What is driving ocean container freight pricing?
“Why are freight rates not falling faster?” is a common question which Drewry consultants are being asked, these days.
Since lockdowns closed much of the Shanghai export hub in March, the Drewry World Container Index composite index (an average of spot rates on eight Asia-Europe, Transpacific and Transatlantic export and import routes) has continued to decline gently, but has not crashed – see Figure 1 below.
Spot rates have remained solidly at levels double the 5-year average of about $3,300/40ft container.
Drewry’s market experience and our forecasting models have shown for years that freight rates are no longer driven primarily by the supply-demand balance – the previous received wisdom until about 2016.
In the Drewry Container Forecaster and in pre-bid planning calls with consultancy customers, we have firmly forecast that rates would continue to rise in 2022, when others in the industry thought that the current boom would end.
Is the supply-demand balance not relevant? Our evidence is that the policies adopted by the carrier industry in responding to demand shocks are more important than the relative rise or fall in demand. Container network inefficiencies and widespread port congestion and inland bottlenecks are also big factors supporting freight rates. The differential between contract rates and spot rates and the interaction between these two markets are other major drivers of rates.
Detailed data in the Drewry Container Capacity Insight shows that, as soon as the Shanghai lockdown started in mid-March, sailings were cancelled by all alliances, and blank sailings will continue in the forthcoming weeks. The result? Despite the sudden slowdown in demand and the huge economic disruptions, the carrier industry reduced capacity in both the Asia-North Europe and Asia-West Coast North America trades in April and May.
In Drewry’s analysis, understanding how carriers manage capacity – faster and more tightly than before 2016 – is an important part of understanding the trend and the lower volatility of freight rates post-pandemic.
When volumes rebound after the Chinese lockdowns, you could well see an increase in port congestion. Port congestion will act, like blank sailings, as a break on surplus capacity so carriers have two buffers against over-capacity.
What if Asia-Europe trade demand decreases in June and July (and possibly longer), as inflation and recessionary trends take hold? Again, Drewry does not expect a collapse in spot freight rates, because blank sailings will adjust effective supply and reduce the swings in spot rates.
However, shippers will need to address in the next year or so the unusual market situation of having spot rates (currently softening) below contract rates (currently hardening).
The relatively new, insulated “behaviour” of container freight rates in all kinds of market shocks and environments leads us to ask the question: in what direction will freight rates evolve in the medium term?
Again, this is a question that many Drewry shipper customers are asking, and which is becoming more critical as shippers start their annual bid process. (The Drewry Benchmarking Club provides unique contract rate forecasts and spot rate forecasts to over 100 shippers.) Exporters and importers also need to determine whether elevated contract rates were just a 2021-22 problem, or will become a permanent cost base.
Just as the supply-demand is not the main driver of freight rates in the current market cycle, there will be new factors driving freight rates in the medium term: decarbonisation regulations, “carbon pricing” (expected to start in Europe) and the ongoing consolidation and concentration of the carrier industry.
Freight rates have not only become harder to forecast, but they are also becoming a more important topic in the boardrooms of many companies.