After 3 months of steady declines from the January surge, rates on East - West trading routes have been climbing again in May. They're now siting significantly higher than in the first month of the year, according to some freight rate indices.
There is believed to be a real blend of factors driving these increases being seen on East - West trading routes at present. But it’s fair to say that the severity of this spike has caught the industry by surprise. As recently as the final week of April, most industry analysts were forecasting an early peak season in May but not to this extent.
Many factors are driving the freight rate increases
Primarily, obviously the continued Red Sea diversion is meaning the Asia – Europe trade lanes are requiring roughly 15-20% more vessels than in normal circumstances to maintain the same service calls. Vessels which the carriers seem to be struggling to provide. That means we’re getting operational blank sailings. I.e. the carriers simply don't have a vessel available to honour a service loop.
It’s estimated carriers are 10% short of space they need for the Asia-Europe lane, according to Alphaliner. This is despite the carriers taking over 1 million teu in new deliveries already in 2024, with over 1.5 million on the way in the second half of the year.
Unfortunately, there are currently no signs this diversion is going to be ending anytime soon and we’re advising shippers to continue planning as such.
Demand is also higher than expected this month. This is partly due to Western economies returning to economic growth but it's also suspected there is a high degree of nervousness in the market.
"We can't rule out the possibility that a degree of nervousness is driving a demand increase here. The scars of Covid-19 mean that understandably, when there is the threat of a capacity shortage, shippers may be over-ordering in Q2 for fears Q3 will be even worse."
Jade Blackburn, Head of Sales, WTA Group
As a consequence of higher demand, carriers are implementing general rate increases (GRIs), which are sticking. Most implemented these at the start of May, the middle of the month and further ones are incoming from early June.
We’re also seeing congestion at some Mediterranean ports, Singapore and Colombo. Carriers are avoiding sending their ultra-large container vessels down the Med, which is effectively a dead-end at present. Therefore ports such as Algeciras, Tanger Med, Barcelona, also Valencia are facing an increase in arrivals, leading to congestion.
This is amplified by an increase in transhipment arrivals, as the carriers serve ports deeper in the Med with smaller ships. Transhipment traffic in Barcelona was up 63% year on year in March.
Container equipment is increasingly in short supply on China export routes and threats of future tariffs on goods from China into the US are suspected to be providing upward pressure too, as shippers potentially over-order into the States.
This capacity crunch isn’t forecast to settle down in the next few weeks, with space still in short supply into June and more GRIs on the way.
"It's impossible to forecast when rates will begin declining again. It could just be that this is the 2024 peak season brought forward because of unexpected market conditions and rates will decline in the coming months. Equally it could be the case that this surge remains until we’re well past the typical peak season – which takes us well into Q4.
What I can say, is that space is very, very tight well into June already, so we have at the very least several more weeks of this capacity short market."
Kimberley Hines, Head of Key Accounts, WTA Group
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