The past month was, in essence, a continuation of the developments which had already been underway for several months. Rates in the spot markets continued to decline sharply, most severely in the Asia to US West Coast market where the levels are now rapidly approaching pre-pandemic levels.

Asia to US East Coast is also declining, but at a slightly slower pace, and therefore the spread between the two is increasing. There are two fundamental reasons driving this development. One is the continuing congestion problems in major ports on the US East Coast which still acts to “soak up” capacity from the market. The other is the shift in demand where cargo owners continue to favour the East Coast when possible. This was originally done to avoid the West Coast congestion but is now increasingly a risk mitigation effort. There are two major risks facing shippers using the US West Coast in the near-term future. One is the increasing risk of labour action on the US West Coast as the port workers’ union ILWU who have still not entered into a new agreement with the terminals’ organisation PMA. Secondly, there is still a risk of a rail strike in the US which would impact shippers who have cargo entering – especially the US Pacific Northwest for rail carriage further east. Hence a shift of cargo, where relevant, away from the West Coast and over to the East Coast is a prudent risk mitigation measure. But this is in turn causing the aforementioned congestion problems.

The Atlantic head haul trade still holds up firmly in terms of spot rates, and this is to a large degree due to the US East Coast congestion, which has had the side-effect of also reducing Atlantic capacity.

On the topic of near-term risks, there is increasing concern related to both price and availability of diesel fuel in the US. The reserves are down to a level matching only 25 days, which is lower than anything seen in more than 70 years, and as consequence prices are escalating rapidly. This will impact both trucking and rail within the US. If this leads to de-facto capacity reductions on inland movements, it will create a ripple into the container terminals where congestion would again start rising.

Given the severe drops in spot rates, contract rates are in some cases as much as USD 4-5,000/FEU higher than spot rates. This has led to the completely predictable result that many contracts either have been or are in the process of being amended. Over the past few weeks there have been cases of major carriers proactively approaching some customers and suggesting amending the contracts to a lower rate level in the Pacific. Such behavior from the carriers is a good indication of the weakness of demand. From a carrier perspective, you would normally see a shipper gradually reduce volumes booked on contract as they begin to shift to the spot market. Eventually the shipper would ask to amend the contract rate and the carrier would likely comply. However, during this period the carrier is losing volume. Pro-actively approaching this from the carrier side is only done if the overriding objective is to safeguard cargo volumes.

And demand is indeed weak. The CTS (Container Trade Statistics) data from August shows that global demand measured in TEU*Miles declined -5.5% compared to same month a year ago. It also shows that demand measured in TEU*Miles is now down -2.0% compared to August 2019 and hence we are now for the first time in 2022 at a demand level which is lower than pre-pandemic.

All in all, the sharp decline in spot rates was inevitable – at some point the market was going to normalise. However, the very weak demand developments add further strength to the reductions and it is likely that we will see spot rates in the coming months temporarily drop below pre-pandemic levels before coming back up to normality.

Marex Media