On November 23, we hosted the most awaited webinar of the year, where we looked back at the black swan events in 2021 to understand current industry data and uncover the 2022 outlook.
During the November ‘State of the Ocean Freight Market Webinar’, Patrik Berglund, Xeneta’s CEO & Co-Founder and Peter Sand, Chief Analyst at Xeneta, discussed what shippers and carriers can expect from 2022, analyzed rates for the top 5 global trade corridors and showcased how data can help build supply chain resilience.
In case you missed the webinar, check out this short video summary followed by a full webinar transcript.
To read the full webinar transcript, scroll below.
To download the presentation, click here.
Meet the Speakers
Patrik Berglund, CEO & Co-Founder, Xeneta
- As CEO and Co-founder since 2012, he has grown Xeneta to be the top worldwide ocean freight benchmarking and market analytics platform ultimately transforming companies’ logistics procurement with actionable data intelligence.
- As a logistics and tech-enthusiast, he is passionate about modernizing business processes related to logistics procurement and the supply chain.
- He has in-depth logistics and transportation experience from several years at Kuehne + Nagel in various roles and as Co-Founder of Nordilog, a logistics consultancy firm.
Peter Sand, Chief Analyst, Xeneta
- Over a decade of experience of analyzing commercial markets based on the global economic situation and its influence on trade at BIMCO
- Throughout his career, Sand has been regarded for his widely read articles and industry insights and his regular appearances on global news networks such as CNN, BBC, CNBC, and Bloomberg.
- Master’s in Economics from the University of Copenhagen
Agenda
Patrik: [1:18] The agenda that we have planned for today looks as follows. We're going to cover a basic introduction to explain why we have these insights and what kind of data we lean into.
[1:28] Then we're going to focus on where's the market now, what's going on currently. Then shift that focus to more of an outlook, what can we see looking into 2022, and as mentioned, a Q&A in the beginning.
- Xeneta Data
- State of the Market | November 2021
- 2022 Outlook
- Market Movements
- Top of the Mind Tips
Xeneta Data
Patrik: [1:46] Xeneta has built up the biggest database in the world of rate data to contract ocean and air freight rates. Today we're focusing on the ocean side, where we add more than 9 million rates a month, which is split around 160,000 port pairs, and a total database of more than 280 million rates growing quickly.
[2:11] We collect our data from a pool purchasing for more than $20 billion that's currently on the shipper side, which is important to understand because we also work with 7 of the top 10 global freight forwarders. We work with 3 of the 5 biggest shipping lines. So we have really built up a community with all the key stakeholders in the industry.
[2:34] This data is funneled to us primarily by Excel sheets. These are so prone to error. I want to highlight the amount of work, dedication and technology that we've developed in order to collect this data on a scale.
[2:51] As I mentioned, these new 9 million rates coming in every month and how we cleanse, normalize and validate that data is absolutely instrumental to delivering the market intelligence that we're doing as of today. This is what we are going to lean on for this webinar as well. Now we are going to start looking at where is the market as of November 2021.
State of the Market | November 2021
Patrik [3:14] The first point we're going to drill into is that rate levels...even if it's temporary, but finally, they've peaked a bit. They've started to drop off a little bit. Peter, maybe here you can chime in because this is an interesting development, isn't it?
Peter: [3:49] What we have been talking about for one and a half years now since rates took off from the early first half 2020 abyss where liners carriers canceled and delayed postponed outright blanks sailings left, right, and center.
[4:09] Right now, they are deploying multipurpose ships to carry cargo out of the Far East region in particular across the globe. From what we are seeing from Xeneta data early on in November, seems to me that we are entering now the past peak, at least on the spot rate market.
[4:34] And it comes of course on the back of changes to the underlying demands because what has also brought around the record high freight rates is not only a super strong demand consistently over many months, which now seems to be a little bit going down following what we also have right now the traditional peak season for container shipping.
[4:58] On top of that, some carriers have called it peak season every single day for the past 15 months. In all fairness, they have also been super busy moving boxes predominantly the loaded ones, but also the repositioning of them. But we are moving into some new grounds.
[5:19] Also, in terms of themes that are moving and shaking the market right now, Patrik. I'm very keen to deep dive a bit into some of the main traits as we continue this talk. What we have right now is a changed focus, also away from the hype, the spot market, and also into the long‑term contracts. How do you see that playing out?
Patrik: [5:47] We all learned that forecasting this market in 2020 after the summer period and beyond has been really difficult. What's interesting to see with this softening on the spot market is that we're heading into this major tender period. From now on, almost for six months, going forward, there will be so many large volume players that are signing new long‑term contracts.
[6:16] Some of them have already agreed. Some of them are in the current process of negotiations. We're privy and fortunate enough to see a lot of these results and bidding data coming through. It is interesting with this point that we have on the slide here that the market has softened. Maybe this is then an all‑time opportunity for the shipping lines and maybe the all‑time worst chance or time period for the shippers to enter into a new long‑term agreement.
[6:47] If we just go one or two webinars back from our side as well, and even on our customers' summit, we flagged a lot of these multi-year deal talks that were going on. I can see that there's more and more uncertainty around these due to the softening of the market, as we see here with this point. You briefly touched upon it, but it might be correlated.
[7:13] It might be that we're now just wrapping up that it's too late to move cargo in for the Christmas period, anyhow, by the ocean and with all these congestions going on in the US and with the long sailing time to the European connections.
[7:29] Then, maybe you now are finding a set of market dynamics that might see the market soften a bit. I believe that would almost be good news at this point because...One last item here before I'll let you comment some more on this demand trend here. The carriers have now reported fantastic profits. We haven't seen the full potential effect of that.
[8:01] If all of these big volume shippers now strike their contracts at a really high level, and if the spot market then either drops some or remains at some elevated levels relative to what we've seen over the last six months, it can sure drop a bit. You think about the fact that most line reports now that 60 percent of their volumes sit on long‑term contracts up from 40 a couple of years ago.
[8:27] If they can secure those at these elevated levels, then there might be some shippers that would be disappointed come six and 12 months down the line. Let's see. What do you think?
Peter: [8:38] In terms of pricing for the first time in history, maybe that could be secondary to getting stability and predictability into those global supply chains even though negotiations are likely to be as tough as they can going into the tender season on some of the key traits mainly the Far East to Europe right now.
[9:01] What shippers predominantly want is that goods are delivered in due time. We will get more back to reliability on key trade lanes later in our talk today when we deep dive into what is behind the surface of the freight rates. Just adding on to that, that is one of the essential parts.
[9:25] Going back, almost 12 or 10 months ago that I said something like, "Well, look at these spectacular profits for liners in 2021." Trust me on this one. 2022 is going to be even bigger. We just had a little brief into that on the Q3 now. It all rests on the assumption that carriers are now fixing long‑term contract rates at a much higher level than what they delivered in 2021.
[10:03] If I may add on that also, as we are moving towards the focus on the US demand, it's also fair to state for the time being as you touched upon a bit, it's too late for at least container shipping of Christmas presents ‑ that you may be able to truck or rail it from the Far East into Europe.
[10:23] Still, if you can find a vacant space on an air freighter, that's also possible, but for ocean freight, that is gone by now. Also, on top of that, we can conclude that restocking has also stopped in the US for the time being. We see volumes trending a little bit down.
[10:42] It basically matches very well what we have put into context also when we have talked about the market earlier on here that we are not expecting the market's freight rates, volumes, or anything to fall off the cliff at any point in time soon. We're going to see a gradual normalization that will take months, quarters, more than a year at least in terms of normalizing.
[11:07] That's basically also what we see in some of the data that we have from the key ports around the US West Coast. If we see the most recent data, we have compiled on US West Coast inbound volumes, we see that for the month of September, that was the first time we saw volumes being below that comparable month of last year.
[11:32] We also tend to see that we do not have the full picture there for October into both Long Beach and LA, Seattle, Tacoma. They are not dropping sharply, but they're flatlining on a high level right now. Giving reasons to believe that the strings will remain for at least the upcoming, four or five weeks ahead of us, and then likely to push up a little bit also in terms of loading ahead of the Chinese New Year, and of course, the Beijing Olympics is starting on 5th February, something that I'm personally looking very much forward to being a sports fanatic.
Patrik: [12:14] Moving on to the next point. We have already briefly talked about it. Now that there is a tender season for the next six months‑ish, and then there are already agreements made and volumes under negotiations here to find the new rate levels for 2022.
[12:42] Some of the questions we are getting are directly related to that, but I'd like to start with whether it's a good time for tendering, and I want to comment on that. For a lot of businesses, there are no other alternatives. This is the way they've run their budgeting cycles for decades; this is how their internal financials are controlled and structured, and they need predictability.
[13:04] Here comes an important point for all the shippers, and it's vastly different from one to the next depending on what kind of commodity you have, whether you can stand these cost increases. We'll talk more about these related topics to multisourcing, and nearshoring, and so forth later in the webinar as well.
[13:22] For some high‑value commodities, in particular, these price increases are substantial and difficult to deal with, budgets are through the roof, but there is still no other alternative for them, and they run the RFQ as they've done in the past. What we're seeing, though, is that there is a significant spread.
[13:41] There is a significant spread between the different carriers and the different tenders. To put some numbers on that, we can see Trans‑Pacific eastbound rates coming in at $7,000 for one company and at $14,000 for another one. That is a difference of $7,000, which is more than the contract market stands and asks for today on that trade even.
[14:02] It's unprecedented, and this links back to the profitability that Peter was saying, "Just you wait for 2022." There are comments coming in here on the side as well about shippers feeling ripped off. I can understand that feeling, but to some degree, this is the ultimate proof of supply and demand and how that works.
[14:25] I hope for all future, we can stop talking about whether the rate has anything to do with bunker movements or the cost base of a carrier because these rate levels are not correlated with that at all. Any thoughts on contracting in general or the tender season we're heading into here, Peter?
Peter: [14:51] One final comment. When comparing the performance from the individual liners, it's always difficult to see who comes out on top. If we are going to do a top three on who is the most profitable carrier or the best performing carrier, you can put so many variables into this.
[15:12] Again, getting back to my point before, from a shipping perspective, they are not that concerned about whether the liner company is profitable or not. They carry about a different set of parameters in order to assess who is my number one carrier.
[15:30] Also, many shippers make use of a selection of carriers in order to spread their exposure amongst the various carriers, in the end, to avoid a Hanjin moment, but also to test the market, because as you rightly put it, it is super competitive out there. Go back two years, it was, "Tables have flipped." Ever since then, 10 years in a row, shippers were offered jet‑cheap transportation. For the time being, it's the other way around, but we may also look forward to...come 2024, 2025, tables could easily be flipped to what we used to see in terms of freight rates being in favor of shippers.
Patrik: [16:20] A couple of questions, I'm going to roll into this as well, then. Do you think at any point we'll get back to 2019 levels?
Peter: [16:27] I see no reason why not, and let me give a short reply to that. From a fundamental perspective, and I must admit, fundamentals are completely off to the moon right now, perhaps, even off to Pluto, but at some point in time, gravity will prevail again. What we can see in terms of global demand is that it's up by not more than three percent on compound annual growth rates if we expand from the pre‑pandemic 2019.
[16:57] It's that whole recovery of global economics all the way from the Far East into Europe, but mostly, the way that the Americans have dealt with this, that has completely turned the market upside down and wreaked havoc in global supply chains across the board. Don't even begin to start on the lack of components for the automotive industry, etc.
[17:22] There's a lot of things that are not normal here, but back to my point, at some point in 2023, 2024, 2025, when the raft of ships that have been ordered earlier this year and already in Q4 last year when carrier started to spend some of that money, which is going to bring down markets for sure.
[17:47] Also, when the redeployment of ships into the trades they used to supply begins, that is a normalization I see as a no‑brainer. Of course, the real brain's job is to know when will it actually happen? When will we see something like back to the status quo in whatever form it may take? Should we have to wait 15 months for that? That's at least some of the things that we're going to talk about extensively also for the coming year. How will that play out when that normalization begins?
Patrik: [18:18] That's coming in from the audience as well. Commented questions around all these new builds that's been ordered. I think you covered that very well. There is one small thing that I want to flag from our side.
[18:32] Which is, it is the fact that there are three alliances controlling about 90 percent of global capacity or deep‑sea trades, which is primarily what we're talking about here.
[18:45] I would like at least to flag that when you have so few players, there is a tendency in markets that those players have good opportunities to make a decent amount of money. I want to draw a parallel to the Express parcel sort of landscape of DHL, FedEx, and UPS. Not a direct comparison, but it's a lot of different niche players in that market.
[19:10] These three big ones, seem to be year over year making good bucks on the market. To some degree, I wonder whether these alliances are a little bit comparable to that, but we will see in due time as the capacity comes in.
[19:25] Do you have any thoughts around COP 26 effect on the liner shipping in 2022?
Peter: [19:34] Yeah, that's basically red hot at the moment with more or less the same deployments meeting. Now, in London, at the IMO headquarters for the recurrent Marine Environmental Protection Committee, which is basically that this is the body for global shipping.
[19:51] Also whatever it came out of Glasgow and COP16, or COP26, I must say it was not particularly relevant to shipping only. If you're shipping coal, of course, then there might be just a little bit of negative sentiment coming out of that.
[20:08] In terms of, say, the procurement of the services going forward and how global liner shipping is getting about this, they are putting pressure on IMO right now basically for having them to act. Why do they do that? They do that simply because they want to avoid regulation being regional. Avoiding the European commission from setting standards, which will only apply to trades in and out of Europe. That will simply be a mess.
[20:44] Without that the global shipping industry, like anyone else, needs to consider their future emissions on carbon and other hazardous greenhouse gas emissions. In all shortness, this will not affect liner shipping to any extent in 2022.
[21:10] It's also fair to say that liner shipping is at the forefront of this because they are more or less, it's not business to consumers what we're doing here in the liner shipping business, but it relates very much to consumer goods and needs. Having a more clear insight into the carbon footprint and reducing the carbon footprint, that work already started many years ago.
[21:36] It will accelerate as we move closer to not 2025 only but also 2030. To draw a quick conclusion here, it has little to take away from COP26, but I fear that we will see regional regulation setting the bars going forward as the IMO may not deliver what some politicians hope for.
Patrik: [22:03] It's an interesting line of thought here to think about IMO 2020 and the time prior to that where the carriers were on the fence screaming about how this cost would need to be passed onto the shippers.
[22:17] I wonder if in this environment one would expect that the carriers can consume whatever additional cost regulations for more environmentally friendly solutions will be imposed on them that they should probably carry that themselves, or let's see if they push that onto the customer.
2022 Outlook
[22:37] Wanted to talk a little bit about what we can expect going forward. To ease us into that, we want to not talk about necessarily rate levels, to begin with, but start on the reliability point of view because what have the shippers have been buying from the carriers over the last 12 months here, Peter?
Peter: [23:06] Well, just bridging this also, to a little bit of politics because what we're looking at here is a poor performance from the carriers, but it's not all their fault. You may argue that it's not their fault. It's the fault of COVID and then lack of infrastructure development for decades in North America.
[23:29] It's too little too late when the White House issues a fact sheet, they are calling for. They did not call for United action across the supply chains, but that's what they should. Some of you reading into those details may recall that they said, " Now we managed to open all terminals 24/7 and bring 3,600 TEUs on a weekly basis more in and out of the terminals."
[23:57] It was a fun moment, but I'm not sure that they realized how fun it was at Capitol Hill. Biden‑Harris action plan is another say jots stick to look forward to when they are going to spend something like $17 trillion on America's ports and waterways. Hopefully, some of that money will be well spent.
[24:24] Also, bringing up the reliability, which we have in front of us here. Illustrative and courtesy for credits given to Sea Intelligence for showing us this corridor from Asia to North America West Coast, as you can see the reliability in whatever way you measure it is appallingly low. Coming away from a much higher level of last year but sitting at 11 percent with an average delay of 12 days.
[24:54] Right now, we have some 79 ships sitting off the coast of the US West Coast at an average size of 7,200. It's not only all the small new add‑ons in terms of line of businesses presenting a service from the Far East into to the US West Coast, but it's also some of the major alliances and some of the big carriers that have ships right now waiting not only at the anchorage but also drifting.
[25:24] We can say that the only way is up from here. Let me just give a little bit of perspective into this because we often say also, there are global repercussions in the logistics on a global scale when we see impacts like this. We can also conclude at least that there are some corridors, which are not that hard‑hit.
[25:52] Please, do recall also that in the good old times, some three years ago, we had reliability on the main corridors sitting around 70 to 90 percent, depending on the season, depending on at worst conditions of any kinds. We're having reliability down at this level is super‑duper low.
[26:14] On a global average, we have 7.2 days, but as you can see here, some corridors do have reliability around 52 percent with say delays late arrivals at around three to three and a half days. That should be capable for any shipper and carrier to let's say, make up for in some way. Having a continued low level of reliability is not good for anyone.
[26:45] That's also why we bring back the overall point here that predictability and stability is what everybody is looking for to avoid adding say tons of extra inventories to make up for this late arrival because, in all fantasy, some shippers may have little idea of when their goods will arrive.
[27:12] Along those lines, it's fair to conclude that there's much room for improvement. It will also be interesting to follow for the entirety of 2022, how fast this will pick up because there are many say different jobs to address here.
[27:30] Mostly, the number of truck drivers picking up the cargoes in and out of the US west coast ports, we have seen quite a successful, also implementation of this container 12 Ft that the Port of Long Beach and Port of LA have just postponed once again for another week.
[27:47] It seems as if they are working along the lines that they were hoping for getting a better flow. As soon as we get that better flow more consistently and we also arrive at February, March, we should have reliability across the board at a much higher level.
Patrik: [28:03] This is at least the one area where there's aligned incentive between the shippers and the shipping lines where it's not in anybody's interest.
[28:10] This has not optimized the utilization of the asset for the shipping lines, so they definitely would like to see this solved. A bit of market chaos is, of course, something that they benefit from. It's clear and bizarre to see that shippers are buying the weakest product in the history of liner shipping but paying the biggest bucks we've ever seen.
[28:36] You told me another commodity or product that you can buy with those kinds of conditions, and whether the customers are substantially happy buying such a product, but I'll push us on to go into a little bit more of the price movements and cover that.
Market Movements
[28:54] We've prepared a few different corridors, and I see there are questions coming in on reliability on various trades around the world. That is, of course, available in the application and in our software.
[29:07] For today, we picked a few different ones to go through focusing primarily on the bigger ones. This first trade we're going to look at is Far East main ports to North Europe main ports.
[29:28] For all the trades, we've selected a 40‑foot container, and we're going to look at, in yellow, the short‑term market, and we're going to look at a blue line that will appear here that will show us the long‑term contract market. You can still see that across these charts, we're still flagging premium surcharges to go between the different combinations.
[29:47] As of today, the market average (and this is important, it's the average without the premium surcharges) sits at 14,000 USD to go with one 40‑footer, for instance, from Shanghai to Rotterdam in this example, for Far East main ports to North European main ports.
[30:08] I want to flag here that over the last 12 months, the market is up by 389 percentage points. If I go all the way to the left, you can see that the market already, at that point, was at 2,884 USD for a 40‑footer, and now, it's moved to $14,000. It's interesting, Peter, here to see the softening of the short‑term market. What do you think?
Peter: [30:34] I think that mostly, when you look also behind the scenes here, on the right‑hand side, you may be able to click the high and the mid‑high, and then you will see also that that is predominantly the most expensive cargos that are now coming down. You see those shippers being capable of dealing in the spot market at a lower rate than the average here.
[30:56] They are still seeing somewhat the same or unchanged conditions, but it is the absolute red‑hot part of the market which is coming down slightly right now. That's the takeaway that I get from this one, that there's still solid demand and solid volumes being shipped by the main carriers and main shippers, but we also see a little bit of tendency into it to the mom‑and‑pop shops that have little insight into their supply chains, and that had to pay the premiums‑plus‑something on top of the prices that they were offered from freight forwarders, and perhaps, any third‑party logistics provider that they made they made use of simply because they had the demand, they craved the transportation.
[31:50] They needed the goods on the shelves in due time for the peak sale season, because many, especially the smaller shippers, also rely heavily on the seasons there for, in some cases, up to more than 50 percent of their annual sales. They have no option but to weigh out what's the value of my cargo against what is the price of the freight.
[32:13] Obviously, what we also have seen, as the curve has reached $14,000 per FEU here, is also that some of the cheapest cargos have been squeezed out of the market. That is something that is also going to cushion the market once it starts coming down in 2022 because some of those volumes are likely to re‑enter the market.
Patrik: [32:39] If we then take a look at the long‑term market, look at this Delta that we saw back in November 2020 versus the Delta that we're currently seeing, you can see that the blue line here, the long‑term market is gradually catching up and picking up, and closing some of that gap that we've seen since summer.
[33:03] I want to go even faster, a bit further and forward here into January, and now, we're going to disclose some interesting things. Those who have gone early and tendered have seen, so far, a higher price increase than what we necessarily would anticipate being the outcome as this short‑term market continues to soften, assuming that it continues.
[33:31] This is a good view to look at and to pause a little bit and reflect around some of the main concerns that I see coming in on the question side here from the shippers. "Is it really a good year, a good timing to go to market now? Should I consider sitting down at the table again mid‑next year?
"[33:51] Should I consider multi‑year deals because someone's offered multi‑year deals at a discount?" which we've seen as well, some of them with a thousand dollars below the one‑year rate offered, and so forth. What I think is worthwhile flagging here and maybe is the crux of the concerns ‑‑ is that you can see that you're striking at an all‑time high.
[34:17] The market might still go up. I don't want to be the one saying there's no more room, because you can clearly see here over beginning of the year that the market softened on the short‑term market, and then came summer and rates started going up again.
[34:34] Whether it's ever given, whether it's a new lockdown, whatever we're going to see, it's impossible to know, but what we do know is that relative to historical rate levels, you would settle at the highest level we've seen. That leaves a couple of concerns, but also some opportunity.
[34:55] First and foremost, it's worthwhile mentioning that blindly striking a 12‑month rate agreement without any mechanism in there to regulate the prices over the next 6, 12, 24 months appears to be very risky. You can imagine contracting at, let's say, $10,000, $7,000, and a spot market, a short‑term market falling to $3,000.
[35:20] That kind of news article that the CFO or whoever has the budget responsibility at the end of the day would pick up from the mainstream media, that would be a painful position for the procurement person to sit in.
[35:36] With that in mind, one of the biggest conversations and most important conversations to have is what will cause a renegotiation of the rate level, or what is the duration you should strike with? These conversations are crucial for the shippers to have and settle on at the moment, being fully informed that having data available to make those conclusions. Anything to add to that, Peter?
Peter: [36:02] The current conditions requires also more complexity to be put into the contracts. You mentioned yourself, having an index‑linked contract rate seems to be a no‑brainer in the current situation simply due to the fact that this is an all‑time high level.
[36:22] Often, you also tend to see that there are put caps for and a roof into any deals going forward, and then a regular renegotiation or resettlement depending on where the spot rates sit. Because, obviously, no one needs to or can basically be caught out in the market.
[36:45] At the end of the day, it's fair also to consider that you may, as a logistics responsible person in your company, sign at an all‑time record high here. Come, say, the peak season of 2022, and you are left with no available room for shipping your cargoes in due time for the Christmas season next year. What do you do then?
[37:13] I'm pretty sure that no one in your company would love to see you left completely to a spot market which you do not know where it is. Obviously, every shipper also considers how big a share of the expected volumes that I will move in next year should I put on long‑term contracts? Should I perhaps adjust that to what I used to do?
[37:35] If that was 50/50 maybe I should reconsider that to a third, two‑thirds, something like that. Giving myself some flexibility because obviously, again, getting back to the stability and the predictability, you need to make sure as a shipper that you have secured space on board those ships.
[37:55] We may have a little bit more certainty on 2022 than we had going into 2021 because that was still a very much market in the making and a recovery from COVID. Whereas 2022 is likely to be less erratic in many ways, so there are different things to consider now. There is still clearly a chance for shipping capacity also to be in short supply come the peak season in July, August, September 2022. That's worth considering as well, absolutely.
Patrik: [38:29] There's a question about whether the plateauing of the short‑term market is an indication of what will follow for the long term. This is one of the interesting points. Historically, we've seen a correlation between the short and the long, meaning the short moves first, and the long follows.
[38:47] What we could see here, potentially, depending on whatever events might happen, is that companies agree to secure quite high elevated long‑term contracts, and then the short term falls off. You would have a switch of position where the short‑term market would be below the long. That's a painful situation.
[39:05] I talked about this as where we historically have seen loyalty and friction between the shipping lines and their customers. It feels like there's an opportunity here to create different relationships. At the same time, I know shippers screaming about being ripped off and so forth. Those dynamics, I see play out over again if that turns out to be the situation.
[39:31] Keep in mind, all of this data is available online on our platform, and we are ready to supply all of you with the intel that you would need.
[39:47] Different corridor, spot market first, Far East main to US West Coast. Here's a bit of a more drop‑off than what we saw in the European counterpart here. Any comments, Peter?
Peter: [40:00] I think that's clear because of the fact that this has been the melting pot of the whole supply crunch on a global scale. Obviously, the most red‑hot market you can also see in our alert there, that holds the biggest spread. We had a much smaller spread from the Far East to Europe. That went up to $4,000 FEU. In this regard, a premium's paid also on the Trans‑Pacific, been all the way up to $10,500.
[40:33] It's no big surprise that once you see markets just beginning to come slightly off, we do get a little bit of a bumpy ride here. Then again, expect not a complete reset from February down to where we were last February, but a gradual settlement for the coming weeks before we head into the pre‑Chinese Lunar New Year season.
Patrik: [40:57] It's quite an interesting period you mentioned there. Going back to February, I remember the conversations about how high the rate levels were at that point. We didn't know what was coming our way. You can see now over the last 12 months, it's doubled, but if I went back to October here, it was up 130 percent.
[41:20] It's already significantly down. Then, if we overlaid the long‑term market here, you can see that it's plateaued a bit here now going in towards the end of this year. This is a good indication that you might see more softening of this trade because you have this development here. It's going to be interesting to see.
[41:40] I would also like to flag that there are substantially different results and treatment on the existing long‑term contracts from companies moving 500,000 TEUs or a million TEUs versus the one with 10K. More so than ever before. I connect this with a few questions coming in with the additional surcharges seen on the long‑term contract and so forth.
[42:05] Yes, we collect that data, but it's very different from shippers to shippers, what they've seen. That's important to keep in mind. Moving on to another super interesting trade - South America East Coast from the Far East main,
[42:25] Look at these rate levels. Look at these optics on the long and the short back going back into November last year, sitting at 4,700, which is a very high level already at that point. Average today at $13,000 on the short. You can see how the long‑term is catching up.
[42:48] A little bit of the same on all of these three corridors, but the US one has the biggest drop off more of a plateau on South America, east coast, and North Europe, main ports. Anything to add, Peter?
Peter: [43:03] Just one small brief thing. Maybe that shippers sometimes cry foul over liners trying to be manipulative or abusing their power. Also, politics is right to add to the picture here because some of the flattenings of the lines that we saw also on the Transpacific early on in the year was what you could say impacted by some direction given from Beijing.
[43:30] It's fair to say that they were trying to work a little bit or exercise a bit of their power in terms of Nazi freight rates going through the roof. Later, they eased on that. They also had competition authorities across the globe concluding that there was no foul play but only tough negotiations and tight market conditions. That was just what I wanted to add at this point in time, Patrik.
Patrik: [43:57] This elevated outbound of Far East rate levels, they can't live in isolation. There are other trades as well that need equipment and vessels attracted to them. It's worthwhile flagging a couple of interesting ones. North Europe main to US east coast main, look at historically how flat it has been. Limited amounts of volatility here.
[44:22] Now you can see the short and long‑term market moving from, percentage‑wise, extreme levels. If I go back here, it's 240 percent up on the short term and 209 percent on the long‑term. What's interesting here is that we go into next year, we can see some of these contracts dropping off a bit with the newest contract sign.
[44:44] Still, if I go back to what you said, Peter, about whether we've seen the financials of the carriers peaking. I think what we have portrayed so far on these trades is that once we get into full effect of Q4 rate levels reported into Q1 and Q2 of next year unless there's a collapse in the spot market, we will see even higher profit margins reported from the shipping line - Meaning the more painful it is for their customers, the financially better is for the shipping lines.
Peter: [45:21] Also, a comment to make from this one is that you needed the ever‑given incident to set the market on fire. Then, you must also admit that this is another key front haul into the US from North Europe, and what an amazing optic. It took a while, like all freight rates lift into Europe, but look at the numbers that we read now, see also being done on the long‑term contract rates. It's quite spectacular.
Patrik: [45:56] We wanted to show the breadth and depth of the platform. We wanted to make sure we cover an Inter‑Asia trade as well. Here's China East Main into India West Coast and Pakistan main ports.
[46:09] This also portrays a picture that further fuels the margins and the recent uptakes coming on other corridors than just Asia outbound to these destinations of Europe and the US. A very similar picture here, wouldn't you say?
Peter: [46:29] Absolutely. Also, busy trade lane out of China, as they are also constantly slowly moving and progressing their plans for the Belt and Road Initiative. This is just a part of what they are also doing, trying to stitch their immediate neighbors also closer to China. Obviously, that's why we also tend to see not only a solid lift here but also a squeeze on capacity on this essential market. Arriving a little bit late, fair and square, but then again, this is not the most significant market of them all.
Patrik: [47:09] Going to tie in another question here - Whether shippers who sign long‑term contracts will be able to go back to the table and renegotiate if the short‑term market collapses. I'm happy to give some initial two cents from my side. Peter, you can bolt onto that.
[47:27] What I would say is that we've seen a lot of contracts that have been signed between shippers and carriers over the last two years, where the carrier hasn't held their end of the deal. That is not a good basis for asking the customer to do that when the tables turn.
[47:50] I would be surprised if we didn't see the historical loyalty that exists amongst a lot of these relationships. Not all, just to be very clear on that, not all, but I would be surprised if that is changed in this industry. I would be pleased to see it, but I do not, unfortunately, believe it.
Peter: [48:13] This is a global industry where people get together from anywhere. It's not a matter of having high standards or poor business ethics. It's just the fact that people from either part of the world works in a different manner to where perhaps the counterparty may be.
[48:32] At some point in time, it's the shipper not honoring the contracts, and other points in time, it's the liner not honoring the contract. At the end of the day, they all have a mutual, say, benefit from moving on and making sure that the goods are moved, and the relationship stays strong.
[48:52] Obviously, you put renegotiation and triggers into your contracts. As I mentioned, you do have already stated in many contracts, say, roof, floor, and indications for when adjustments may take place in a hectic market like the one or in a normal market, which we have seen for many years in the past. Of course, when the stakes are high, obviously, the temperature of the negotiations is also extraordinarily high.
Patrik: [49:27] I would urge everybody to use the datasets available here to make sure that you strike the right dynamics and to go into the contracts to adjust the prices at the right time depending on those market dynamics.
[49:40] Peter, we wanted to give a few more nuggets before wrapping this up. Asia‑US West Coast, from a capacity point of view. Here, you can see, again, just to be clear, and there's data coming from Sea‑Intelligence, how much offered capacity there is on average per week. You can see the week numbers below the bars.
[50:07] This is Asia to US West Coast. It's the amount of offered capacity in dark purple here. Light purple is blanked capacity for the different weeks and the amount of blanked sailings. You can see blanked sailings in total for a 12‑weeks period, 80 sailings, and then this data breaks it down per the alliance.
[50:29] You can see two alliances blanked out, 17 percent capacity, 13 sailings, and so the list goes on. Interestingly enough here, other carriers have blanked out only three percent. If we do the offered capacity per alliance, you will see that almost a third of all the capacity on this trade is now serviced by other carriers. This is a trade that has been almost opportunistic for a few carriers to step into and increase their capacity. Any thoughts on this?
Peter: [51:07] Of course, other carriers include not only the happy‑go‑lucky liner companies that have been set up like the container ship company some 10 years ago. Obviously, also, quite sizable carriers with a regular routine schedule to cross the Pacific.
[51:28] What you should take away from this, besides having a real solid overview on the capacity being added by the various players in the market, obviously, you can also rest a bit more, say, solid at night if you expect more cargo on your side to be shipped ahead of what I mentioned quite a few times already, the Chinese Lunar New Year.
[51:53] You can see here that carriers are expecting you to move more cargo also going into the last week of December and most of January. You see week three having a super high level of offered capacity in the market. There will be ample room here.
[52:10] Obviously, you will also realize that, how will this affect freight rates? Based on this analysis, it is likely to follow very much that of offered capacity. It's a no‑brainer to expect liners to add more capacity at a point in time when they expect not only to lift freight rates but also to lift more boxes out of Asia into the US West Coast.
[52:39] There's so much more money to be spent from the American consumers to support this. It offers a very good insight into the most immediate market. If you flip back to offered versus blank, you can also see, quite clearly, again, that there is a bit of blanked capacity already known in the early weeks of January.
[53:05] As compared to right now, where we can conclude that the stocking up is over for the time being and Christmas presents are sent, this gives you real good intelligence into how to plan for the most immediate future.
Patrik: [53:21] Just a quick look at Europe. This, from a point of view where you look at other carriers, is a very different trade as we mentioned. There are hardly any other carriers operating here, and there are less blank sailings planned for the next 12 weeks. Any other comments from your side, Peter?
Peter: [53:49] In many ways, it's a very different trade. We tend to bundle the long‑haul, high‑volume trades from the Far East to Europe with that of trans‑Pacific, but in essence, they are quite different from one another. What we point out here in terms of the fact that that is almost exclusively run by alliances and no happy‑go‑lucky carriers.
[54:14] That's also a little bit of the way that European shippers are constructed. You simply have a completely different market for the carriers and freight forwarders in North Europe than you have in the US.
Patrik: [54:31] There's a question on some of the data, the sums not matching between offered and capacity. It's offered capacity, on average, so it's important to get these headings correctly. Happy to follow up separately on that.
Top of The Mind Tips
[54:46] Before we wrap it up, Peter, we wanted to give some more conclusive top‑of‑mind tips that we picked up from our community and internally from what we discussed. From what we can pick up out there in the world, supply chain resilience is a big, major topic these days, a recurring one.
[55:06] We touched upon this several times when we talked already, especially over price versus actually getting goods shipped and delivered in time.
Peter: [55:22] Yes, we have already seen at least some of the major shippers try their luck on more hybrid solutions here, whereas some of the main shippers from the North American side have opted to charter in their own ship.
[55:40] There's a reason for us not to have that included here because that is the odd one out. I think they have tried, failed miserably, or at least concluded at some point in time leave that for the professionals. There's a raft also of opportunities here in order to build in more supply chain resilience. Rest assured that they all have a price tag.
[56:05] You can put cargo on rail or truck, it will arrive faster, but the price will also be higher. Moving to just‑in‑case inventory or just‑in‑case supply chains, meaning that, of course, your working capital will increase. There is a limit to how much working capital you are ready to commit in order to just have that just‑in‑case inventory or just‑in‑case supply chain setup. It's a no‑brainer that everyone will see higher inventories going forward.
[56:41] Right now, in terms of the US, they are struggling really to keep up the inventories, but in that sense, how much safety stock are you ready to put aside? Then the final one. That's the bigger one. It's the big animal on the savanna, but also the most expensive one. You really do so only if you want to avoid any kind of obstacle that you face in front of you.
[57:13] Also, have clear in your mind that the trade war for one...I mean, there are plenty of trade wars right now. It's not only US and Europe which are at a trade war but also US and China predominantly. That already accelerated at least supply chains in Far East Asia. Some of which were then impaired by COVID lockdowns. Most notoriously Vietnam which is now fairly up and running again, but then again, they missed the point they wanted to achieve here, make a more resilient supply chain, but then along came COVID. We will most likely see everything happen, but it will be much different between say the importers, the manufacturers, the shippers, what kind of strategy, in the end, they will make.
[58:11] Most likely, they will not go only for one of them. They're likely to make use of a few of them to make sure that supply chain resilience is key going forward.
Patrik: [58:21] Absolutely. It's worthwhile flagging here as we got this in our customer summit as well, that this varies widely depending on what kind of products and what kind of factories. There is, for instance, chemical companies with billion‑dollar factories stock in places.
[58:37] These are not potentially short‑term decisions for them but long‑term changes that can also be in play. For others, it's different. Some have already stopped sourcing from the Far East, then moved to, for instance, Turkey.
[58:49] We know about customers who is now picking up cargo from Eastern Europe and other sources because it's not simply an alternative for them given the commodity they move to pick it up from the Far East. That being said, we had two more top‑of‑mind topics we wanted to mention before we wrap it up today.
[59:08] Multi‑year contract deals. We've touched on this several times today. The important dynamic here is to make sure you have some mechanism to return to the table because signing at this point in time, is historically high risk. That does not mean that you can't win with it, but even given any historical data, it's more likely that you lose out on contracting on a high long‑term rate level.
[59:33] Then, finally, this push that we see going on from the carrier side with the vertical integration. This will continue and be a bigger topic over the next year in 2022, as the rate levels stay elevated. It gives the ammunition to the carriers to push on this interesting statement from Hapag‑Lloyd that they will go in a different direction.
[59:57] It's going to be very exciting to see where the forwarders will then maneuver and move more volumes over to the carriers that are more vocal, that they will stay true to their core business. So there's, there's a very interesting market play market dynamics going on this side as well. Any final comment from your side, Peter.
Peter: [1:00:20] I'll just say, well, good luck in those negotiations. Be as tough as required as there are a lot of challenges ahead. Those three top‑of‑mind tips will be on our table for discussion and for considerations throughout the coming year. I can only say thank you so much to all of you for your kind attention and great interest in joining us today with also a busy Q&A session.
Patrik: [1:00:52] Appreciate all the questions coming in. We've done our absolute best to cover as many as possible. We will follow up separately on them, which we didn't manage to address here. As always feel free to ping us at xeneta.com and request your free freight spend analysis. Thank you all for tuning in.
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