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FBX Index: Slight shift towards market weakness

The global supply chain continues to be plagued with severe congestion, which in turn has ramifications for the supply/demand strength of the ocean related part of container shipping.

The newest data from May from Sea-Intelligence shows no strong improvement in global reliability as the timeliness of vessels are still lower than at same point time last year. It also means that reliability remains below 40% for the 14th consecutive month. There has been a slight improvement in the duration of vessel delays. However, this has only brought down delays back to the same level as we saw last year – which is still more than six days.

All in all, this means that 10% of the global vessel capacity remains effectively unavailable to the market. This is an improvement from almost 14% in January 2022, but is actually worse than seen in the same month last year.

All in all, this means that 10% of the global vessel capacity remains effectively unavailable to the market. This is an improvement from almost 14% in January 2022, but is actually worse than seen in the same month last year.

The spring period is the seasonal low point of container demand. As an example, only 22% of the Asia-Europe annual volumes are loaded in the 1st quarter of the year, and for the Asia-North America trade it is 20% based on the pre-Covid seasonality. Yet despite the seasonally lower volumes, the operational improvements in the supply chain have only reduced the problems to the same level as seen immediately prior to peak season 2021.

This means that even a modest peak season has the potential to dramatically worsen congestions, which in turn will remove capacity and send freight rates spiraling.

But the counterpoint to this development is what we have seen in recent spot rate developments.

There was an expectation that the Shanghai re-opening would lead to a significant boom in demand. Unfortunately, demand data tends to be lagged in time, but the spot rate development gives a more up-to-date view on the developments. Until mid June it could be shown that spot-rate decline on the Asia-North Europe trade was following normal seasonality.

There was an expectation that the Shanghai re-opening would lead to a significant boom in demand. Unfortunately, demand data tends to be lagged in time, but the spot rate development gives a more up-to-date view on the developments. Until mid June it could be shown that spot-rate decline on the Asia-North Europe trade was following normal seasonality. In other words, the market was not fundamentally weak. On the Transpacific, the rates to USEC took a level shift down, but this was more likely due to effects of shifting cargo between East Coast and West Coast driven by fears of port congestion effects. The slope of the decline itself followed normal seasonality. Pacific rates to the West Coast declined to a low point matching seasonality, but did not exhibit the usual pre-peak temporary rate increase.

This all pointed to a market in normal balance. However, the last few weeks of June saw spot rate levels deteriorate further – and this at a time where seasonal behavior would normally have them increase. This is a sign of weakness in the market.

Additionally, the weekly data from Flexport shows that even though the transportation time for cargo from Asia to Europe and North America is improving, the supply chain still suffers from delays of some six to seven weeks compared to the pre-pandemic normality. This implies that shippers practicing proper planning should also have started peak season six to seven weeks earlier than usual – in which case the peak is slowly underway already now. This in turn means we should see spot rates on the increase already – which we do not. Again, a sign of weakness in the market.

It is as yet too early to assess the coming whole peak season as weak. Even if demand is weak the risk remains that bottleneck problems will further reduce the available capacity.

It is as yet too early to assess the coming whole peak season as weak. Even if demand is weak the risk remains that bottleneck problems will further reduce the available capacity. Key examples of such risks have been clearly seen in recent weeks as there have been port strikes in Germany, rail strikes in the United Kingdom and truck strikes in South Korea.

In conclusion, shippers who are now facing a situation where spot rates are dipping below contract rates would be wise not to break or initiate renegotiations of those contracts just yet – additional capacity constraints might still lead to spot increases in the coming months.
Source: Baltic Exchange, Lars Jensen, CEO, Vespucci Maritime, https://www.balticexchange.com/en/news-and-events/news/guest-column/2022/Slight-shift-towards-market-weakness2.html

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