The ocean freight market is in standoff as peak contract season hits

March and April are essential months for ocean carriers trying to ink annual freight contracts with shippers, together with the world’s greatest retailers, however this yr contract season is popping right into a ready recreation.

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

This has triggered shippers to hit pause earlier than signing on the dotted line, with ocean carriers trying to signal on the greater spot charges fueled by the Purple Sea diversions, and shippers holding out for a steeper decline.

Ocean spot freight charges have tumbled for a sixth-consecutive week because the Shanghai Containerized Freight Index dropped by 6%. Ocean carriers have been unable to push via a mid-March charge improve, and expectations of an April charge hike are fading amid tender demand.

Peter Sand, chief analyst at Xeneta, tells CNBC that shippers are ready to see if the unfold narrows and to strike a steadiness of how a lot they’ll purchase on the spot market versus contract.

Earlier than the Purple Sea spike, ocean freight charges and contracts — which drive earnings for the ocean carriers akin to Hapag-Lloyd and Maersk — had dropped to as little as $1,342 for a 40-foot container in October. The affect of these decrease freight charges have been mirrored in latest This fall ocean service earnings.

The market is at present experiencing a big mismatch between purchaser and vendor worth expectations, in a demand-deficit atmosphere, in accordance with Christian Roeloffs, co-founder and CEO of container buying and selling and leasing platform Container xChange. “There’s a important imbalance between provide and demand worth expectations for containers,” Roeloffs stated.

The present spot charge atmosphere is benefitting shippers.

“[Ocean] carriers are taking the chance to use this present market,” stated Sand.

Finally, he says time is on their facet.

“Carriers sit in a way more snug chair now, and by the top of April, the entire contracts that have been signed final yr will expire. In order quickly as they expire, shippers could have to ship all of that product on the spot market. No large-scale shipper can go all in on the spot market,” Sand stated. “Proper now, it is positively not the popular possibility.”

Sand stated shippers can handle charges via the phrases of the period of the contract and by bringing in renegotiation clauses.

“I feel many companies are attempting to carry off on making choices,” stated Michael Aldwell, government vp of sea logistics for Kuehne+Nagel.

“Will the Purple Sea congestion subject nonetheless be there? How critical is that? Can we anticipate charges to fall additional after the spike in short-term freight charges? As we get via the subsequent three, 4, 5, six weeks, companies are going to finish up making extra agreements and I feel in opposition to that backdrop of all of the uncertainty on the market, that makes lots of sense,” Aldwell stated.

Full yr 2024 outlook for ocean delivery

Chris Rogers, head of provide chain analysis for S&P World, stated the disruptions the logistics world is at present dealing with will proceed for the remainder of the yr, however the prices related to delivery haven’t gone up as a lot because the spot charges did through the Purple Sea assaults and the Panama Canal drought points, resulting in the latest pricing reversal.

“We’re persevering with to see these charges drift down,” Rogers stated. “That will proceed via the remainder of the yr.

Lars Jensen, Vespucci CEO, stated he anticipated the spot charge decline to proceed, however charges will differ relying on the worldwide commerce lane.

“You are going to see will increase, particularly in contract charges Asia to Europe and Asia to U.S. East Coast, as a result of we simply do not have the Suez,” stated Jensen. “We even have the Panama Canal subject. However I’m not that satisfied you are going to see dramatic will increase in contract charges to the U.S. West Coast.” 

Zvi Schreiber, CEO of Freightos, a digital reserving platform for worldwide air and ocean freight, stated although Asia to West Coast freight charges are decrease than the East Coast charges as a result of it is a shorter route, they’ve spiked as a consequence of each geopolitics and local weather change.

“The Suez diversions have an effect on the entire community,” Schrieber stated. “The Panama Canal I feel is recovering now, however it’s properly beneath its full capability due to a drought. They rely upon rain there to fill the locks in that canal so lots of importers would like to deliver their items into Lengthy Seaside port the place they don’t seem to be depending on the Panama Canal.”

West Coast ports, typically, have seen a bump in quantity as a consequence of quite a lot of points, together with the Panama Canal. The Port of Los Angeles introduced a 60% improve in container processing for February yr over yr. It was the seventh-consecutive month of year-over-year development on the nation’s busiest port. For the 2 months into 2024, the port has a 35% improve over 2023 throughout the identical timeframe.

One other headwind for the East Coast ports is a potential longshoremen strike within the fall.

“Consumers expect worth reductions in weeks to come back, whereas sellers are holding off the stock as they anticipate costs to stay secure as a consequence of tight capability,” Roeloffs stated.

The Purple Sea diversions and what will be described as a extremely imbalanced commerce atmosphere are including to points within the container market, Roeloffs stated, pointing to China-Russia commerce for example. Chinese language exports to Russia grew by 12.5% year-over-year within the first two months of 2024, whereas imports rose by 6.7%.

These rising commerce imbalances have impacted the work wanted within the provide chain to reposition empty containers.

“We will see there’s a rise in the necessity to transfer empty containers of 20%,” stated Alan Murphy, co-founder and CEO, of Sea-Intelligence. “We’re not seeing the ramifications but as a result of these empty containers haven’t began getting repatriated again. The query is, is that surplus of empty containers in Asia, or is it caught throughout North America or throughout Europe? When you might have longer transit occasions you lengthen the availability chains, and you’ve got extra gear tied up in that offer chain. So, that might be a downstream consequence of the Purple Sea disaster that might push charges up once more.”