FBX Index July 2023: Peak or no peak?

The major markets from Asia to Europe and North America are entering their traditional peak season, and the open question is whether or not the peak will happen. As a first baseline, it is important to note that this is not pandemic related at all. The concern over upcoming peak season strength is a quite normal part of the annual market cycle – at least it was prior to the pandemic.

The challenge from a data perspective is that demand data is heavily lagged. The latest data covers April 2023. From that perspective, global demand measured in TEU*Miles declined -3.2% year-on-year. Whilst this is still a decline, it marks the second consecutive month where the demand decline was quite limited as the drop in March was -2.0%. The six preceding months saw an overall decline of -12.4%. In other words, the collapse in global demand has been halted. Most major deep-sea trades went back to stagnation of growth, but the major exception was the Far East to North America trade where demand continued to drop sharply for the eighth consecutive month. In April the drop was -17%.

Looking at the freight rate developments, the Asia to Europe and North America trades, to a large degree, followed seasonality after Chinese New Year. Mainly slightly downwards, but until a few weeks ago nothing which could not in the main be explained by typical seasonality. Towards the end of June this changed and spot rates declined further and now also dropped below seasonal expectations.

The exception to this is the westbound Atlantic trade where rates continue to drop sharply. This has, until now, been part of a normalisation process, coming down from extreme high levels driven by the pandemic ripple effects. We are now at a point where spot rates are mainly back to normal.

The spot rates are naturally a more up-to-date indicator of market conditions than the lagged demand data. At the same time, analysis of the capacity deployment shows that from April carriers were reducing their use of blank sailings. The clear interpretation here was that, since the increased capacity due to fewer blank sailings did not cause rates to drop below seasonality, the market had a reasonable degree of strength. However, the drops in recent weeks points to renewed weakness in the market.

The issue, therefore, lies with carrier behavior in the coming weeks. If the peak season fails to materialise, they need to remove capacity quickly to prevent a sharp drop in spot rates. The present outlook based on the carriers current sailing schedule, including announced blank sailings, will certainly be too much. Data from Sea-Intelligence point to a 20% year-in-year capacity growth in the Pacific. In Asia-Europe, the injection is 24% in August and in the Atlantic, it is 23%.

Even if we do get a strong peak season – for which there are currently no indications – such capacity injection is excessive. The initiative lies with the carriers. They have shown over the past three-and-a-half years that, in the face of severe overcapacity, they have the ability to remove capacity and balance the market. However, this comes down to a choice on their part – and with the alliance structures under pressure and carriers once more heading for loss-making territory, it is not a given that they will reduce capacity sufficiently.
Source(s): Lars Jensen, CEO, Vespucci Maritime for Baltic Exchange