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A lot of sea freight uncertainty

The current lockdown situation in China, and particularly in Shanghai, continues to cause problems in supply chains worldwide. Not only in terms of logistics, but also in terms of production.

Initially carriers continued to serve Shanghai as per normal despite the problems. A month ago, it was predicted that if the lockdowns continued then the carriers would begin to blank more sailings and increase port omissions in Shanghai – and this is exactly what has begun over the past two weeks. Additionally, the redirection of cargo and production orders to other locations in China is increasing congestion problems in China’s other major ports.

The Chinese government has again confirmed their view that their zero-tolerance policy is the right policy, and it should therefore not be anticipated that the situation will be fully resolved in the short term. Instead, it should be assumed that various additional lockdowns and re-openings will be the normal situation for a long time in 2022.

This means that the level of uncertainty as to what the coming months, and especially the peak season, will bring remains very high. This uncertainty can also be seen in the freight rate developments in the market.

Large Differences in rates

Looking at the various spot rate indicators they clearly show a declining trend over the past two months. For Asia-Europe the decline can mainly be explained by the normal seasonal drop seen after Chinese New Year. Of course, it is a larger number measured in USD/FFE but in percentage terms it is normal. Transpacific rates are slightly weaker than the seasonal decline can explain – but conversely the Atlantic rates from Europe to North America continue to set new records.

Another element to look at is the reported spread in spot rate levels from the FBX index. Keep in mind that this includes some extreme measurements at either end of the market. The data from the first week of May 2022 shows the Asia to North Europe spot market have a spread between 10,000-15,000 USD/FFE and the Pacific to US West Coast has a spread from 9,500-25,500 USD/FFE.

This extreme spread primarily shows two things: There are extreme differences for specific conditions related to geography and timing of the shipment, and a large uncertainty in the market as to what direction it is moving in.

Looking at the contract market it becomes even more interesting. Data from WCI shows the spot rate from Asia to North Europe declined 13% in April compared to March, whereas data from Xeneta shows that contract rates in the same period increased 16.8%.

This shows that many of the shippers who enter contracts clearly see the current market as a temporary downturn and are expecting a much more difficult market environment once we get into the peak season. Therefore, they are willing to enter contracts at higher levels to safeguard volume commitments in the coming peak season.

Many of the indicators used to assess port congestion are largely unchanged compared to a month ago. And as alleviation of the port bottlenecks is a key piece of releasing more capacity into the market, it indicates that the peak season 2022 might indeed become as challenging as it was in 2021.

Backhaul issues

At the same time the imbalances on key trades have gotten worse in 2022 according to data from Container Trade Statistics. In 2019, before the pandemic, 48% of the containers shipped from Asia to Europe could be filled with paying cargo going back. In 2021 this was largely unchanged at 49%. However, Q1 2022 saw this drop to just 43%.

For Asia to North America the problem is even worse. Before the pandemic, in Q1 2019, 44% of the containers on the backhaul would be filled with paying cargo. In Q1 2022 this had dropped to just 26%. And the same is seen on the Atlantic where the backhaul cargo from North America to Europe would account for 62% of the containers before the pandemic, but in Q1 2022 has dropped to 48%.

A higher imbalance leads to a need to have higher head haul freight rates to pay for the empty slots going back. This would be an argument for sustained high-rate pressure on the head haul. On the other hand, part of the reason for increased imbalance is the much higher freight rates charged on the backhaul which is unviable for shippers with large volumes of low-value cargo. If the head haul rates are very high, there is limited incentive for carriers to take backhaul cargo – in turn creating less backhaul volume which creates more imbalance, and on and on it goes.

All in all, 2022 looks as challenging as 2021 in terms of disruption to supply chains, congestion, and an increase in freight rates.

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