Container Ship Diversions Drive Rate Surge, Yet Approaching Limit – Analysts See ‘Breathing Room’ Ahead
The mass diversions of container ships around Africa’s Cape of Good Hope resulted in a surge in spot rates. However, experts believe that the Red Sea effect may have already reached its limit as upward momentum has slackened. Rates in most shipping lanes have leveled off, with several European indexes showing a decline.
The Shanghai Containerized Freight Index (SCFI) dropped by 2.7% in the week ending Friday, marking the first weekly decrease since late November. Jefferies shipping analyst Omar Nokta stated that the freight rates into Europe are starting to decrease from their previous highs, although rates in other regions remain firm. Unlike the demand-driven rate surge during the pandemic, the current increase in rates is being fueled by supply constraints.
Container lines are adjusting their schedules to accommodate the longer routes around the Cape of Good Hope, which should theoretically stabilize rates. Additionally, the influx of new ships this year will provide companies with the necessary vessel supply to handle the longer routes. The upcoming Chinese New Year holiday in early February is expected to temporarily reduce vessel demand, easing the rate squeeze.
Lars Jensen, CEO of consultancy Vespucci Maritime, predicts that once the Chinese New Year passes, demand will decrease, providing some breathing room for the industry. He anticipates that rates will remain higher than pre-crisis levels but expects a gradual decline in spot rates. Contract rates, on the other hand, are expected to increase as the industry settles into a round-Africa pattern for the foreseeable future.
The effect on the contract market is evident in the China Containerized Freight Index (CCFI), which includes contract rates. While the SCFI experienced a decline, the CCFI rose by 9%. Assessments from Platts suggest that peak rates have been reached, with rates in various lanes seeing significant decreases from their highs. The Drewry World Container Index (WCI) shows a slower rise in European markets, while the Freightos Baltic Daily Index (FBX) global composite remains relatively stable.
Overall, experts believe that the current surge in rates is likely to subside in the coming months, as the industry adapts to the new routing patterns and vessel supply increases. Despite remaining at elevated levels, rates are expected to gradually decrease as market dynamics shift in response to changing conditions.
