retail prices, shortage of stocks, and overall increased cost of living.

Factors driving the increase in Freight Rates

The steep increase in ocean freight rates can primarily be attributed to the factors explained below:

1. Changes in consumer spending patterns:

As Covid-induced lockdowns and mobility restrictions confined forced people to their homes, consumers started spending less on services and diverted their spending to household products. The proportion of disposable incomes spent on outdoor entertainment and traveling reduced, with a corresponding increase in the sales of products such as laptops, chairs, and worktables. This increased demand for shipping services for Chinese manufactured goods, which led to higher freight rates.

2. Congestion at ports across the world:

As demand rose, initially at US West Coast ports, the heavy flow of vessels created a backlog, which caused massive congestion at the ports of Los Angeles and Long Beach. The congestion soon spread to other European ports and thereafter to the secondary trades.

With vessels stuck at congested ports worldwide, shipping capacity was scarce, causing rates to increase.

3. Lower than anticipated impact on disposable incomes and spending power:

Due to government stimulus packages, disposable incomes in developed countries were not affected to the extent anticipated. This, combined with the inability to spend on services, created greater product demand, causing import freight rates to spike.

4. Labour strife and challenges:

Delays ascribable to congestion were aggravated by labor issues at various ports, besides Covid infections amongst dockworkers. This effectively reduced the number of workers available to service vessels and handle containers, compounding the impact congestion and prolonged transit times had on freight rates.

5. Pressure on shippers to maintain supply chain integrity:

Even as shippers faced delays of unpredictable lengths, they still had to ensure that products reached their primary markets and had enough stock to maintain smooth production. Given prevailing space and equipment constraints, Carriers resorted to levying premium surcharges, which shippers were compelled to accept, to keep their business operations running.

6. Unforeseen events and contingencies:

Incidents such as the Suez Canal blockage disrupted global trade on a massive scale, causing additional delays and disrupting the world’s busiest trade lane for almost a week. The consequent impact on schedule reliability added to the upward pressure on freight rates.

 

 

Trans-Pacific Trade

The Trans-Pacific trades were among the first to experience the debilitating effects of congestion, with over 100 vessels waiting off the ports of Los Angeles and Long Beach ports at the peak of the disruptions.

Vessel and cargo delays were so severe that they prompted shippers to reconfigure their supply chains to incorporate East Coast ports, with shipments being diverted to East Coast ports such as New York, New Jersey, Savannah, and Houston. The magnitude of the inter-coastal shift in trade was so great that New York is now the busiest port in the US.

The inevitable outcome was that congestion steadily shifted from the USWC to USEC, with about 75 vessels anchored outside the ports of New York, Houston, and Savannah, at the beginning of September 2022.

While port-side congestion at USWC has eased off in recent months, inland evacuation has emerged as a challenge, with challenges regarding railroad connectivity and chassis shortages delaying the movement of cargo to the hinterland and causing congestion at major rail depots.

Currently, freight rates from Shanghai to Los Angeles are USD 3,500/ FEU.

 

Trans-Atlantic Trade

Though not as big in volume terms as the Trans-Pacific or Asia-Europe trade, the Trans-Atlantic trade is nonetheless crucial, connecting the two big markets of Europe and North America.

As congestion has built up on the USEC ports, the Trans-Atlantic trade has been increasingly disrupted, with prolonged vessel delays, equipment shortages, and stretched delivery times, all of which have propelled rates far above pre-pandemic levels.

As things stand right now, the elevated freight rates and cargo delays and inextricably linked to congestion levels at USEC ports. Rates have stabilized even as the situation has eased in relative terms over the past couple of months and as carriers will likely augment capacity on the Trans-Atlantic trade (since it is now the most lucrative trade).

However, USEC is still heavily congested, so the freight rates on this trade have held up better than on the Trans-Pacific or the Asia-Europe trades.

Spot rates on the Trans-Atlantic trade stood at USD 8,333/ FEU at the beginning of September 2022, increasing from the USD 6,000/ FEU quoted in September 2021.

  

 

Outlook for 2022 and beyond

In recent months, the ocean freight market has moderated and is slowly reverting to some semblance of normality.

With fears of an impending recession casting a shadow over the prospects of economic recovery, analysts and consumers alike are cautious and have cut down on discretionary spending.

The lower demand has caused manufacturing activity in China to drop, wherefore vessel sailings ex-China have reduced, allowing for clearing up of existing vessel and cargo backlogs.

Fewer sailings and lower demand have also freed up capacity, alleviating space and equipment shortages and thus exerting a deflationary impact on freight rates.

The extenuating circumstances have resulted in rates falling from their record highs, adequate space in most trades, and better equipment availability.

The few trades or regions which show signs of disruption are largely on account of localized factors such as labor issues or inclement weather.

Besides, with the delivery of newbuilds ordered in 2020 and 2021 expected to commence from Q2 2023 onwards, it is expected that the infusion of additional capacity will further temper freight rates.

On the other hand, factors helping prop up freight rates include higher bunker costs, vessel charter rates, and vessel scrapping reducing net capacity.

Overall, while freight rates are expected to decline further, it appears unlikely that they will return to pre-Covid levels, at least in the interim.

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