The recent surge in freight rates across east-west trade lanes has drawn attention, but industry experts suggest shippers should focus on long-term strategies rather than short-term volatility. Drewry Maritime Research offers valuable insights for forward-looking logistics planning.
Pre-Lunar New Year Rate Spike: A Seasonal Anomaly
Freight rates on major east-west routes have shown unexpected strength in early 2023. Drewry's Hong Kong-Los Angeles container rate benchmark jumped 28% in the first week of January, with rates for 40-foot equivalent units (FEU) increasing by $396 to reach $1,832. This level was maintained through the second week, as carriers in the Transpacific Stabilization Agreement (TSA) successfully implemented their planned $400 per FEU rate increase.
A similar pattern emerged on Asia-Europe routes. The Shanghai-Rotterdam World Container Index (WCI) benchmark surged 41% in the first two weeks of January to $1,335 per FEU. The $391 increase closely matched carriers' planned $400 peak season surcharge (PSS).
"The critical question everyone is asking is how long this rate recovery will last and what it means for 2023 transpacific contract rates," notes Martin Dixon, Drewry's Container Freight Rate Insight Research Manager.
Temporary Recovery vs. Sustainable Strategy
The current rate strength appears largely driven by pre-Lunar New Year shipment surges from Asian factories, leading to vessel overbooking and some container rollovers. Several carriers reported load factors exceeding 100%, enabling significant rate increases.
"Once the pre-holiday shipment peak subsides, spot rates will likely retreat to December levels unless carriers take action to reduce excess capacity," Dixon cautions. "Shippers would be wise to wait a few weeks before initiating contract negotiations."
Most transpacific contracts run from May to April. While 2022 contracts were signed at equal or lower rates than 2021, the current weak container shipping market suggests shippers may secure even better terms this year. Drewry's Hong Kong-Los Angeles benchmark fell 27% between May and December 2022, with spot markets typically serving as leading indicators for contract rates.
However, Dixon warns: "Shippers should be cautious about locking carriers into low rates today, as this may jeopardize future capacity availability." Drewry anticipates significant rate increases in the second half of 2023 as cash-strapped carriers reduce capacity.
"A repeat of 2021 seems inevitable, when rates rose sharply amid constrained capacity," Dixon adds. "Drewry strongly recommends shippers consider index-linked contracts to mitigate these risks."
Rate Indexes: Navigating Market Volatility
Prior to the recent rebound, east-west rates had been in freefall. Drewry's East-West Freight Rate Index, a weighted average of major Asia-Europe, transpacific and transatlantic trades, plunged 38% in the 12 months to November 2022.
However, other Drewry indexes show regional variations in stability. The Intra-Asia Freight Rate Index fell just 6% in 2022 and actually gained 4% in the four months to November.
"Few trade lanes achieve this level of sustained stability," Dixon observes. "Despite capacity influxes affecting other trades, intra-Asia routes have maintained remarkable rate stability thanks to robust traffic growth."
Capacity Challenges: The Fundamental Imbalance
Peter Sand, Chief Shipping Analyst at BIMCO in Copenhagen, notes that 2023's new vessel deliveries will pressure rates, asset values and earnings across the shipping industry.
"The supply-demand ratio must reach equilibrium somehow," Sand states. "Prudent capacity management is essential for restoring owner profitability, at least in the short term."
Long-Term Contracts: Mitigating Future Risks
The ocean freight market faces complex dynamics where short-term rate spikes may prove ephemeral, but underlying capacity risks remain substantial. Rather than reacting to spot market fluctuations, shippers should proactively secure long-term contracts to lock in capacity and hedge against potential future rate increases and space shortages.
Simultaneously, monitoring freight rate indexes provides valuable market intelligence for strategic decision-making. In this uncertain environment, measured strategies prove most effective for navigating the challenges ahead.