FBX Index: Two new forces to decide rate development
Rate levels continue to surge with the FBX composite index going above the USD 5000 level towards the end of May. This is compared to a pre-pandemic level below USD 1400.
Even trades which had appeared to avoid the impact in 2020 have seen rates increase sharply in just the past few months. Examples abound such as the North Atlantic westbound or the Europe to South America eastbound where FBX rates essentially doubled within just six weeks following the Suez incident.
In many cases shippers also need to pay add-ons to get equipment as well as vessel space, easily adding several thousand USD on top of the spot rate itself.
Looking ahead to the coming few months there are two opposing forces acting on the price formation. One is related to capacity, and one is related to demand, and none of those forces tend to play any role under normal market circumstances.
On the capacity side the normal state of affairs is one of readily available capacity should an operational problem arise. When a vessel suffers for example an engine malfunction, a replacement vessel can be found. Should this not suffice, it is possible to shift the booked cargo onto alternate and/or later departures. This may or may not result in local increases of freight rates depending on the cost of bringing such replacement capacity into play, but the bottom line is that there is always some element of buffer capacity available somewhere.
Right now, there is no buffer capacity available whatsoever. This goes not only for the vessels but in a number of places around the world, also in terms of available port capacity as well as for the containers themselves.
This means all available capacity in many places is already fully committed and there is already cargo which physically cannot be shipped due to shortage of capacity. This places a significant upwards pressure on rates. But what is making matters worse right now and in the short term is the fact that whenever there is an added mishap, it creates an amount of additional cargo which was supposed to have been shipped on committed capacity, but which now has to be shifted onto other assets which are also already committed. This increases the pool of cargo waiting in line to be shipped so to speak. And with zero excess capacity in the system this proverbial line of cargo is not getting shorter and every mishap makes it longer.
Just in the past week, the port congestion in Hamburg, the vessel fire off Sri Lanka and the partial port closure in Yantian all serve to make the problem worse, and will in turn result in continued upwards rate pressure. On top of that every such incident will postpone the point in time where the pool of cargo waiting can be eliminated.
Acting in the opposite situation is the impact rate levels will have on the demand itself on the head haul cargo. Under normal circumstances, freight rates only amount to a relatively small share of the retail value of the goods being shipped on the head haul trades. Hence changes in freight rates tend to have no material impact on demand. But now this is changing. The rate explosion is increasingly pricing some shippers out of the market. For some commodities which are bulky, but do not have a high total retail price for a container load, this is already becoming an issue. This includes commodities such as assembled furniture as well as larger appliances. Based on average market data some of these shippers are getting to a point where rates can now account for as much as 30-60% of the cargo value making shipments entirely untenable.
This in turn means that there will be a negative impact on demand as some cargo will no longer get shipped.
The large unknown is whether we are already at a point where the negative impact on demand exceeds the upwards pressure from capacity shortages. If this is the case, we should see spot rates level out. However, with continued problems on the horizon such as a coming lock-down in Malaysia and the traditional peak season for demand coming up, it appears we may not yet have seen the peak of rates.
About Lars Jensen, CEO, Vespucci Maritime
Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years’ experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of Vespucci Maritime.