BDRY - Extraordinary Freight Rate Rebound Sparks Hope Amid Lingering Global Logistics Capacity Woes

2023-08-30 05:04:00 ET

Summary

• During Q2, rates on the trans-Pacific Asia-to-U.S. routes were already rebounding. This month, they saw double-digit percentage increases, though these were admittedly from a low base.
• Reports indicate that companies are rolling over cargoes as container rates get closer to breakeven for lines.
• Trans-Pacific routes to eastern U.S. ports have also faced restrictions due to work on the Panama Canal, further bolstering rates.

Original Post

By Stuart Burns

Buyers who depend on imports for semi-finished materials or finished components will undoubtedly cheer the recent fall in freight rates. Indeed, global logistics costs peaked in late 2022. Now, buyers will soon see relief from the historic highs of the COVID-induced ocean freight-feeding frenzy. Indeed, few will shed a tear to learn that many shipping lines continue to contend with container spot rates that are below cost. They may even view them as "payback" for the massive profits made in the preceding three years. However, as rates on many routes have dropped even below pre-pandemic levels, it's unlikely that such generosity will endure.

During Q2, rates on the trans-Pacific Asia-to-U.S. routes were already rebounding. This month, they saw double-digit percentage increases, though these were admittedly from a low base. Volumes also increased slightly. Still, most of the improvement followed lines shifting capacity to the Europe-North America service earlier this year. More recently, these companies also began canceling sailings to manage overcapacity.

These efforts have so far been successful. Indeed, reports indicate that companies are rolling over cargoes as container rates get closer to breakeven for lines. Trans-Pacific routes to eastern U.S. ports have also faced restrictions due to work on the Panama Canal, further bolstering rates.

Global Logistics Could Rebound with the Right Conditions

Conversely, trans-Atlantic Europe-to-North America service rates have suffered due to the Pacific service's advantage. As vessels shifted from the latter to the former, overcapacity increased. Rates from Rotterdam to New York in early November last year were nearly $7,500 per 40-foot unit. However, last week, they fell to $1,577 per 40-foot unit. Shipping lines originally moved vessels as rates on the North Atlantic held up well after the end of the COVID-19 boom. Still, overcapacity and a slow recovery in Europe resulted in excessive space. This, in turn, led to a decline in both spot and contract rates.

New vessel deliveries only exacerbated the situation, increasing global logistics capacity as demand faltered. By mid-August, rates were half of those seen before the pandemic. While lines continued to reduce capacity this summer, it will take time for rates to recover. Currently, contract rates exceed spot rates, and shipping lines might need to renegotiate contract rates mid-term to maintain volumes. Ultimately, shippers should anticipate an extended period of service cuts, canceled sailings, and disruption as lines adopt a more aggressive approach to capacity management.

Pacific Routes on the Mend

Rates on Pacific routes will likely continue recovering as lines adhere to their aggressive capacity management program. Although they might not reach pandemic freight rate levels, the trough has passed, and a further recovery trajectory seems plausible. The only caveat is the scheduled new vessel deliveries in 2024. Indeed, this will necessitate rigorous management by lines that must withdraw older vessels to prevent a decline in recent gains.

Meanwhile, the Europe-to-U.S. Atlantic market remains feeble, and rates will likely stay low through Q4. This is enough to cause anxiety in the hearts of procurement professionals nationwide. However, there are indications of a recovery here, too, as various capacity management efforts from lines have begun yielding results. Contract rates in the latter months of 2024 may prove to be a wiser choice for shippers than in 2023, when those under contract consistently lost out to the spot market.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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