Last week, Xeneta published a blog update highlighting developments in the market ‘mid-high’, which indicated shippers are no longer willing to pay higher and higher spot rates to move their cargo.
This week, focus turns to the market low, and more specifically the spread between the lowest and highest spot rates being paid by shippers.
Market spread
In periods of high volatility, the spread between the market low and market high increases. This is because shippers and freight forwarders (and to a certain extent carriers) must react quickly in the face of supply chain uncertainty – and the contrasting priorities of these three key stakeholder groups places pressure on the market in different ways.
Take spot rates from the Far East to the US East Coast. When the market spiked earlier this year following outbreak of conflict in the Red Sea, the average spot rate increased from USD 3 840 per FEU on 14 January to USD 5 660 on 15 January.
This spike was mainly driven by the upper end of the market, with the market mid-high (representing the 75th percentile of the market) increasing by USD 2 550 per FEU and the market high (representing the 97.5th percentile of the market) increasing by USD 2 420.
In contrast, the market low (representing the 2.5th of the market) fell marginally by 1%.
This resulted in the spread between the market low and the market high more than doubling on 15 January to USD 4 540.
A similar situation occurred when the market began its latest rally, with the market average increasing by 22.3% between 30 April and 1 May, while the market low remained relatively flat at +1.5%.
Why this happens
In a volatile market, the spread between spot and long-term rates increases so rapidly that the risk of containers being rolled becomes a sudden and real threat. Typically, this hits smaller freight forwarders first, but as the spread gets bigger an increasing number of freight forwarders and shippers are exposed to this risk. For some it may only be a problem for volumes above minimum quantity commitments (MQCs), while others may be unable to ship volumes below MQCs.
To avoid containers being rolled, impacted freight forwarders and shippers will either have to pay extra surcharges on top of previously contracted long-term rates – or be pushed onto the spot market. However, they may be able to secure rates below the average spot rate, leaving them at a mid-point between the much-lower long-term market and the higher end of the spot market.
These markets dynamics highlight the varying experiences for stakeholders across the market during a spike. While the average spot rate can provide a good barometer for the market, it is often not a rate many shippers and freight forwarders will recognize during times of volatility.
This is why Xeneta customers use the platform to understand how the rates they are paying on the long and short-term markets compare to their peers.
Spread narrowing in July
On the Far East to US East Coast trade, the low-high spot market spread increased from USD 1 000 per FEU in December last year to USD 5 450 at the end of June, again driven almost entirely by increasing market-high rates. By the end of June the market-high rate was USD 5 640 per FEU higher than at the end of December, while the market-low had risen by ‘just’ USD 1 200 per FEU.
In July, the high-low spread has narrowed considerably to USD 1 730 per FEU due to the market-low increasing by USD 5 600 between 30 June and 24 July to stand at USD 9 100. Meanwhile, at the high end of the market, the growth in spot rates has slowed significantly.
Low and high are at the extremes of the market
The huge increases in the market-low partly reflects the market playing catch up. The dynamics that kept the low end of the spot market subdued are reducing as new long-term rates are negotiated and enter validity. This means the discounted rates offered to those pushed onto the spot market to protect against containers being rolled, are being discontinued.
It is also a case that the lower end of the spot market will eventually increase as an overall market spike progresses (unless the upper end of the market collapses first).
It must be remembered that the market-low and market-high represent the extremes of the market at the 2.5th and 97.5thpercentile. For example, looking at the Far East to US East Coast, the low end of the spot market in the first half of 2024 is dominated by a few carriers offering low rates out of Japan.
Mid low to mid high
The spread between the market mid-high and mid-low is naturally much smaller than between the market-high and market-low. But smaller movements here are arguably even more important as the spread between mid-high and mid-low represents rates for 50% of the market, compared to 5% at the market-high and market-low.
On 24 July, the spread between the market mid-high and mid-low between the Far East and US East Coast stood at USD 490 per FEU. In the initial round of spot rate increases it rose up to USD 2 040 per FEU in mid-January. Year-to-date, the mid-high mid-low spread on this trade has averaged USD 830 per FEU, close to four times the pre-pandemic average of around USD 200 per FEU. It is however still considerably lower than the over USD 2 000 per FEU the spread averaged in the pandemic years.
Not all trades behave in the same way
The major fronthaul trades out of the Far East tend to follow the same trends during a Black Swan event or market spike, but there can be notable differences in terms of the development of market spreads.
For example, on the Far East to Mediterranean trade, the high-low market spread reached USD 5 100 on 15 January during the first spot rate spike following the outbreak of conflict in the Red Sea.
However, in contrast to the Far East to US East Coast trade where the high-low spread has increased dramatically once again since May, the spread on the Far East to Mediterranean trade has remained more stable, increasing by USD 1 000 to USD 3 000 from the end of April to 24 July.
This demonstrates why it is so important for shippers to understand their own market position across each of the trades they use to move containers.
The long-term market
On the long-term market, the spread between the market-high and market-low on major trades is increasing – although the key drivers on long-term rates are different to those on the short-term market.
While there is still an element of different shipper profiles being offered different rates (such as bigger volume shippers getting lower long-term rates), the increasing market-high is mostly explained by the spot market starting to rub off on long-term rates.
This is seen in long-term contracts entering validity in July, with some new contracts negotiated in the past two months during the second spike in the market coming in higher than the agreements they are replacing.
Long-term rates at the highest end of the market on the Far East to North Europe trade have gone from not passing USD 5 000 per FEU in May and June to now rising to USD 9 000 per FEU. This means the market-high has jumped to USD 6 560 per FEU on 24 July, up 80% from the end of June.
However, it should be noted that the majority of new contracts entering validity in July remain at much lower levels, meaning the increase in the average rate has been much lower. New long-term rates entering validity in July between the Far East and North Europe are averaging USD 2 800 per FEU, which is 33% higher than new contracts which entered validity in June.
This highlights that there are still plenty of long contracts coming in at lower levels. The market low between the Far East and North Europe is still down at USD 1 230 per FEU.
This suggests carriers are still thinking longer term and looking to maintain relationships with their most important (often bigger volume shippers) by offering lower long-term contracts.
Markets within a market
Not only does the Xeneta data indicate the spot market is reaching its peak following the recent spike, it also clearly demonstrates how experiences will vary across shippers, freight forwarders and carriers.
To gain any real understanding of the dynamics at play, it is vital to benchmark the rates agreed by an individual shipper or freight forwarder against the rest of the market as well as across trades.
