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Freight rates near pre-Covid levels as pace of normalization accelerates

by Başak Ceylan -
  • 29/11/2022 (07:57)
As spot freight rates near pre-pandemic levels, shipping industry has shifted its near-term outlook and started preparing for a ‘new phase’ in container shipping. Shippers are reported to have been busy renegotiating their long-term contracts and announcing more blank sailings amid efforts to balance supply with reduced demand.

World container index down 77% from peak

The latest Drewry World Container Index released on November 24 showed that freight per 40-foot container is 77% below the peak in September 2021. Although the index is still 82% higher than pre-pandemic rates, it indicates that the normalization in freight rates has already begun.

Drewry data also showed that spot freight rates on Shanghai – Rotterdam dropped 18% while rates from Shanghai – Los Angeles slipped 3% to per 40ft box last week.
According to Freightos, a global freight booking and payment platform, Asia-US West Coast and Asia-US East Coast prices slid 3% each per 40ft container individually last week.

Market correction quickens amid low consumer demand

Although US retail sales showed a slight improvement last month, the recent economic data point to a major decline in consumer demand in China and elsewhere. Against the backdrop of weaker consumer demand, major ocean carriers agree that the pace of normalization has accelerated following an extended period of record-high profits. With steep falls in rates suggesting a sooner-than-expected return to pre-pandemic levels, carriers have begun to prepare for a shift toward a ‘new phase’ in the shipping industry.

Overcapacity loom large despite capacity reductions

According to Drewry, 105 cancelled sailings were announced between November 28 – December 4 and 26 December – January 1 out of a total of 725 scheduled sailings. 59% of the blank sailings will be occurring in the Transpacific Eastbound, which accounts for around one-sixth of global container trade flows.

Although carriers stick to their capacity reduction strategy by the blanking sailings, many analysts believe that the industry is still on course for a period of structural overcapacity in 2023. The record orderbook of around 7.4 million TEU, which corresponds to 30% of the current flee, continues to loom large over the market.

Xeneta, a freight rate benchmarking and market analytics platform, forecast idling of up to 1 million TEU and perhaps even more in 2023. The platform also said that they were expecting ocean freight volumes to drop by around 2.5% and significant reductions in freight rates next year.

Carriers renegotiate long-term contracts with customers

In addition to removing capacity, several carriers were reported to have been renegotiating elevated long-term contract rates. Israeli ocean carrier Zim said that they agreed to revise their prices in an earnings conference call held on November 16.

Xavier Destriau, CFO and Executive Vice President, of Zim explained that the spot market declined below the contract rate amid steep declines and that the contract season had ended at elevated rates compared to the prior year. “As the spread between the contract rate in terms of dollar per TEU and the spot was increasing, we had to sit down and agree and revisit the pricing for those customers,” Destriau said.
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