Spot freight rates for container ships continue to fall, and have recently been lower than long-term contract rates. A large number of customers are beginning to consider renegotiating contracts or even breaking the contract.
Recently, major shipping indices have shown that due to lower than expected transportation demand, the overall freight rates of major routes such as the US line, European line and the Mediterranean continue to fall.
Shipping spot price falls below long-term contract price
The latest issue of Drewry’s Comprehensive World Container Index (WCI) showed that it fell sharply 3% this week to US$7,285.89/FEU. This is a 10% decrease from the same period in 2021.
The freight rate from Shanghai to Los Angeles plummeted by 5% or US$426 to US$7,952/FEU;
The spot prices of Shanghai-Genoa and Shanghai-New York fell by 3% at the same time to reach US$11,129/FEU and US$10,403/FEU respectively;
The freight rate from Shanghai to Rotterdam fell by 2% or US$186 to US$9,598/FEU.
Drewry expects the index to continue its slow decline in the coming weeks.
Data from the Xeneta platform shows that the current spot freight rate on the trans-Pacific route to the West America is US$7,768/FEU, which is 2.7% lower than the long-term agreement price. The long-term agreement price is US$7,981/FEU, a year-on-year surge of 159.9%.
The gap between the spot and contract freight rates on the trans-Pacific route to the West Coast has narrowed rapidly. Some container freight rates on the West Coast line have reached less than US$7,000 per FEU. The spot price has fallen below the long-term contract price, and an inversion phenomenon has occurred. On the European route, The spot price is also in danger of sticking to US$10,000.
Shipping companies also mentioned that although the current freight index is falling, the rise in international oil prices has affected the budgetary control of the American people. Retailers have not yet replenished a large amount of inventory because they are waiting to see the consumption potential. In addition, the negotiations between West American longshoremen have not yet reached a conclusion, and the market is worried. Work slowdowns and strikes will aggravate port congestion and the goods will be diverted to the east of the United States first. This is also the reason why freight rates in the east of the United States are more stable than those in the west.
At the same time, NCFI stated that transportation demand on North American routes has not improved, and there is a clear surplus of space, resulting in increasing price declines.
Over 70% of companies want to renegotiate long-term contracts with shipping companies
In addition, due to limited freight demand on European lines and poor loading rates recently, some liner companies have been under pressure to proactively lower freight rates to strengthen cargo solicitation, and customers have also begun to seek renegotiations with shipping companies.
Data from Xeneta’s customer survey show that 71% of the companies surveyed said they would seek to renegotiate long-term contracts if there were major changes in the market;
11% of the companies surveyed said they were prepared to default and look for other alternatives to reduce costs;
Only 8% of the companies surveyed said they would continue to fulfill existing contracts regardless of changes in market conditions.
In this regard, the shipping company stated that it has not received similar requests. Although shipping companies will cooperate with customers to reduce freight rates when the loading rate is not high, under the current circumstances where the shipping company’s loading rate is still at a good level, it is “incompatible with the status quo” to discuss reducing long-term contract prices.
Both shipping and cargo parties will perform the contract in accordance with the spirit of the contract and will not be in a hurry to make changes.
According to industry insiders, shipping companies have made a lot of money by taking advantage of the high freight prices in the past two years and will not easily cut prices to compete. Moreover, operators can stabilize freight rates by regulating the shipping space on routes (empty flights).
Container freight rates are still at a high level. The SCFI freight index shows that current freight rates are still four times what they were before the epidemic. With a full load rate of 70% to 80% or even 50% of shipping companies are making money. The current loosening of spot freight rates is mainly at the freight forwarding end.
Some freight forwarding practitioners believe that due to the special circumstances of the shipping market in recent years, the long-term agreement price has been higher than before. This has also resulted in the price difference between the two being larger than before when the spot price falls, which will affect the customer’s willingness to continue to perform the long-term agreement price. .
Another freight forwarder pointed out that the shipping company may cooperate in restarting negotiations based on the customer’s willingness to renew the contract next year, but in the end it still depends on the willingness of the shipping company, and there are no amendable clauses in the contract, so it is not easy to revise it; in addition, It has not yet entered the traditional peak season of the third quarter, so it remains to be seen whether negotiations on long-term agreement prices will be restarted.
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