Commentary

By Lars Jensen

The difficulty for shippers is that the market could go in two extremely different directions .

The container shipping market right now can be described as teetering at the top of a sharp pyramid . The ability to predict — even roughly — what freight rates will do over the next six months appears more difficult than ever . This is because the two most likely paths lead to extremely different outcomes .

But to understand this precarious balancing act , it is necessary to think of the underlying market as composed of several layers .

Layer 1 : the baseline fundamentals . Demand growth of some 8 % over the past five years against fleet growth of 25 % has created substantial overcapacity . Quite a bit of this capacity has been absorbed through slow steaming , but there is overcapacity nonetheless . We will still see some 1.5 million TEUs of capacity injected in the rest of 2024 , and hence the overcapacity will worsen .

Layer 2 : the Red Sea crisis . The much longer sailing distances around southern Africa mean a sharp change in demand when measured in TEU miles . Essentially , the overcapacity seen in layer 1 is just enough to cope with the new diversions around Africa , provided vessels are sped up again and — crucially — provided there are no additional disruptions .

Layer 3 : increasing port congestion . In Asia and the Western Mediterranean , port congestion has been gradually worsening for several months . It appears to have flown somewhat under the radar , almost like the proverbial boiling of a frog that doesn ’ t notice the problem if you only increase the water temperature slowly .

However , the situation has come to a boiling point over the past month . And as the developments in layer 2 led to a market with zero excess capacity to deal with new problems , it means that in layer 3 , we now have insufficient capacity in the global supply-demand balance .

Layer 4 : a sudden , sharp spike in demand . This appears to have caught everyone by surprise , to some degree even the carriers . A good hypothesis presently is that this is an extremely early onset of the traditional summer – fall peak season . It would fit the mentality of shippers anxious that the peak season might see large scale disruptions on the US East Coast if labor negotiations break down . Also , an earlier peak season should be expected for any services being diverted around Africa .

Finally , it appears that while container shipping is seeing a sudden sharp spike in demand , the same is not the case for air freight . If the sudden sharp demand was driven by an unforeseen buying rush by consumers , one would expect that air freight had also seen such a sudden spike .

Layer 4 is — to some degree — the straw that broke the camel ’ s back in terms of capacity shortages .

Echoes of the pandemic

The market situation right now is similar to the early parts of the COVID-19 pandemic disruptions , during which insufficient capacity led to the largest rate increases the industry had ever seen . If the market remains at layer 4 , and especially if this is not just a temporary early peak season but a sustained boom , then the rate development is poised for a repeat of what was seen during the pandemic .

However , if the Red Sea routing reopens , which is unlikely now but not out of the realm of possibility in a few months , this would instantly recreate the substantial overcapacity the market was grappling with at the end of 2023 and could cause a sharp drop in spot rates .

The difficulty for shippers trying to plan their supply chains and , importantly , manage their freight budgets for the rest of 2024 , is that the two most likely scenarios appear to go in two different directions .

It is possible that we could again see the rate spikes of pandemic-level proportions . There were already offers over $ 10,000 per FEU floating in the market as of May 20 from Asia to the US East Coast . Platts , a sister company of the Journal of Commerce within S & P Global , pegged spot rates on the North Asia – US East Coast route at $ 7,300 per FEU as of June 4 , up 2 % from the previous week and 217 % year over year .

But it is also possible that if this is only a short-term spike in demand due to an early peak season , and if the Red Sea reopens , freight rates could plummet back to the depths seen in the later parts of 2023 .

Which scenario plays out is dependent on predicting the reopening of the Suez route . With continued sporadic attacks by the Houthis operating in Yemen , global carriers continue to be cautious , with CMA CGM the only exception among major carriers to have a few Asia – Med vessels go through the still-risky passage .

email : lars . jensen @ vespucci-maritime . com

44 Journal of Commerce | June 17 , 2024 www . joc . com