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Ongoing normalisation

September is traditionally the last month of the peak season on the main export routes from Asia to Europe and North America.

However, 2022 did not have a peak season. As expected, before the month of September began, the rate decline continued unabated as markets are on a path towards normalization.

In terms of the spot market, as measured by the World Container Index (WCI), rates for the Asia - Northern Europe trade fell 38% from 1 September to 6 October. This is obviously a sharp drop, but it is far from a record drop. In 2015, when there was a major freight rate war between carriers, there were several situations where the 5-week decline was worse than -60%.

Additionally, despite this drop in September, the spot price in the first week of October 2022 is still 295% higher than the same week in October 2019, before the pandemic.

This gives us the insight that the price decline is indeed fast, but not at a record pace, and that spot prices are still very high compared to pre-pandemic levels.

Falling sport rates remain at a high level

Among other major Asian exports to the US West Coast, rates fell 46% over the same five-week period. This is the largest 5-week decline in the Pacific in the 10 years of the WCI index. This is a faster decline than during the 2015 freight rate war. But even then, rates remained 119% higher than in the same week in 2019.Bear in mind that in the Asia-Pacific trade, about 30% of capacity is operated outside alliances, while in the Asia-Europe trade, only 5% is operated outside alliances.

There are many new smaller carriers in the Pacific, and these rely heavily on small charter vessels that are not only fuel inefficient, but also hired at charter rates up to 10 times higher than normal by 2021. These carriers must ensure that their vessels are full, and this creates additional negative pressure compared to trade between Asia and Europe.

The Atlantic trade not only held up so far in September, but also saw WCI spot rates to the US rise as much as 6% to a new record high. A good example that despite the global trend of markets returning to normal through a rapid injection of new capacity, it may take some time for this trend to manifest itself everywhere.

Further cancellations expected

Carriers have rapidly increased the number of empty sailings on the Asia-Europe-Pacific routes, but so far without major consequences. Shippers should prepare for more blank sailings and cancellations in the coming weeks and months, as carriers will step up their efforts to slow the decline. They cannot stop the decline as the market returns to a more normal situation, but they will try to slow it down.

We are now at a point where 7.9% of the world fleet is unavailable due to congestion in ports. While this is still not good, it is a big improvement from January 2022, when 13.8% of the fleet was unavailable. This is the underlying driving mechanism behind tariff normalisation. Added to this is the fact that demand in the market is relatively low as there has been no real peak season.

Rates will continue to drop until they are truly normalised

As for the coming months, the baseline should be an expectation of continued declines in spot rates, but perhaps at a slightly slower pace as the number of blank sailings increases. Eventually, we are likely to see a small deviation from what the normal level should be, but the market is likely to recover quickly to the new norm. Among other factors, this new normal will be influenced by the sharp increase in operational costs seen by carriers. For instance, bunker fuel prices have increased by 90% when comparing the legally required low-sulphur fuel with the "old" bunker fuel in 2019.

Looking at the overall costs, it is instructive to look at Hapag-Lloyd, which is representative in the market. Their operating cost per TEU increased 49% from Q2 2019 to Q2 2022.

There are also two key risk factors to consider.

Two risk factors to bear in mind

One is a potential strike amongst the port workers on the US West Coast. The union agreement expired 3½ months ago and there is still no new agreement. Minor disagreement has flared in recent weeks, and if there is not a new agreement after the US mid-term elections in November, the risk of a strike increases significantly. This would drastically worsen congestion and send rate rising temporarily as capacity becomes scarce not only into USWC but also into USEC as more shippers would be booking to the East Coast instead.

The other risk factor still has a low probability, but with a very large impact. This would be a major cyber-attack successfully impacting several major container ports. The underpinning of such a scenario would be an escalation of the de-facto hybrid war with Russia, and such an attack has the potential of creating levels of congestion reverting the market back to the state it was in back in the end of 2021.

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