Spot rate volatility spreads amid disruption, bumping up long-term prices

The latest Drewry World Container Index (WCI) of container shipping rates remained stubbornly high this week, despite a 1% decrease to an average $5,736 per 40ft, still well above the year’s average of $3,946.

But among that little movement, Shanghai-Los Angeles rate dropped 3%, to $6,740 per 40ft.

But the report concludes: “Drewry believes spot rates have peaked, but continued shipping disruptions will keep a floor under the spot rates for some time.”

That is one way of putting it. Only weeks ago, a UN ceasefire resolution caused a drop in liner share prices, as the market expected a breakout of peace to bring rapid normalisation to freight rates.

A World Bank study published at the beginning of July purports to be able to quantify and predict how disruption affects freight rates, finding that for each million teu of container trade on stalled or waylaid ships, the Shanghai Containerised Freight Index (SCFI) goes up by $2,300 per teu. Well, now we know.

“Regardless of the cause, delays or re-routing mean disruption diffuses at a global scale,” said the World Bank. “The [Global Supply Chain Stress Index] explains the observed surges in shipping rates during disruptions, assuming shippers’ willingness to pay for scarcer shipping slots.”

But this week, the Israeli killing of Hamas leader Ismail Haniyeh in Tehran and Hezbollah commander Fuad Shukr in Beirut brought the Levant a step closer to open war, and has put paid to any ceasefire talks. It is likely, therefore, that Red Sea disruption will keep Asia-Europe rates elevated for many months.

But the question now is what the implication will be for the shipping industry – by now an accepted strategic target – should the Middle East conflict escalate.

Announcing preliminary Q2 24 revenues of $12.8bn yesterday, Maersk said it expected disruption “…to continue at least until the end of 2024, coupled with robust container market demand.”

The liner giant upgraded its full-year guidance for a second time, telling its investors to expect an Ebitda of $9bn to $11bn from an already previously elevated $7bn-$9bn, and overall container market volume growth of 4-6 (previously 2.5-4.5).

Meanwhile, Xeneta is reporting that the volatility in spot rates is now spilling over into long-term rates.

The Global Xeneta Shipping Index (XSI) July measure increased 2.5% month on month from June. The XSI sub-index for Far East Exports to Europe and the US, meanwhile, had hovered around 150 since the beginning of the year, but during July suddenly increased 12.6%, to 178.8.

Xeneta analyst Emily Stausbøll believes this is evidence that the peak in spot rates is having an influence.

“Long-term ocean container shipping rates remained subdued despite massive increases on the short term market in May and June – but that is starting to change,” she said.

The XSI for Far East Exports was 640 points at the height of the 2022 disruptions, but Xeneta noted that the conditions were different, in that equipment shortages had caused a corresponding increase in long-term rates on backhaul trades as shipping lines struggled to get containers back to Asia.

But a corresponding increase in backhaul rates has not materialised this time, suggesting there is more equipment available.

“This is a pivotal time for the market,” said Ms Stausbøll. “Shippers will be hoping the spot market crashes back down hard and fast, while carriers will be doing everything possible to keep short-term rates elevated for as long as possible.”