Cargo owners and shipping lines await outcome to determine who will have greater bargaining power

 

Ocean rates from Asia have remained at about the same level as last week, but from Asia to the US West Coast (USWC) are still 6% lower than in mid-July, while to Europe they are down 3% from their high for the year reached in early July. 

 

These trends according to Judah Levine, head of Freightos Research suggest that spot rates may have reached after reaching their seasonal peak and could continue to decline. In fact, he indicates that some shipping lines have also begun to reduce their surcharges for some South Asia and Africa routes, which may also indicate that there is more available capacity in the service networks as a result of improving conditions in the main shipping lanes.

 

Declining spot rates 

 

Levine states that it can be assumed that rates have already peaked (the point at which the decline begins) due in part to reduced congestion at Asian hubs, shipping lines continuing to add capacity to the main east-west routes and the projected delivery of a million more TEUs of new capacity before the end of the year. Other reports confirm lower levels of vessel space utilization on the Asia-Europe route.

However, the biggest contribution to the decline in rates for Levine is probably the early start of the peak season for North America and Europe. This occurred in May, after many importers considered longer itineraries and timed themselves so as to avoid delays caused by the Red Sea crisis closer to vacation periods, or to secure shipments before the implementation of new tariffs on imports from China or before possible labor disruptions from the U.S. East Coast (USEC).

 

According to Levine, this widespread frontloading may have resulted in the peak demand and, consequently, the observed shortage of space and increase in spot rates. 

 

According to the analyst, even though volumes have increased since May, destination ports in North America or northern Europe have not experienced significant congestion or delays as a result. So, if peak volumes are already on their way, USWC ports would be in a position to handle another increase in throughput, including a possible increase due to the potential volumes to be diverted from USEC should the stevedore strike in October materialize.

Long-term rates on the rise

 

The contract, or long-term rate front began to show signs of strength, just as spot rates begin to soften. The Xeneta Shipping Index, XSI, rose by 2.5% in July to 151.5 points. Most notably, the underlying XSI sub-index for exports from the Far East, which includes the world’s largest shipping routes from Asia to Europe and the US, rose 12.6% in July to 178.8 points.

 

Emily Stausbøll, senior shipping analyst at Xeneta, points out that the opposing behavior between the spot and long-term markets means that the spread between the two markets is narrowing, presenting a delicate balance ahead of long-term contract negotiations between cargo owners/shippers and shipping lines later this year, where important things will be at stake: “This is a crucial time for the market. The big question is, how much will rates go up in the long term before growth is slowed by the downturn in the spot market?” he interjects.

What makes it interesting is that there are conflicting hopes between one side and the other: “cargo owners will expect spot rates to fall hard and fast, while the shipping lines will do their best to keep them high for as long as possible.

 

Stausbøll adds that “where the long-term and spot markets are at the time when new contract negotiations start will be crucial in determining who has the stronger hand, the cargo owners or the shipping lines”.

 

But beware! There are multiple latent threats lurking in the scenario: the continuity of the Red Sea diversions, the possible strike at USEC and the tariffs that will undoubtedly be applied by the USA in case Donald Trump becomes president of the USA again.             

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