Shipping giants and customers are far apart on price in peak ocean freight contract season

NEW YORK : March and April are critical months for ocean carriers looking to ink annual freight contracts with shippers, including the world’s biggest retailers, but this year contract season is turning into a waiting game.

The $2,500 spread between spot market rates and long-term freight contract rates for Asia to U.S. West Coast containers has reached its highest level since September 2021, when the spread between short-term rates and the long-term rates was $2,900.

This has caused shippers to hit pause before signing on the dotted line, with ocean carriers looking to sign at the higher spot rates fueled by the Red Sea diversions, and shippers holding out for a steeper decline.

Ocean spot freight rates have tumbled for a sixth-consecutive week as the Shanghai Containerized Freight Index dropped by 6%. Ocean carriers were unable to push through a mid-March rate increase, and expectations of an April rate hike are fading amid soft demand.

Mr. Peter Sand, Chief Analyst at Xeneta, tells CNBC that shippers are waiting to see if the spread narrows and to strike a balance of how much they will buy on the spot market versus contract.

Before the Red Sea spike, ocean freight rates and contracts — which drive profits for the ocean carriers such as Hapag-Lloyd and Maersk — had dropped to as low as $1,342 for a 40-foot container in October. The impact of those lower freight rates were reflected in recent Q4 ocean carrier earnings.

The market is currently experiencing a significant mismatch between buyer and seller price expectations, in a demand-deficit environment, according to Mr. Christian Roeloffs, co-founder and CEO of Container xChange. “There is a significant imbalance between supply and demand price expectations for containers,” Roeloffs said.

The current spot rate environment is benefitting shippers.

″[Ocean] carriers are taking the opportunity to exploit this current market,” said Mr. Sand.

Ultimately, he says time is on their side.

“Carriers sit in a much more comfortable chair now, and by the end of April, all of the contracts that were signed last year will expire. So as soon as they expire, shippers may need to ship all of that product on the spot market. No large-scale shipper can go all in on the spot market,” Sand said. “Right now, it’s definitely not the preferred option.”

Sand said shippers can manage rates through the terms of the duration of the contract and by bringing in renegotiation clauses.

“I think many businesses are trying to hold off on making decisions,” said Mr. Michael Aldwell, Executive Vice President of Sea Logistics for Kuehne+Nagel.

“Will the Red Sea congestion topic still be there? How serious is that? Do we expect rates to fall further after the spike in short-term freight rates? As we get through the next three, four, five, six weeks, businesses are going to end up making more agreements and I think against that backdrop of all the uncertainty out there, that makes a lot of sense,” Mr. Aldwell said.

Full year 2024 outlook for ocean shipping

Mr. Chris Rogers, head of supply chain research for S&P Global, said the disruptions the logistics world is currently facing will continue for the rest of the year, but the costs associated with shipping have not gone up as much as the spot rates did during the Red Sea attacks and the Panama Canal drought issues, leading to the recent pricing reversal.

“We’re continuing to see those rates drift down,” Rogers said. “That may continue through the rest of the year.

Mr. Lars Jensen, Vespucci CEO, said he expected the spot rate decline to continue, but rates will vary depending on the global trade lane.

“You’re going to see increases, especially in contract rates Asia to Europe and Asia to U.S. East Coast, because we just don’t have the Suez,” said Jensen. “We also have the Panama Canal issue. But I am not that convinced you’re going to see dramatic increases in contract rates to the U.S. West Coast.” 

Mr. Zvi Schreiber, CEO of Freightos, a digital booking platform for international air and ocean freight, said even though Asia to West Coast freight rates are lower than the East Coast rates because it’s a shorter route, they have spiked due to both geopolitics and climate change.

“The Suez diversions affect the whole network,” Schrieber said. “The Panama Canal I think is recovering now, but it is well below its full capacity because of a drought. They depend on rain there to fill the locks in that canal so a lot of importers would prefer to bring their goods into Long Beach port where they’re not dependent on the Panama Canal.”

West Coast ports, in general, have seen a bump in volume due to a variety of issues, including the Panama Canal. The Port of Los Angeles announced a 60% increase in container processing for February year over year. It was the seventh-consecutive month of year-over-year growth at the nation’s busiest port. For the two months into 2024, the port has a 35% increase over 2023 during the same time frame.

Another headwind for the East Coast ports is a possible longshoremen strike in the fall.

“Buyers are expecting price reductions in weeks to come, while sellers are holding off the inventory as they expect prices to remain stable due to tight capacity,” Mr. Roeloffs said.

The Red Sea diversions and what can be described as a highly imbalanced trade environment are adding to issues in the container market, Roeloffs said, pointing to China-Russia trade as an example. Chinese exports to Russia grew by 12.5% year-over-year in the first two months of 2024, while imports rose by 6.7%.

These growing trade imbalances have impacted the work needed in the supply chain to reposition empty containers.

“We can see there’s an increase in the need to move empty containers of 20%,” said Mr. Alan Murphy, co-founder and CEO, of Sea-Intelligence. “We’re not seeing the ramifications yet because those empty containers have not started getting repatriated back. The question is, is that surplus of empty containers in Asia, or is it stuck across North America or across Europe? When you have longer transit times you extend the supply chains, and you have more equipment tied up in that supply chain. So, that could be a downstream consequence of the Red Sea crisis that could push rates up again.”