Will freight rates on Asia-Europe or the Transpacific reach 40.000 USD/FFE in the run-up prior to Chinese New Year 2022? Or will they start dropping already now and be back to a more normal level of 2-3.000 USD/FFE by February?
These are extremely important questions to get right – both for a shipper looking to budget his freight costs as well as for a carrier trying to assess not only profitability but also to which degree to lean towards the spot market versus locking cargo up in longer term contracts.
There is not a mathematical model in the world which can realistically predict how this will play out in the next coming months. This is not for want of a plethora of mathematical tools to be applied, but it is linked to some very fundamental uncertainties for which there is no solid answer to be had presently.
The unfortunate reality is that both scenarios could realistically happen, as could any variation in between these. Furthermore, there is not a mathematical model in the world which can realistically predict how this will play out in the next coming months.
This is not for want of a plethora of mathematical tools to be applied, but it is linked to some very fundamental uncertainties for which there is no solid answer to be had presently. It is informative to explore the nature of this uncertainty a bit more in depth, and then look at which options are open to both shippers and carriers in terms of managing this extreme level of uncertainty.
The spot market is clearly driven by a capacity crunch, and the outlook for the spot rates is therefore closely linked to the issue of supply and demand.
In terms of forecasting demand for the next 4-5 months this is problematic due to three fundamental reasons. The first reason is that the impact of the pandemic has led consumers, especially in the USA, to change their behaviour. They have switched substantial funds away from spending on services and instead spend them on goods, and this is a switch which took place inside of two months. This change is of a nature which we have not seen to the same degree in the past 60 years. Which in turn means we have no solid foundation upon which to base a forecast of the behaviour in the near-term future. The behaviour could remain the same, but also stage a rapid reversal. Remaining the same would ensure continued strong demand, whereas a rapid reversal could trigger a sudden sharp drop in demand.
The second problem is that container demand is being forecast there is typically a reliance on linkages to changes in macroeconomic parameters. But the ripple effects from the pandemic means that the different components of the macroeconomy behave quite differently from the norm, which in turn means that it would be highly doubtful to which degree the usual links are accurate.
The third problem is the capacity shortage. This has potentially led to a pile-up of cargo which is waiting to be moved once more capacity becomes available – which in turn would appear as an added boom in demand even though it is “only” a shift in time for the cargo. There is no good solid data available which can quantify this effect presently.
On the capacity side the forecasts are equally challenged. The overriding problem for capacity is the fact that the shortage is predominantly due to severe delays in the supply chains. This effectively removes vessels, containers, trucks etc. from the overall available pool of capacity. If the delays are resolved, we would experience a surge of capacity into the market causing a potential sharp reduction in rates. On the other hand, further delays and more congestion will cause a continued upwards pressure on the rates. And forecasting these delays are subject to uncertainties such as the potential shut-down of major port facilities due to new Covid outbreaks.
In this extremely uncertain environment it is not realistic to assume a reliable forecast for rates over the next 4-5 months can be produced.
Instead focus should be levied on risk management – and developments are already seen in this aspect.
On the demand side, this involves lengthening supply chain lead times and increasing inventory. Something already pursued by many shippers – and incidentally having the side effect of added fuel to the proverbial fire as it pushes more cargo through a capacity-starved supply chain.
On the capacity side this involves some freight forwarders and cargo owner chartering their own smaller vessels in order to have secured access to at least a minimum of capacity. This has the side effect of removing capacity from smaller local niche trades, in turns creating an upwards rate pressure in those trades.
On the freight rate side this leads to a larger push by the carriers towards 2-3 year contracts which are ostensibly to be more enforceable than the usual contracts, but unfortunately also leads down a path where some carriers are choosing to leave contract cargo on the quay and instead favoring more lucrative spot cargo. This is linked to the debate concerning enforceable contracts aiming to create a more stable environment.
However, another risk management option is also on the table through the Forward Freight Agreements – similar to risk management tools used on other industries precisely aimed at mitigating risk.
However, another risk management option is also on the table through the Forward Freight Agreements – similar to risk management tools used on other industries precisely aimed at mitigating risk.
To sum all of this up, the reality is that the market over the next 4-5 months is particularly unpredictable and can go in either direction. This means that any stakeholder in the supply chain need to levy much more focus on how to manage this risk.
Source: Lars Jensen, CEO, Vespucci Maritime
