Mounting risks fail to avert freight rate downturn amid increased capacity

Freight rates saw further drops in February and March, returning to their January 2024 lows, primarily driven by increased shipping capacity, easing demand, and new carrier alliances. However, trade tensions from US tariffs, Trump’s proposed fees on China-linked ships, and continuous attacks in the Red Sea remain significant challenges for the sector.

Freight rate slump deepens

Increased shipping capacity has been putting a strain on freight rates, which have now fallen for 11 consecutive weeks. The surge in capacity, coupled with reduced demand, continues to drive rates lower, contributing to an extended period of decline in the industry.

Additionally, the pressure from new ocean carrier alliances makes blank sailings less effective during the transition period. While carriers typically reduce capacity when prices decline, the ongoing introduction of new alliance networks means that capacity withdrawals through blank sailings are less impactful right now, according to industry sources.

Drewry’s world container index decreased by 4% to $2,168 per 40ft container on March 27. The index has declined by a total of 45.6% since January 9, when the latest peak was reached following a more-than-two-month uprun driven by front-loadings and US port strike worries.

Drewry’s China to US West Coast rates decreased by 6% last week to $2,487 per 40 ft container, while US East Coast rates were down by 4% to $3,622 per 40 ft container. Since early Jan, rates have fallen by 54.5% and 49%, respectively.

Drewry’s China to Northwest Europe route declined by 4% last week to $2,370 per 40 ft container, while rates to Southern Europe were down by 3% to $3,171 per 40 ft container. Northwest Europe route saw a cumulative 46% decrease since January 16, while Southern Europe route declined by 39%.

Meanwhile, Drewry expects rates to decrease slightly in the upcoming weeks.

US port fees on China-linked ships

In February, the Trump administration announced that it was considering imposing steep new fees on vessels owned by Chinese firms or built in Chinese shipyards. Under the proposed policy, cargo ships owned by Chinese companies, as well as foreign-flagged vessels constructed in China, could face charges of up to $1.5 million per US port visit.

There is strong opposition from industry executives to the Trump administration’s plan. Although the policy aims to curb China’s dominance and boost domestic production, shipping firms argue it could disrupt supply chains, push cargo to foreign carriers, and make operations unsustainable for US firms reliant on Chinese-built ships. Industry leaders highlight that replacing these vessels would take years due to limited US shipyard capacity, while trade groups warn of economic consequences, including reduced exports, GDP decline, job losses, and higher consumer prices.

Shipping association BIMCO warned that the proposed fees would significantly raise US transport costs and harm the economy while having an uncertain impact on China’s dominance. Deputy Secretary General Lars Robert Pedersen noted that Chinese-built ships would remain in the global fleet despite the fees.

If the proposed fee structure is implemented as drafted, seaborne trade to and from the United States of America will become less efficient and less economically viable. It is likely that some operators would shy away from having Chinese tonnage in their fleets and dedicate their maritime operations towards the US market. Other operators might do the opposite, increasing their share of Chinese tonnage and dedicating their maritime operations to non-US trade. The totality of the world fleet would not change, but the overall cost of maritime trade would increase due to less competition in the now segregated US market.

Trade war fears add to uncertainty

The global shipping industry faces mounting uncertainty as US President Donald Trump escalates trade and geopolitical tensions. With new US tariffs on Chinese goods and upcoming duties on imports from Mexico, Canada, and the EU, trade disruptions could weaken shipping firms’ pricing power and profitability.

These trade measures come as supply chains already struggle with higher costs due to vessels rerouting away from the Suez Canal following Houthi militant attacks. While US container imports have surged as companies frontload ahead of tariffs, experts warn that demand could drop once new import taxes take effect and inflation-weary consumers absorb the cost increases.

No return to the Red Sea anytime soon

A potential return to the Red Sea, which could have offered relief to the shipping industry grappling with longer routes, now seems further out of reach due to a new series of attacks. Although the Houthis paused their assaults after the January ceasefire, the group reiterated on March 12 that their threat to target Israeli vessels would persist until Israel allowed the delivery of aid and food to Gaza.

In response, the US has committed to continuing its strikes on the Houthis until they cease their attacks on shipping. US military actions against Houthi targets in Yemen have caused ships to avoid the Red Sea and the Suez Canal, opting instead for routes around Africa to reduce the risk of conflict.

Lars Jensen, CEO of Vespucci Maritime, noted that if security concerns remain, such rerouting could extend through the peak summer season, affecting supply and demand dynamics.

Looking ahead, rapidly changing geopolitical dynamics and rising instability are expected to affect the freight industry. However, the prevailing expectation is that declines will continue in the short term, driven by increased capacity and less effective blank sailings due to new alliances. Despite this, the delay in returning to the Red Sea indicates that rates are likely to stay elevated, even if they continue to fall.