Ouch, those container spot rate increases are high!

Posted by: David Wignall

Designation: Advisor – Technical and Commercial

Date: July 5, 2024

Ocean freight rates are not the most common discussion points over dinner, but some mass media journalists think we should be paying more attention to them. Spot rates the most immediate market responsive measure of ocean freight costs are once more far above those is 2019 before the container shipping market went through a “once in a lifetime” boom market created by the world’s reaction to the Covid 19 pandemic. So, is this a twice in a lifetime experience? What is driving such volatility in the market?

A swift review shaws that the Hamas attacks on 7th October, the Israeli response and consequent supporting actions from other Iranian linked paramilitary groups, notably those linked to the Houthi’s long-standing insurrection or fight for autonomy in Yemen, has led to the effective closure of the Red Sea to container shipping. So much for the freedom of the seas! This closure means container ships need to Europe round southern Africa and increased the transit times from Asia to Europe and therefore the numbers of ships required to maintain services. Spare a thought for the Suez Canal! The closure has also led to changes in the number (and location) of port calls that can be made as elements of the considerable changes required to container lines networks. Consider how much effort they put into redesigning and optimising those networks when they find the need to reverse the flow of containers across the Mediterranean rather than through Suez, chaos has ensued. India is one of the countries in the worst position as the ripples of changes to networks though it may take a year for all those changes to come to fruition. Although no one is forecasting a rapid resolution to the situation in the Red Sea, it cannot be rules out.

There are also other factors changing ocean freight rates. These include the large numbers of ultra large container ships being delivered, the Panama Canal has experienced a prolonged drought reducing transits and ship capacity and more, Nearshoring or China plus one strategy for procurement of consumer goods. Rather than making statements about unusual and unexpected factors impacting spot rates we should focus on the reality that spot rate are volatile.

Volatility in spot rate is one reason people contract over periods of time. The link between contract rates and spot rates is not fixed, but in some way, there is a link. The additional stability provided by contract rates allows cargo owners to plan and adjust to rate changes as they see the pressures on rates mounting or reducing. The contract is in some degree transferring the risk from cargo owner to shipping line. So how long you contract for depends on your forward view of the market. It also means that shocking headlines on the rapid rise in spot rates are not as shocking to the market as they may appear.

In all of this we should also perhaps remember a core benefit of containerisation. The massive reduction in freight costs that has enable globalisation. Even COVID high spot rates for containers did not form a significant percentage of the costs of consumer or finished goods (one reason containerisations took off). Not true for some cargos that came later to container transport. We must not lose site of the benefits and focus on the real need, make sure your contracting strategy for transporting your cargo is the right one and you are managing the benefits and risk effectively through that strategy. Do not be a slave to spot rate and their volatility!

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