Spot freight rates out at sea escalated to kick off May as uncertainty rages on throughout the global supply chain, particularly close to the Red Sea.
According to Drewry’s World Container Index (WCI), which measures ocean spot freight rates across eight major global trade lanes, prices for 40-foot containers rose 16 percent week over week on Thursday to $3,159.
This marked the largest one-week jump since January, when the WCI increased 23 percent in the week to Jan. 18, before peaking the week after at $3,964 per container as more vessels avoided the Red Sea due to the ongoing attacks on shipping by Yemen-based Houthis.
The sudden jump in spot rates after three months of steady declines also comes right as many contracts expired at the end of April, as shippers lock in new deals with ocean carriers amid the start of the new contract freight season.
“Contract rates are clearly the way to go for shippers in this very volatile market,” said Philip Damas, managing director of Drewry Supply Chain Advisors. The largest shippers, meaning companies like Walmart, Amazon and Target among others, opt to go the contract route because they require higher quantities of freight for a longer-term period.
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This season in particular has seen slower contract negotiations than usual as firms had waited for spot rates to drop closer to contract rate levels after the January peak.
But Damas told Sourcing Journal that recently, there’s been “possible panic buying before the peak season amid concerns about rate increases,” which is one of multiple factors pushing the prices up.
In a post on LinkedIn, Lars Jensen, CEO of container shipping consultancy Vespucci Maritime, explained a current dichotomy among shippers, and how it has slowed down some of the contract negotiations due to the spot market’s sudden strength.
“Some shippers being highly dissatisfied with the sharp uptick in prices, [with] some shippers being able to still move cargo on agreed contract materially below spot. And a whole gray zone in between,” Jensen wrote. “Just like during the pandemic, I would expect the first-mentioned group of shippers to be those we hear quite vocally in the market, as they are clearly hurting from this. And just like during the pandemic, I do not expect shippers who move freight on contracts substantially below the spot market to be very vocal about this at all—after all, this is a competitive advantage for them.”
Citing Drewry consultants across China and Europe, the sudden double-digit rises appear to be linked to a combination of short-term factor and supply and demand changes, Damas said.
Damas pointed to stronger-than-expected U.S. consumer imports as another top reason for the shift, although he noted these effects have not reached Europe. As for Europe, he noted that there is lower ship capacity going to the continent, combined with potential for low inventories due to the ongoing slowdowns in the Asia-to-Europe trade lanes. Maersk expects more of the same on that front, estimating second-quarter capacity losses of 15 to 20 percent on the Far East to North Europe and Mediterranean trade lanes due to the lengthier routes.
Additionally, Damas pointed to anecdotal reports of changes in ordering, as well as earlier shipping, by shippers concerned over longer the lead times and geopolitical risks that have come out of the Middle East.
One such American company, Wolverine Worldwide, did exactly that for its European wholesale business, pulling $8 million in revenue forward into the first quarter by ordering more product ahead of time in an effort to mitigate the delays, chief financial officer Mike Stornant said in a Wednesday earnings call.
The escalation in spot freight rates appears to be impacting container shipping out of China the most, according to the Drewry data. Spot rates on four major routes from China (to Los Angeles, New York, Rotterdam and Genoa) jumped 16 percent or more week over week.
Another major index out of China is showing a similar trajectory, backing up the WCI spot data. The Shanghai Containerized Freight Index (SCFI) increased 19 percent on a two-week basis to $2,306 per container as of Friday. The total marks a 20-month high for the SCFI.
The rates for containers originating outside of China remain stable, Drewry results say. Trans-Atlantic freight movement from New York to Rotterdam increased just 1 percent to $629 per container, while the reverse path saw declines of 2 percent to $2,160 per container. Trade lanes to Shanghai out of Los Angeles and Rotterdam were flat and down 6 percent, respectively.
