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FBX Index: The long slide downwards is in motion

July, which usually marks the peak season getting into full swing, continues to see declining spot rates. As an example, the global FBX weekly index declined 7% during July and is down 37% compared to the peak associated with Chinese New Year.

Whilst such declines in rates might at first glance give the impression that rates levels are rapidly approaching pre-pandemic normality, this is not the case. The level at the end of July 2022 is still 350% higher than at the same time in 2019 before the pandemic.

Of course, developments vary on specific trade lanes, but for an overall impression of the global trend, the above numbers are strictly based on the FBX Global Container Index.

How quickly will the spot rates potentially revert back to normality?

The FBX Global Index reached an absolute maximum in September 2021 at a level of 11,109. Since then, the index has declined to 6,120. The level in 2019 fluctuated between approximately 1,250-1,600 depending on the timing of the year.
The period from September 2021 to the end of July 2022 has seen an average decline of 500 points per month on the FBX Global index. If this decline continues at the same rate, spot rates would still take another 9-10 months before reaching pre-pandemic normality, which would be about May 2023.

However, while this is the development for spot rates, there is also the issue of contract rates to take into account. In 2021 some, especially larger, shippers had cargo moved on contracts agreed early in the year, which led to a large spread in pricing between spot and contract cargo in the peak season of 2021. Earlier this year the new contract rates increase substantially while spot rates were coming off their historical highs.

The current situation is that contract rates are increasingly seen to be above spot rates in the current environment, which will generate challenges in the relationship between shippers and carriers. Historically, many bilateral contracts between shippers and carriers have been de-facto unenforceable when spot and contract rates were too far out of alignment. We saw this clearly in 2020-2021 when spot rates exceeded contract rates by a large margin and some shippers were unable to move the expected volumes on the agreed contract rates. We are increasingly likely to see the same pattern, albeit in the opposite direction, unfold as spot rates continue to slide below contract rates.

However, this ‘spill-over’ effect between spot and contract rates always happens with a time lag, as well as at a less rapid pace, and hence it might be further into 2023 before we see rate levels fully normalise.

The major wildcard in the coming play-out of the decline is the impact of continuing widespread congestion issues in ports and terminals, as well as inland transportation. This has the effect of removing large amounts of capacity from the market, while any worsening in the situation could cause a temporary increase in rate levels once more. Meanwhile, recent strike action in Europe has the potential to worsen the matter, while the risk of strikes on the US West Coast appear to be quite subdued as the negotiating parties maintain a normal working environment despite having run over the initial deadline.
Source: Baltic Exchange

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