Thursday 25th January saw Xeneta host its customer January 2024 Ocean Freight Market Pulse webinar. As well as insights relevant to the ongoing Red Sea crisis, audience members gained a sneak peek into the next generation of Xeneta, launching at TPM24.
Below is a snapshot of the new 360-degree market view customers will have. This first-of-its-kind intelligence layers and contextualizes market data to provide clear guidance, particularly in times of crisis. On the left, the average rate is mapped against the total market spread – showcasing just how volatile and uncertain offered rates have been during the crisis. On the right, you can see how all the rates of major carriers (in grey) compare to one another and the market average (in blue) – crucial information during negotiations.
Additional Surcharges in response to the Red Sea crisis
Peter Sand, Chief Analyst at Xeneta, warns customers to expect increases in CO2 and ongoing surcharges. Whilst the EU ETS emissions scheme is still relevant, this has been momentarily dwarfed by surcharges attached to the Red Sea situation. Once market order has been restored, we expect the shipping industry to return its focus to EU ETS carbon emissions.
EU ETS aside, the biggest concern surrounding surcharges is how inconsistently they are being applied and the causal effect they’re having on uptakes on long-term market rates.
From speaking with our customers, the carrier situation is changing rapidly, and charges are being agreed upon on an individual basis based on individual negotiations. In the words of Patrik Berglund, CEO & Co-Founder at Xeneta, “That is what creates all this uncertainty in the market - as they only see what they're getting themselves. And it's different what they get from carrier to carrier or from forwarder to forwarder.”
The spread we’re currently seeing on Xeneta between market-high and market-low is caused by these individual negotiations being treated as individual outcomes. This makes it very hard to say there’s a broad stroke that’s applicable to all.
To illustrate this insight, we took a poll of the 700 webinar attendees and found that nearly two thirds of shippers are no longer having their containers moved on the terms of previously agreed contracts as a result of the Red Sea crisis.
As Peter Sand notes: “We are seeing opportunistic behavior in the market, and so should there be – it’s a very competitive environment.”
Speed of short-term rates escalation has been notable
Xeneta data shows the Red Sea crisis has had a more sudden and rapid impact on ocean freight shipping rates than the first months of COVID.
Whilst we’re yet to see rates hit as high as they were in COVID, the pace of short-term rate increases has caught many shippers and freight forwarders off guard just as they start entering tender negotiations. This is particularly concerning when you consider Q4 was looking like a freight buyers' market.
Lunar New Year – a respite or a reset?
Early indications suggest ocean freight shipping rates are set to increase further in early February. What this tells us is that carriers have successfully moved the vast majority of their short-term rates to a much more profitable level. Something they'll be keen to maintain for as long as possible.
Whilst the market-high short-term rates in early February are unseasonably high, Xeneta is also witnessing a certain kind of calming on the short-term rates between FE Main – North Europe Main. This market behavior mirrors what you’d expect ahead of factory closures in China and Taiwan for Lunar New Year (Feb 10th), with every ship that will leave before LNY having either left or already been booked.
What is less clear is what happens to the market in the longer term, how much of this will be valid without surcharges being added on top, and how long the ripple effect will last.
For instance, if you were to look at the February GRIs in the US, these keep moving up, which is a pure knock-on / domino effect of the Red Sea situation. Considering we're heading into prime tender season for US importers/exporters, this is an important trade to watch.
Michael Braun, Vice President Customer Success at Xeneta, notes, “the majority of the market is going to define where the market is moving [long term].”
The question that follows is, how many shippers are willing to continue accepting Red Sea related surcharges vs how many shippers will be forced to accept them because of supply chain requirements and missing alternatives?
This will drive how high the long-term market will grow.
Artificial demands and the effect on the long-term market
Due to the diverse range of products being shipped, we are seeing different shippers respond to the Red Sea crisis in different ways. The response depends greatly on the nature of the business, contingency planning, inventory stock levels and risk aversion. For instance, the apparel industry has been quicker to overbuy and stockpile capacities.
Other freight forwarders have accused the lines of creating “artificial demand” by blanking sailings and talking up a looming empty box crisis in the hope of maintaining or increasing rates in the second half of February.
As Braun says,“The more difficult the market gets, the more fear you see and the higher the orders are getting because everybody is trying to ship their stuff earlier rather than later which is of course putting extra pressure on the market. This will be mostly defined in the next 4-6 weeks, during the aftermath of Lunar New Year”
This artificial demand increase is temporarily mitigating consequences of the situation shippers fear is ahead. If the situation stabilizes but a lot of cargo has been front loaded, we could witness the market drop back down again very rapidly.
As Berglund observes, “The forecast is evolving as quickly as the data shifts, creating a lot of uncertainty around when the market will flatten. Depending on the stickiness of February GRIs, shippers could have an opportunity to get their freight spend closer to initial expectations, but only with a keen eye on the latest pricing shifts.”
Repositioning driving up freight rate costs
If you were to head into the platform and go back four years, you’ll see that the first rate to react on the Ever Given scandal was not the main haul rate it was the back haul rate. This is because the first thing that was missing was equipment in Europe and that’s exactly the same thing we’re seeing now.
Carriers are desperately trying to get empty boxes back to the Far East as fast as possible. This is being reflected in February increases for exporters out of Europe.
At the moment, the market isn’t experiencing equipment shortages, but the question Braun asks is, how long is that going to last? The longer we have missing equipment, or services or services with significant delays, the more ‘scars’ will appear and it will be the exporters who suffer first.
Whilst the backhaul profitability has ‘flipped overnight’ for some shipping lanes, Sand was quick to remind the audience that “no two trades are alike. I can only encourage you to go back to US East Coast to FE Main – one backhaul that’s not affected yet. Go ahead explore all kinds of trades, they are not alike.”
Impact on US and EU tender season
We know a lot of US importers and exporters have already begun their main tender cycle, so time to market is less than ideal. In fact, most shippers and freight forwarders are anticipating the impact on their 2024 EU tender season too.
When you consider how different the Q4 expectations were, our advice is to re-evaluate this year’s tender cycle and Q4’23 forecasts, planning for two or four price adjustments in 2024.
Where possible, attempt to go for shorter rate validity (3/6months). Underlying consumer demand is not as elevated as it was in COVID, so indicators are showing a softening of the market could happen much sooner than anticipated. Be aware of this when entering into negotiations as carriers will be keen to stick to rates outlined by the GRI.
If shorter contracts aren’t an option, you must continuously renegotiate temporary surcharges to avoid financial loss. At a bare minimum, attempt to negotiate an ocean freight rate without the price consequence of the Red Sea so when the market comes back down, rates go down to a more palatable level.
Want more insights?
The Ocean Freight Market Pulse webinar is a monthly session we hold for customers to gain critical market insight. If you’re interested in gaining access to market data that outlines opportunities and risks to your supply chain as they happen, book a live demo tailored to your most important trade lanes, budget goals and suppliers.
For more insights specifically on the Red Sea Crisis, Xeneta is currently monitoring the situation and updating its Red Sea Crisis newsfeed as new insights become available.
