LCA rates drop by a third; an accurate price war between shipping lines is on the way

The Trans-Pacific Maritime Conference (TPM) is held annually in Long Beach, California. It is also where transport companies and container owners usually meet to talk about contracts. Sources close to the situation told the Wall Street Journal that the LTA rates that large shipping companies are getting now are about one-third less than last year. The shortest contract period is even an unprecedented two to three months. There is growing concerned about whether the shipping industry will enter a price war.

This year's TPM conference attendees were looking for answers to several vital questions: How will LTA negotiations proceed now that shippers have the upper hand? What will be the duration of the global trade downturn that began in the second half of 2022? Are container carriers able to stop freight rates from falling further? As the conference opens, the global shipping industry deals with "slowing global trade and plummeting container freight rates." According to the Baltic Freight Index FBX, the freight rate from China to Los Angeles has fallen 8% to 1071 USD/FEU, much lower than the 15898 USD in the same period last year. U.S. East fell 10% to $2,344/FEU, far below last year's $18,020.

TPM has been the start of the rate negotiation season for trans-Pacific contracts for years. By May 1, parties will sign up for the TPM to test each other's bottom line. Sources close to the situation say that the big shipping companies can now get LCA rates that are one-third lower than last year. Rates are also being lowered for cargo owners. Xeneta data confirms this. Because of the recovery of U.S. export rates, February's global container LCA freight rates stopped falling sharply. Xeneta's latest shipping index (XSI) shows that average LCA rates fell by only 1% in February after plunging 13.3% in January. Due to weak fundamentals, Xeneta said the index had dropped for the sixth month and was 22 percent lower than in August 2022. Before this year's TPM meeting, shipping contracts were usually discussed for a year. But Peter Sand, chief analyst at Xeneta, a freight analysis and benchmarking platform, says that contracts were negotiated at this year's TPM meeting for two to three months, which has never happened before, and the winds are changing. Shippers now have the upper hand in negotiations, which will put shipping companies under pressure during tariff negotiations this year.

Shipping companies will face pressure in this year's rate negotiations.

According to some analysts, shipping companies may begin reducing rates in the next few weeks to compete in the price war. Lars Jensen, CEO of Vespucci Maritime and shipping analyst, believes shipping companies should cancel double the number of voyages. The collapse in demand over the past five months has caused a price war that no one wants. To avoid overcapacity, shipping companies must idle, return chartered vessels, and take other measures. Maersk and Mediterranean Shipping (MSC) have canceled one-third of their sailings from Asia to the United States and dozens of sailings from Asia to Europe in the past three months. About 7% of the world's container shipping capacity has been idle, with ships either parked at terminals for maintenance or anchored offshore in China, Malaysia, and other Southeast Asian countries.

If U.S. consumers keep spending, the inventory backlog will be gone quickly, and demand for imports will rise again. Still, if the economy worsens, container freight rates will likely drop below 20% of profit and loss, causing shipping companies to compete on price. The Maritime Executive says lower freight rates have caused some smaller carriers to leave the business. Focus Container Line, an Australian shipping company, went out of business in February. Allseas Global Project Logistics, a British shipping company that has only been open for six months, will shut down in October 2022. Because there will be less competition, shippers may have fewer choices and pay more for freight. According to Soren Toft, chief executive of Mediterranean Shipping Company (MSC), inventory levels are still high but expected to drop slightly in the second quarter, bringing growth to the year's second half. MSC will provide up to 60 ships and scrap some older ones to control capacity. Over the next three and a half years, the company will gradually add 130 new boats to its fleet. Other people who work in the industry say that it may take longer for the container shipping industry to recover after the downturn. It may take six to eight months for demand to increase again, and this year's profits will be lower than last year, according to Maersk CEO Vincent Clerc. The National Retail Federation (NRF) is expected to report that U.S. seaborne imports fell 26% from a year earlier in February.