Surging Spot Rates and Increased Shipping Volatility to Continue in H2 2024

The container shipping market has experienced significant changes this year, with various factors driving fluctuations in spot container rates and freight rates.

The Containerised Freight Index has surged by 300% year-on-year this July, while the Baltic Dry Index has risen by 85%. In a recent interview with Seatrade Maritime News, Daniel Richards from Maritime Strategies International (MSI) shared his insights on these trends and the outlook for the future.

Spot Container Rates Have Risen Much Higher Than Expected

“There is no doubt that the scale, particularly in the spot market increases, has been stronger than the consensus, and certainly more than we expected,” explains Daniel Richards from MSI. The delayed and secondary impacts of Red Sea diversions via the Cape of Good Hope have been significantly greater than anticipated, with MSI identifying a mix of drivers for this trend.

Trade data has been better than expected, and demand growth at 6% in the first five months is not much better than MSI had been anticipating. Richards notes, “There is some possibility that volumes have been brought forward as container shippers are trying to anticipate and avoid delays and supply chain problems.”

Additionally, the need for extra vessels for African Cape diversions has prevented the addition of extra capacity on unaffected trades. Port congestion, initially in certain Mediterranean ports, has seen containers piling up in storage yards and congestion spreading to Southeast Asian hubs such as Singapore and Port Klang.

This combination is effectively taking supply out of the system. Richards further explains, “I think this really points to the final driver, which is simply that freight markets now just seem to be far more volatile than they were in the period before the pandemic.”

“It does seem that for a select number of shippers, they are willing to pay the premium rates to get their stuff loaded, leading to far more explosive responses in the market.”

Read More: Containerised Freight Rates Up 300% Year on Year

Potential for Freight Rates to Hit Pandemic Levels

Richards asserts that much depends on how long the crisis lasts. “You need to see really sustained strength in the spot markets for that to filter through to the new contract negotiations when they come up, generally towards the end of the year and towards the end of Q1 and Q2 on certain trades.”

He continues: “Assuming some normalisation and softening in the spot markets in the second half of the year, as you move beyond peak season and new capacity continues to come into the market, we would expect that lines won't be in quite as strong a position going into the next round of contract negotiations with shippers."

"But in the very near term, further increases are certainly plausible, and the market seems fairly unconstrained in terms of how high shippers seem willing to spend.”

Meanwhile, over 1.6 million TEUs of container shipping capacity have been added to the global fleet so far this year. Much of this has been directed towards compensating for lost time and servicing longer shipping routes around the Cape of Good Hope.

However, this rapid increase in the number of vessels has introduced its own issues, such as port congestion and long wait times for ships outside of ports.

The answer lies in the capacities currently tied up in ships waiting for days outside ports for the next available berth to unload their cargoes. Carriers' use of a "ship bunching" strategy has further exacerbated the situation. From Shanghai to Singapore, from ports in the Mediterranean to the US coasts, the longer ships wait outside ports, the greater the chances of blank sailings, the cost of which is ultimately passed on to shippers.

As the traditional peak season begins, shippers can only hope this often-repeated problematic scenario will resolve itself sooner rather than later so that shipping rates cool, supply chains normalise, and global trade continues to grow.

Impact of a Ceasefire in Gaza on Red Sea Shipping

“We would expect the market to weaken, and generally speaking, the prevailing rate levels towards the end of 2023 are what we'd anticipate if sailings resume through the Red Sea,” Richards says.

However, questions remain about whether the Houthis would reliably cease attacks if there were a ceasefire in Gaza. Additionally, it is uncertain how different lines would react—whether all would return to the Red Sea immediately or adopt a wait-and-see approach. A much weaker market would be expected.

The Red Sea crisis has significantly impacted the global supply chain, not only increasing fuel costs but also causing severe congestion and delays at ports worldwide, driving shipping spot rates to unprecedented levels.

Read More: Red Sea Attacks Expand to Gulf of Aden and Arabian Sea