Freight rates plunge! Spot rates fall below LTA rates! Over 70% of customers want to break their contracts?

Current major shipping indices include Drewry's World Container Index (WCI), Freightos Baltic Freight Index (FBX), Shanghai Shipping Exchange's SCFI Index, Ningbo Shipping Exchange's NCFI Index, and Xeneta's XSI Index. All show that due to the transportation demand not being as expected, the overall freight rates of major routes such as the U.S. line, European line, and the Mediterranean Sea have fallen. The survey shows that if the market conditions continue to change, more than 70% of the customers will start to consider renegotiating their contracts. Some will even default on their contracts.

Yesterday (June 23), the latest edition of Drewry's composite World Container Index (WCI) plunged 3% this week to $7,285.89/FEU. 10% lower than the same period in 2021. Shanghai-Los Angeles freight rates declined 5% or $426 to $7,952/FEU, while Shanghai-Genoa and Shanghai-New York spot rates fell 3% to $11,129/FEU and $10,403/FEU, respectively, while Shanghai-Rotterdam rates fell 2% or $186 to $9,598/FEU. Drury expects the index to continue its slow decline in the coming weeks.

Data from the Xeneta platform shows that the current spot rate for the Trans-Pacific service to the U.S. West is $7,768/FEU, which is 2.7% below the LCC rate, which is an incredible 159.9% year-over-year spike at $7,981/FEU.Currently, the trans-Pacific route to the U.S. west of the spot and contract rates is rapidly narrowing and, to the surprise of many shippers, has now reached a critical moment. The U.S. West Line part of the container rate has been less than $7,000/FEU. Spot rates continue to soften and have now fallen below the LCC price, a phenomenon known as inversion. The European line's spot freight price of 10,000 U.S. dollars was also in jeopardy, resulting in many shippers focusing on the contract details. The market rumors of shippers' plans to modify the contract with the shipping company, fearing the shipping company's profit.

Industry sources said that the U.S. line rates were divided into different types. Many direct customers and shipping companies signed long-term agreements with prices. The price ranges from the cheapest, at 6,700 U.S. dollars (to the U.S. West basic port), to the most expensive, at 9,000 U.S. dollars. As the current market spot price has been lower than the long-agreement price, shipping companies may reduce prices depending on the situation. The cheapest spot rate in U.S. West has fallen below $7,000, and the rate in the U.S. East is still maintained at above $9,000.

Meanwhile, the Ningbo Export Container Freight Index (NCFI) report reflects the industry's pessimism about the trade, NCFI said that the North America route's transport demand has not improved, and there is an apparent surplus of space, resulting in increasing price declines. In addition, due to the limited demand for freight on European routes, the loading rate has recently performed poorly; some liner companies are under pressure to take the initiative to reduce freight rates to strengthen the collection of goods, and the spot market booking prices fell. Data from Xeneta's customer survey showed that 71% of the companies surveyed seek to renegotiate long-term contracts if there are significant changes in the market. 11% said they were prepared to default on their contracts to find other alternatives to reduce costs, and only 8% said they would continue to honor existing contracts regardless of changes in market conditions. Only 8% of the respondents said they would continue to fulfill their existing contracts irrespective of the changes in market conditions.

In response, shipping companies said they had not received similar requests. Although shipping companies will cooperate with customers to reduce freight rates when loading rates are bad, it is "not in line with the status quo" to discuss reducing LTA rates when loading rates of shipping companies are still reasonable. In addition, the entry into the third quarter of the traditional peak season, first ushered in by the holiday season, followed by Thanksgiving, Christmas, and other year-end shopping season shipments in Europe and the United States, is expected to gradually increase the volume of cargo, supporting the freight rate or even upward. and willing to accept the LTA for most of the large direct customers, including large retailers in Europe and the United States. Most of them have been included in the freight cost and correctly passed on to ensure space, control costs, in pursuit of stable freight quality. Both sides of the ship and cargo will be in the spirit of the contract performance, not to rush to modify.

Shipping companies also mentioned that although the current freight index is down, International oil prices hit the U.S. people's budget dominance, and retailers do not have a lot of inventory replenishment because of the consumer potential situation. In addition to the U.S. West dock workers' negotiations not yet having results, the market is concerned about slackening. Strikes will intensify port congestion and delay goods shipments to the U.S. East, which is also why the U.S. East freight prices are more stable than the U.S. West.

Industry insiders said that the two years of shipping companies taking advantage of the high freight rates to earn a fortune would not quickly kill the competition, as operators could control the route (airline) space to stabilize freight rates. Container freight is still at a high level.SCFI Freight Index shows that the current freight is still four times that of before the epidemic, and that the total rate of 70% to 80% or even 50% of the shipping company is making money. The current slack in spot freight rates is mainly at the freight forwarding end . The carrier price index (i.e., the shipping company price index, such as SCFI) and the actual shipper price index (i.e., the freight forwarder price index, such as the FBX index) are different. The former better reflects the actual price changes, while the latter, because of the inclusion of the freight forwarder link markup, can easily show greater volatility.

Freight forwarders believe the shipping market conditions have been exceptional in recent years; the LTA price sign than in the past is high, which has also led to the spot price being back down, and the price difference between the two is lower than in the past. How much will it affect the customer's willingness to continue to pay the LTA price? The shipping company may consider the customer's situation to renew the contract in the coming year. Since the contract can not be amended by the shipping company in the terms, wanting to re-modify is not an easy task. In addition, the third quarter has not yet entered the traditional peak season, so the LTA price for restarting negotiations remains to be seen.