FreightWaves SONAR: Have Sky-High Ocean Rates Finally Peaked?

Written by Greg Miller, Senior Editor, FreightWaves
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Box operations in Los Angeles, California (Photo: APM Terminals)

Ocean container rates remain exceptionally high but may have finally hit their ceiling. Spot rates have not only stopped rising, they’ve pulled back by single digits. Is this a new plateau or the start of a longer-term reversal as liner alliances bring more capacity back online?

The share of idle container-ship tonnage is declining. The number of box ships being chartered by carriers is increasing. Charter rates are on the rise. All of this implies there will be more slots available for containers, a headwind for freight rates.

“As carriers restore capacity, ocean rates dipped slightly,” said Freightos Chief Marketing Officer Eytan Buchman in the company’s latest report.

The Freightos Baltic Daily Index featured on FreightWaves SONAR tracks the price to ship a forty-foot equivalent unit (FEU) container in various trades.

Rates peaked on July 8 on the China-West Coast route and on July 7 on the China-East Coast route. China-West Coast rates hit a high of $2,855 per FEU before falling 4% to $2,753 per FEU on July 16 — still more than 65% above rates in the past two years.

Chart by FreightWaves SONAR: Daily rates per forty-foot equivalent unit from China to the U.S. West Coast (blue) and East Coast (yellow).

“Volumes and capacity are still not at equilibrium, keeping rates up, with reports of some carriers even requesting premiums on top of these rates to prevent rolled shipments,” noted Buchman.

The COVID-19 crisis could push importers to bring even more cargo in quickly, he continued. “As infections rates, closures and restrictions grow in the U.S., these extreme freight rates may point to the urgency importers are feeling to ship as soon as possible, as the pandemic has made it impossible to know how long consumers will still be buying.”

On one hand, this could lead to more orders in the coming weeks. On the other hand, importer urgency could have already brought orders forward, implying demand weakness ahead.

In light of COVID-19, demand is a wildcard. Demand could be either positive or negative for rates.

Supply appears more one-sided, in favor of rates declining. An unprecedented amount of capacity was artificially removed from service by carriers to support rates in the wake of coronavirus-stricken demand declines. That capacity is now returning.

Data on idled ships tracked by Alphaliner is pointing to a major change. Alphaliner reported that the inactive container-ship fleet fell to 1,847,871 twenty-foot equivalent units (TEUs) as of July 6, down 20% from the previous count in late June.

“The inactive fleet capacity level has dropped below the 2-million-TEU mark for the first time since mid-February, indicating improving market conditions,” said Alphaliner.

Another indicator of growing capacity (a headwind for freight rates) is the cost to charter a container ship.

Carrier fleets are composed of owned tonnage and chartered vessels. This mix provides the flexibility to manage costs. Carriers renew fewer expiring charter contracts in weak markets. This increases the number of ships available for hire and decreases charter rates.

Those charter rates, which plunged in the wake of the coronavirus, are now coming back.

According to U.S.-based consultancy MSI, “Recent weeks have been encouraging, at least for mid-size and larger benchmarks, as a chartering spree has greatly reduced the number of spot units and placed upward pressure on time-charter earnings.” Charter rates for 8,500-TEU ships are up to $18,000 per day from a low of $11,000 per day, reported MSI.

Looking forward, the big question for cargo shippers is how the reintroduction of container-ship capacity will affect freight rates. If carriers don’t maintain price discipline, a mid-single-digit drop in spot rates could snowball into something more substantial.

So far, ocean carriers have been surprisingly adept at averting a price war amidst the pandemic. But the real test of carrier willpower could come when vessel supply returns to the market.

As Simon Sundboell, founder of eeSea.com, told FreightWaves, “Now that things are starting to open back up, it’ll be interesting to see how well carriers manage not just the shutdown but the reopening. It’s way too early to claim that carriers have gotten the upper hand in the perpetual supply/demand-balance game.”

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