No near-term fall seen in freight rates

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There has been a significant shift from sea to air due to disruptions and congestion in sea freight. Photo from ANA
  • No near-term fall seen in freight rates
  • Rates to stay high barring a global recession late this year that would reduce demand
  • Despite rate dips in Q4 2021 and early 2022, hopes for a decline burst as rates rebounded in April
  • With a global recession in the second half becoming more likely, a drop in demand might just bring down rates

Air and sea freight rates have continued to rise this quarter, defying expectations of a further decline after a significant dip in the fourth quarter of 2021, and could stay high barring a global recession late this year that would reduce demand, Transport Intelligence said.

Ti analyst Conner Wyse reported on May 19 the global air and sea freight market in the second half this year would still be characterized by significant disruption and dysfunction seen since the COVID-19 pandemic began in 2020, with demand and rates trending higher.

The analyst said the rate dip in Q4 2021 and early 2022 had raised hopes that the decline would persist throughout the year. On the contrary, rates rebounded in April as both head-haul and back-haul rates remained higher than their pre-pandemic levels.

Head-haul refers to the outbound voyage from a vessel’s home port and back-haul is the return voyage.

Volume, already at high levels, rose further in Q1 2022, especially on the US West Coast, leading to port congestion, the major contributor to high rates, the analyst said.

For instance, Oakland saw cargo volumes grow 13.2% quarter on quarter, and Los Angeles and Long Beach’s volumes increased 7.3% and 7.5%, the report said.

The report cited data from Statista showing an average loss of 11.1% of global shipping capacity due to congestion in 2021, up from 2.3% in 2019. In January, congestion further squeezed global capacity by 12.7%.

Bunker fuel prices, which make up over half of larger vessels’ operating costs, had surged an average of 38.0% from January to April this year, adding upward pressure on rates.

There are hints conditions for rates to finally fall are being set, with China’s lockdowns likely to spark disruptions on their own, providing limited yet much-needed relief for the congested ports on the US West Coast and also on the East Coast. But the extent of this relief may not be enough to cause a rate fall.

“Those involved in the shipping industry do not think Q2 2022 will mark the beginning of the end for high sea freight rates. Ti’s Ocean Freight Confidence Index, which tracks shippers and carriers’ expectations on rate developments, was just below the 50-point mark by the end of April, indicating an expectation of moderate increases in rates in coming months,” Wyse said.

“However, the proportion of respondents that believe rates were going to ‘significantly increase’ fell by a third between January and April, suggesting that many are seeing upward pressures now weakening,” he said.

Air freight rates also remained high throughout the pandemic due to supply-side issues, with discussions on when they will return to pre-pandemic levels. But Ti’s Air Freight Rate Tracker: Q2 2022 shows this does not appear to be soon, the report said.

Both head-haul and back-haul rates have been trending upwards ever since the start of 2021, with April 2022 data showing head-haul at US$9.02/kilogram, US$2.29 higher than in April 2021. Back-haul rates have also been rising in the first quarter and into April.

The report noted that air freight capacity continued to increase after the recovery in January 2021, allowing the release of 2020 pent-up demand.

But the Ukraine war and sanctions and restrictions have had impacts on capacity on the transatlantic lane and caused major disruption on the East Asia-Europe lane. Jet fuel spot prices were also, in part, influenced by the conflict.

Chinese COVID restrictions have caused further chaos on the transpacific lane. There has been a significant shift from sea to air in response to sea freight disruptions and congestion.

“It appears to be the case that when considering the mix of factors driving ocean freight, the direction of ocean rates in Q2 2022 will see little change from the previous quarter,” the report said. A similar picture is presented for air freight rates.

With a global recession in the second half more likely, a drop in demand might just provide what is needed to set freight rates on course towards pre-pandemic levels, the report said.