Spot container freight rates surged to unexpectedly high levels in the first half of 2024 as a result of the Red Sea crisis, and this will also happen in the remaining months of this year.
Why have spot container freight rates risen so much more than expected?
“There is no doubt that the scale of the increase in the spot market, in particular, has been stronger than consensus and certainly what we expected,” Richards explained.
The delays and secondary impacts caused by the Red Sea diversion via the Cape of Good Hope have been much greater than expected, and MSI sees multiple drivers, including:
Trade data was better than expected. Demand growth of 6% in the first five months was not much better than MSI expected, but he noted that “there is the potential for volumes to be brought forward as container shippers try to anticipate and avoid delays and supply chain issues”. Because the diversion around the Cape of Africa requires additional vessels, additional capacity cannot be added to the unaffected trade. Initial congestion at ports in some parts of the Mediterranean caused containers to pile up in yards, and congestion spread to Southeast Asian hubs such as Singapore and Port Klang. So all of this combined to remove effective supply from the system. I think it does point to the ultimate driver, though, which is that freight markets appear to be more volatile now than they were in the pre-pandemic period,” Richards said.
“For a small number of shippers, they do seem to be willing to pay premium prices to load cargo, and that’s leading to a more explosive reaction in the market.”
Will freight rates reach the levels seen at the height of the pandemic?
Richards said a lot depends on how long the crisis lasts. “You need to see really sustained strength in the spot market for that to filter through to new contract negotiations when they emerge, which is typically towards the end of the year and the end of the first and second quarters for some deals.”
“So, assuming there is some normalization and softness in the spot market in the second half of the year, as new capacity continues to come onto the market after the peak season, then we would expect lines to be in a less favorable position when they go into the next round of contract negotiations with shippers,” he explained.
"But realistically, in the short term, further increases are certainly possible and at the moment, the market seems fairly unconstrained in terms of how much or how little shippers are willing to spend."
What happens if there is a ceasefire in Gaza and the Houthis stop attacking Red Sea vessels?
"We expect the market to weaken and generally speaking, if you see a recovery in the Red Sea routes, the prevailing rate levels you see by the end of 2023 are what we would expect and that remains the case for this," Richards said.
However, there are questions about whether the Houthis can stop their attacks if there is a ceasefire in Gaza and can do so on a sustainable basis. There is also the question of how different routes will react and whether all routes will decide to return to the Red Sea immediately or take a wait-and-see approach. But the market is expected to be much weaker.Spot container freight rates surged to unexpectedly high levels in the first half of 2024 as a result of the Red Sea crisis, and this will also happen in the remaining months of this year.
Why have spot container freight rates risen so much more than expected?
“There is no doubt that the scale of the increase in the spot market, in particular, has been stronger than consensus and certainly what we expected,” Richards explained.
The delays and secondary impacts caused by the Red Sea diversion via the Cape of Good Hope have been much greater than expected, and MSI sees multiple drivers, including:
Trade data was better than expected. Demand growth of 6% in the first five months was not much better than MSI expected, but he noted that “there is the potential for volumes to be brought forward as container shippers try to anticipate and avoid delays and supply chain issues”. Because the diversion around the Cape of Africa requires additional vessels, additional capacity cannot be added to the unaffected trade. Initial congestion at ports in some parts of the Mediterranean caused containers to pile up in yards, and congestion spread to Southeast Asian hubs such as Singapore and Port Klang. So all of this combined to remove effective supply from the system. I think it does point to the ultimate driver, though, which is that freight markets appear to be more volatile now than they were in the pre-pandemic period,” Richards said.
“For a small number of shippers, they do seem to be willing to pay premium prices to load cargo, and that’s leading to a more explosive reaction in the market.”
Will freight rates reach the levels seen at the height of the pandemic?
Richards said a lot depends on how long the crisis lasts. “You need to see really sustained strength in the spot market for that to filter through to new contract negotiations when they emerge, which is typically towards the end of the year and the end of the first and second quarters for some deals.”
“So, assuming there is some normalization and softness in the spot market in the second half of the year, as new capacity continues to come onto the market after the peak season, then we would expect lines to be in a less favorable position when they go into the next round of contract negotiations with shippers,” he explained.
"But realistically, in the short term, further increases are certainly possible and at the moment, the market seems fairly unconstrained in terms of how much or how little shippers are willing to spend."
What happens if there is a ceasefire in Gaza and the Houthis stop attacking Red Sea vessels?
"We expect the market to weaken and generally speaking, if you see a recovery in the Red Sea routes, the prevailing rate levels you see by the end of 2023 are what we would expect and that remains the case for this," Richards said.
However, there are questions about whether the Houthis can stop their attacks if there is a ceasefire in Gaza and can do so on a sustainable basis. There is also the question of how different routes will react and whether all routes will decide to return to the Red Sea immediately or take a wait-and-see approach. But the market is expected to be much weaker.Spot container freight rates surged to unexpectedly high levels in the first half of 2024 as a result of the Red Sea crisis, and this will also happen in the remaining months of this year.
Why have spot container freight rates risen so much more than expected?
“There is no doubt that the scale of the increase in the spot market, in particular, has been stronger than consensus and certainly what we expected,” Richards explained.
The delays and secondary impacts caused by the Red Sea diversion via the Cape of Good Hope have been much greater than expected, and MSI sees multiple drivers, including:
Trade data was better than expected. Demand growth of 6% in the first five months was not much better than MSI expected, but he noted that “there is the potential for volumes to be brought forward as container shippers try to anticipate and avoid delays and supply chain issues”. Because the diversion around the Cape of Africa requires additional vessels, additional capacity cannot be added to the unaffected trade. Initial congestion at ports in some parts of the Mediterranean caused containers to pile up in yards, and congestion spread to Southeast Asian hubs such as Singapore and Port Klang. So all of this combined to remove effective supply from the system. I think it does point to the ultimate driver, though, which is that freight markets appear to be more volatile now than they were in the pre-pandemic period,” Richards said.
“For a small number of shippers, they do seem to be willing to pay premium prices to load cargo, and that’s leading to a more explosive reaction in the market.”
Will freight rates reach the levels seen at the height of the pandemic?
Richards said a lot depends on how long the crisis lasts. “You need to see really sustained strength in the spot market for that to filter through to new contract negotiations when they emerge, which is typically towards the end of the year and the end of the first and second quarters for some deals.”
“So, assuming there is some normalization and softness in the spot market in the second half of the year, as new capacity continues to come onto the market after the peak season, then we would expect lines to be in a less favorable position when they go into the next round of contract negotiations with shippers,” he explained.
"But realistically, in the short term, further increases are certainly possible and at the moment, the market seems fairly unconstrained in terms of how much or how little shippers are willing to spend."
What happens if there is a ceasefire in Gaza and the Houthis stop attacking Red Sea vessels?
"We expect the market to weaken and generally speaking, if you see a recovery in the Red Sea routes, the prevailing rate levels you see by the end of 2023 are what we would expect and that remains the case for this," Richards said.
However, there are questions about whether the Houthis can stop their attacks if there is a ceasefire in Gaza and can do so on a sustainable basis. There is also the question of how different routes will react and whether all routes will decide to return to the Red Sea immediately or take a wait-and-see approach. But the market is expected to be much weaker.
