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Freight rates bounce back to January peak; how long will the rally last?

by Esra Ersöz -
  • 24/05/2024 (07:58)
Surging by around 45-50% in the past three weeks of May, freight rates hit their January peak again. This time, shipments from China are in driver’s seat of the recent rally, with the latest tariff hikes and impending trade restrictions playing a crucial role, while industry players are widely watching sharply rising freights with raised eyebrows.

According to Drewry , the world container index increased 16% to $4072 per 40ft container this week, while the cumulative gain has reached 43% since early May. In terms of the routes from China in particular, the cumulative gains are around 46-48% for the routes to Europe and 41-48% to the US with rates around $5000-6500 per 40 ft container.

Drewry expects the rally to lose momentum in the coming weeks.

A quick look back at freight rates since the pandemic

Extending a rally that first kicked off in June 2020 from around $1500-2000 per 40 ft container, the global indexes for container shipping freight rates breached the $11,000 per 40ft threshold in September 2021 and hit their all-time highs. At that time, freight rates from China to Europe and the US also saw the levels as high as $16-18,000 per 40ft threshold. Booming demand in a loose monetary policy environment and a lack of capacity was the main culprit for this unprecedented jump in freight rates.

Since then, the trend turned downwards, and it took around one and a half years for the markets to return to pre-pandemic levels. The shipping container industry was grappling with excess supply and demand destruction throughout 2023 before the Red Sea crisis erupted in December and prices nearly tripled in less than two months to hit their highest since September 2022 in January .

Following a downturn between February and April, the market is now back up to the same peak before even erasing half of the previous gains.

Drewry – Container – Freight – Index

What drives the recent rally? Is it really ’better-than-expected demand’?

Shipping companies argue that better-than-expected demand in Europe and the US for Chinese cargoes is the main trigger of this recent uptick in prices, apart from the ongoing Red Sea disruption and reduced capacity caused by blank sailings.
However, this ‘allegedly’ tight balance in the container shipping market is highly debatable given the fact that demand remains fundamentally restrained in the western bloc, particularly when the Fed sticks to its higher for longer interest rate policy and recently pronounces more hawkish outlook. Plus, the degree of tightness for containers is questionable since it’s still a carrier-controlled market, and they keep cutting capacity despite the Red Sea crisis that is likely to extend until the year-end.

China ramps up EV exports to Brazil and Mexico

On May 14, the US announced a major increase in tariffs on Chinese electric vehicles, solar panels, advanced batteries, steel, aluminum and medical equipment. The current 25% tariff was sharply raised to 100% for Chinese EVs to protect its own automakers and avoid unfair competition. Estimations largely call for more trade actions for Chinese goods by the US and its allies.

The European Union has also commenced an investigation into Chinese EVs, with provisional duties potentially being imposed as early as July.
In a bid to bypass these trade barriers, Chinese EV makers including BYD have been rushing to ship vehicles to Mexico and Brazil, where considerably smaller taxes are applied, since March and this will continue into June, reported Nikkei Asia, right before Brazil raises tariffs by 8% to 18% in July. Fighting for extra space in ships to South America, all EV companies have created a tightness in cargo ships, affecting the overall container traffic. Some players expect this overall tightness to last even until August.

According to Reuters, Chinese electric vehicle giant BYD also started the construction of a manufacturing complex in Brazil early this year, with plans to put it into operation by the end of 2024 or in early 2025. Nikkei Asia argued that the company is speeding up the construction, which also played a major role in the recent rise in shipping demand from China.

The fear of even tougher sanctions from Washington for Chinese goods

Industry players argue that it’s not only the EVs but also other regular Chinese goods being subject to more trade barriers, particularly if Trump is reelected in November. Concerned about losing market share, Chinese exporters have been flooding the western bloc with their goods undercutting their competitors, said market players.

This rush is the simplest explanation of the surging demand for container shipping, they claimed.
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