How to deal with the abnormal cycle?
The chain reaction under the Covid-19 in these two years has broken the supply and demand tradition of the container shipping market. How to deal with such an abnormal cycle?
The third quarter of previous years is a traditional peak season for the container shipping market. Due to the concentration of shipments, the market freight rates will generally continue to rise. However, the container shipping market in the third quarter of this year is significantly different from previous years. As of August, the freight rates of the world’s major container routes, compared with the second quarter, did not stop falling and rebounded but continued to drop.
Freight rates are abnormal
Judging from the freight rate data released by multiple agencies, the freight rate is continuing to decline. According to the World Container Freight Index (WCI) released by shipping consultancy Drewry, on August 18, the index fell for 25 consecutive weeks, down 3% from the previous week to $6,623.82 per 40ft container this week. Compared with the same period last year, the decline was 35%. Compared with the peak in September 2021, it is down 40%. Drewry expects rates to continue to fall in the next few weeks.
For the recent decline in freight rates, the main reasons include three aspects. First, the global Covid-19 situation has changed well this year, the efficiency of supply chain operations has rebounded, and the process of resumption of work and production has been promoted; second, shipping companies have begun to deliver large-scale orders when the market is good, and the market capacity has gradually increased; third, in the long run, the competition among shipping companies is still fierce.
Freight Rate Trend Analysis
It is not difficult to see from the statistics of many shipping agencies that although the spot freight rate has fallen for 4 consecutive months, the current freight rate is still higher than the level before the Covid-19, and even if it falls, it remains at a high level. There are two important factors that affect the future trend of freight rates.
The first is the situation of overseas orders. Inflation in European and American countries is serious, but the throughput of the entire West ports in the United States is still at a high level, and the cargo volume is expected to rise steadily. Therefore, the freight rate of the US line may have a certain recovery in the third quarter, but it will still be in a state of fluctuation in the fourth quarter.
The second is the uncertainty of the supply chain. The supply chain is affected by various factors with great uncertainty. There are uncertainties in factors such as port congestion and worker strikes, liner companies’ business strategies, industry carbon emission reduction requirements, and unexpected severe weather. Therefore, the freight rate will continue to fluctuate in the short term.
International economic changes
In addition to the oversupply of shipping capacity, changes in the international economic and trade situation are also one of the reasons for the abnormal cycle in the container shipping market.
Maersk has issued a warning a few days ago, saying that political uncertainty and rising inflation caused by rising energy prices continue to affect consumer confidence and demand growth expectations. It is expected that global container transportation demand this year will be at the lower end of the original forecast range. It also specifically mentioned that the slowdown in the European market was particularly pronounced, and inventories at ports and warehouses continued to increase as consumer demand weakened.
Since the outbreak of the Covid-19, international trade has shrunk and the production capacity of various countries has declined. By this year, most countries in the world have lifted lockdown measures, and some orders have flowed from China to other countries. At the same time, the technical recession of the US economy, the sluggish global economic recovery, and the instability of the market supply chain have all adversely affected the international economic and trade situation.
How to respond
For both sides, the shipping companies and factories, the sharp fluctuations in freight rates are not all good things. Experts also gave three suggestions. One is to establish an effective information acquisition channel, for example, through the relevant freight index, research reports, and market information, we can get to know market dynamics and grasp the market trend; the other is to use the container-linked transaction model to improve the contract performance rate of both parties of the shipment companies and industries; thirdly, using container futures products to hedge the risk of freight rate fluctuations.
For freight forwarding companies, participants are required to make adjustments and preparations. Experts suggest that enterprises should do a good job in two aspects: one is to strengthen communication with shipping companies to ensure space; the other is to expand the scope of business and the number of customers to ensure the volume of containers. This pair needs better service to achieve.
