When Will The Sea Freight Price Peak?

Since the epidemic, the issue of shipping has gradually become the core of global concern.

This shipping market, which used to lose money year after year, is now making a lot of money in one fell swoop, even more than it has made in the past ten years. However, high freight prices and delayed port congestion have not been able to solve the problem, which has caused the global supply chain to be abnormal.

As the situation worsens, another more critical issue is intensifying. In November this year, the United Nations Conference on Trade and Development warned that high shipping costs would further aggravate global inflation.

Shipping, a once not so high-profile industry, has now become a link that cannot be ignored in global inflation research and a "barometer" for all walks of life.

So, will the freight rate next year be high or low? Can the problem of port congestion be alleviated? How does the epidemic affect the market?

The epidemic affects demand, and demand influences freight rates

In the past year, shipping freight rates have repeatedly hit new highs. Compared with the long-term agreement prices in 2020, today’s freight rates have skyrocketed by as much as 10 times. Shipping companies have achieved profitability levels that have been unattainable for the past ten years. Even shipping stock prices have risen sharply. In the past ten years, the freight rate has been sluggish, and the market has even crossed zero freight rates and even negative freight rates in the market. Overnight, the industry changed dramatically.

One of the reasons for the rapid increase infreight rates is the growth of demand. How the freight rate in the ocean freight market changes next year will largely depend on the changes on the demand side.

Currently, more than 90% of global trade is transported by sea. Since the beginning of this year, as the epidemic has been brought under control, trade exchanges have gradually recovered, and the demand for shipping by the entire market has rapidly increased. Especially in the Chinese market, due to the relatively in place epidemic prevention and control measures, China's resumption of work and production has been smoother. According to customs statistics, in the first 11 months of this year, my country’s total export value was 19.58 trillion yuan, a year-on-year increase of 21.8% and a year-on-year increase of 25.8%. Among them, exports to the EU increased by 23.9%, and exports to the United States increased by 19.2%.

Consumer demand is also increasing further. Take the United States as an example. Under the influence of the epidemic, service trade consumption has shifted to physical trade consumption. The economic rescue plan implemented by the United States has also further stimulated consumers' shopping demand. In the past Thanksgiving Day and Christmas Day, even though the peak season for Christmas goods has ended, US imports are still close to the highest level in history, 40% higher than the same period two years ago.

At the same time, the impact of demand stimulus on freight rates is full of variables. In October of this year, there was a short-term correction in ocean freight rates, but they soon continued to rise. Zhang Yongfeng, director of the International Shipping Research Institute of Shanghai International Shipping Research Center, China, analyzed that exports in October were slightly sluggish, but after November this year, the demand for exports was better than expected, which led to an increase in the demand for transport capacity in the export market, and the freight rate would naturally follow. increase.

The recent emergence of the new crown Omi Kiron strain once again cast a shadow on global trade.

Zhang Yongfeng said that according to practice, the import and export market will show some signs of slowing down from December to January. However, after the emergence of Omi Keron this year, the market has become nervous. It is not ruled out that some cargo owners arrange shipments in advance. This will cause the originally expected off-season to still show the characteristics of the peak season, the shipping market is still busy, and it is difficult for freight rates to drop. An industry insider who declined to be named also pointed out that in the next few months, freight rates are not expected to drop.

But in the longer term, it is not impossible for the freight rate to fall. Yang Yongfeng pointed out that the current inflation rate in the United States is already high, and subsidies for the epidemic are also decreasing. At the same time, under the influence of the epidemic, it will be difficult for the United States and Europe to sustain high consumer demand growth next year.

Recently, many analysts also believe that the growth rate of imports and exports is expected to decline sharply next year. The reasons include the slowdown of the global economic recovery, the gradual weakening of the contribution of prices to exports, and the improvement of overseas supply chain bottlenecks. Based on the above analysis, the market's high demand for shipping will not necessarily continue the trend in 2021, which will make room for freight rates to return to the right track.

Port congestion is difficult to solve, and capacity deployment is not optimistic
Only when the demand side grows, the supply side grows likewise to maintain balance. But this year's situation is that the increase in shipping capacity in the shipping market does not increase with the increase in orders for new ships, and even port congestion, shortage of containers, and other issues have constrained a large amount of capacity.

Port congestion has always been a "stubborn disease". At the moment, despite the increased demand, the ports are overwhelmed. In particular, the Ports of Long Beach and Los Angeles, which carry 40% of the cargo transportation in the United States, continued to be congested in the second half of the year.

In addition, ports in Europe and Southeast Asia also experienced congestion for several months at different times. In the shipping market, if any port has problems, the global supply chain will be affected, and port skipping and ship dumping will also occur frequently.

This kind of congestion is further restricting the already scarce capacity.

Relevant data shows that in the monitoring data of the 40 most important ports in the world, the on-time rate of ships has dropped significantly. According to statistics from Shanghai Shipping Exchange, the comprehensive on-time rate index of global trunk routes in November was only 17%, but before the epidemic, this data was above 70%.

Some insiders explained that if there are 5,000 ships in operation on the market, originally a ship can run 4 voyages a year, which is equivalent to a capacity of 20,000 voyages; but if congestion is a problem, one ship per year Only two voyages can be run, so the market will only have a capacity of 10,000 voyages, and the volume of cargo transported will be greatly reduced.

This also means that even if new capacity continues to be put into the market, it is difficult to guarantee effective capacity. In July and August of this year, not only "a box is hard to find" situation appeared on the market, but also "a box is hard to find" situation. In addition, the scalpers "fried the counter", and the freight rate has been "rapidly increasing."

On the other hand, the delivery of new capacity in the future is limited. Although a lot of new ship orders have been added this year, the delivery time of these ships will be at least in 2023 or 2022, and it is difficult to keep up with the capacity replenishment. Statistics from Alphaliner, a French shipping information agency, believe that the capacity delivered in 2022 may even be reduced by 5.7% compared with this year.

The market has been expecting the problem of port congestion to be alleviated, but from the current point of view, this problem is not easy to solve. At present, the US government has urged ports to implement a 24-hour work system, but the shortage of port workers and the shortage of truck trailers still hinder the solution of port congestion.

Zhang Yongfeng also said that in the long run, the congestion in US ports tends to ease, but there are still many changes next year. For example, the union issue in the United States has not been well resolved. According to the feedback from the union, workers’ strikes will not be ruled out next year, including Put pressure on ports and demand higher wages, these circumstances may also raise freight rates.

Under the changes in comprehensive factors, shipping consulting company Sea-Intelligence predicted this week that due to the depth of the supply chain crisis, it may take up to 30 months for freight rates to return to normal.

What changes will the long-term agreement bring to the market?

The so-called long-term agreement is a long-term cooperation contract signed between the shipper and the shipping company, and the contract period is at least one year. Compared with the spot market price (retail price) that includes basic fees, surcharges, and other fees and is easily affected by market supply and demand, the freight (similar to the wholesale price) stipulated in the long-term agreement is more stable.

Shipping companies have also seen the opportunity. Generally speaking, European routes are mostly signed in November, while North American routes will be later. But no matter when, the freight rate in the long-term agreement is determined mainly by referring to the freight rate in the market at the time of signing. "Judging from the current average situation in the industry, the current long-term contract freight level signed is higher than this year's long-term contract price." Zhang Yongfeng said.

Yang Zhijian, general manager of COSCO SHIPPING Holdings, stated at the first shareholders meeting that the bidding price for this year's long-term contract is 2-3 times that of last year, and the long-term contract negotiation has two major characteristics: strong willingness to sign contracts and rising volume and price. Data from Xeneta, a shipping price comparison platform, also shows that most long-term agreements in 2022 will be at record high freight rates.

The media Spash, which focuses on the shipping market, stated in its article that the average price of long-term agreements on routes from China to Northern Europe was US$11,900/FEU, compared to US$5,700/FEU earlier.

The shipping company that is willing to sign long-term agreements is naturally not COSCO SHIPPING. The world's largest shipping company Maersk first promised to suspend freight increases in September and stated that they are more inclined to sign long-term agreements with customers than spot freight.

According to the financial report, Maersk’s average freight rate in the second quarter increased by 59%, and cargo volume increased by 15%. Hapag-Lloyd’s freight rate in the first half of this year also increased by 46%, reaching 1,612 USD/TEU, which is 1,104 compared to the first half of 2020. USD/TEU.

BCG global partner Yu Chen told Jiemian News that the price increase of the long-term agreement will have an anchor effect. In other words, given the current high freight rates, signing a long-term agreement also means that freight rates will remain at a relatively high level.

For the above reasons, Yu Chen told Jiemian News that the short-term freight price will come down, but it will still be 2-3 times higher than in 2019 and 2018. But he also believes that if there is a cycle of economic downturn, the freight rate in the spot market may indeed be lower than the long-term contract.

He pointed out that the shipping market is a cyclical market. Generally speaking, when the freight rate is in an upward cycle, shipping companies start to increase the number of ships and containers, and then there will often be a situation of oversupply, and freight charges will follow. After landing, as the ship retires and other market changes, the capacity will be tight again, and the cycle goes back and forth.

It is worth noting that the current market share of the world's top ten liner companies has reached more than 80% in total. In a market economy environment, these shipping companies play a decisive role in the deployment of capacity. For example, when the freight rates of European routes are soaring, the capacity of shipping companies will be concentrated in the European market. Later, China-US routes and Southeast Asian routes have appeared. Similar to the adjustment of capacity deployment, there is even a view that in order to maintain freight rates, shipping companies can also affect the relationship between supply and demand by adjusting capacity. This kind of regulation influences the freight rate to a certain extent. Yu Chen also said that the shipping company's idea is definitely to maintain this relatively tight situation.