Introduction

The first half of 2024 has been nothing short of challenging for ocean container shipping, marked by substantial volatility and fluctuating rates. Shippers and freight forwarders have felt the brunt of this instability, dealing with the pressures and risks associated with market unpredictability. As we navigate through these turbulent times, it's essential to dissect and understand the pivotal elements shaping the landscape.

Volatility in the ocean shipping market is not a new phenomenon, but the current trends and patterns reveal unique insights into how different stakeholders are coping. This blog post aims to provide an in-depth analysis of the market spread, understand why these fluctuations occur, and what it means for the industry moving forward.

By the end of this post, you'll understand the nuances of market spreads, factors driving these changes, and how they impact operations for shippers, freight forwarders, and carriers. Whether you're involved in the logistics industry or simply interested in global trade dynamics, this post will offer a comprehensive look at the shifting tides of ocean container shipping.

The Significance of Market Spread in Ocean Shipping

Understanding Market Spread

In the realm of ocean container shipping, 'market spread' refers to the difference between the highest and lowest spot rates shippers pay to move their cargo. This spread is a crucial metric because it mirrors the volatility and state of the market. During periods of high volatility, this spread widens significantly as shippers, freight forwarders, and carriers react to sudden changes in the supply chain.

For instance, let's consider a major shipping route from the Far East to the US East Coast. Earlier this year, the outbreak of conflict in the Red Sea caused a spike in average spot rates. On January 15th, these rates skyrocketed from USD 3,840 per FEU (Forty-Foot Equivalent Unit) to USD 5,660, driven predominantly by the upper segment of the market.

Why Volatility Occurs

Several factors contribute to market volatility. These include geopolitical events, supply chain disruptions, changes in demand, and operational inefficiencies. When any of these factors come into play, they push the spot and long-term rates up or down, thereby increasing the market spread.

During volatile periods, the risk of containers being rolled - where shipments are delayed because there isn't enough transport capacity - becomes a significant concern. Small freight forwarders are usually the first to feel the pinch, but as the spread grows, even larger players are affected. To mitigate these risks, shippers and freight forwarders sometimes pay surcharges on top of contracted long-term rates or move to the spot market, where they might secure rates below the average.

Recent Developments

In the first half of 2024, we saw some dramatic swings. The market spread from the Far East to the US East Coast widened considerably, from USD 1,000 per FEU in December last year to USD 5,450 at the end of June.

However, as July progressed, this spread began to narrow, standing at USD 1,730 per FEU by the 24th of the month. The narrowing was primarily due to the market-low rate catching up while the high-end growth slowed down. A significant increase in the market-low indicates that previously discounted rates are being phased out as new long-term contracts come into effect.

Mid-High and Mid-Low Market Dynamics

A Closer Look

While the extremes of the market (the highest and lowest rates) are significant, the mid-high to mid-low spread often provides a more accurate picture of market conditions. Unlike the highs and lows which represent 5% of the market, the mid-spreads account for 50%.

For example, on July 24th, the spread between the mid-high and mid-low rates from the Far East to the US East Coast was USD 490 per FEU. This had ballooned to USD 2,040 per FEU in mid-January during initial rate spikes. Year-to-date, this spread averaged USD 830 per FEU, roughly four times the pre-pandemic average but significantly lower than during the pandemic years.

Importance for Shippers and Forwarders

These mid-market dynamics are vital for shippers and freight forwarders because they reflect more stable and predictable conditions. While extreme rates can provide insights into unusual market movements, the mid-high to mid-low spread offers a balanced view, representing the majority of transactions.

Understanding these spreads helps businesses plan their logistics strategies more effectively, budget appropriately, and navigate the complexities of long-term versus spot market pricing.

Variations Across Trade Routes

Different Behaviors in Various Trades

Not all trade routes exhibit the same patterns. The major fronthaul trades out of the Far East typically show similar trends during market spikes, but there can be notable variations.

For instance, the high-low spread on the Far East to Mediterranean route was USD 5,100 on January 15th, similar to the Far East to US East Coast spread. However, post-May, while the East Coast spread rocketed upwards once again, the Mediterranean spread remained relatively stable, increasing by only USD 1,000 to USD 3,000 from the end of April to late July.

Strategic Implications

These differences underscore the importance for shippers to understand their market position across various routes. This comprehension allows for more precise benchmarking and strategy formulation, ensuring that logistics operations remain efficient and cost-effective despite market fluctuations.

Long-Term Market Trends

Rising Long-Term Rates

Long-term rates on major trades have been increasing, influenced partly by the spot market conditions. For example, new long-term contracts entering validity in July on the Far East to North Europe route have shown notable increases, with some agreements replacing older, lower contracts.

The highest end of the market for long-term contracts from the Far East to North Europe saw rates climb from not exceeding USD 5,000 per FEU in the previous months to now reaching USD 9,000 per FEU. This significant jump illustrates how current market conditions are impacting long-term pricing structures.

Maintaining Strategic Relationships

Despite these increases, many carriers focus on maintaining long-term relationships with key shippers. By offering lower long-term rates to larger volume shippers, carriers aim to ensure stability and loyalty. This strategic approach helps mitigate the impact of volatile spot markets on long-term logistics planning.

Conclusion

The narrowing market spread indicates a potential easing of volatility in ocean container shipping. While the initial half of 2024 presented significant challenges and fluctuations, recent trends show a movement towards stabilization, particularly in the mid-market segments. Understanding these dynamics is crucial for shippers, freight forwarders, and carriers as they navigate the complexities of global trade.

As the market continues to evolve, staying informed on these trends and strategically planning logistics operations will be key to managing risks and ensuring cost-efficiency. The complexities of the ocean shipping market demand continuous monitoring and adaptation, highlighting the value of platforms that offer real-time market intelligence.

FAQs

What is market spread in ocean shipping?

Market spread is the difference between the highest and lowest spot rates paid by shippers to move their cargo. It reflects market volatility and provides insights into the state of the shipping industry.

Why does market spread increase during volatile periods?

Market spread increases during volatile periods due to factors such as geopolitical events, supply chain disruptions, and changes in demand. These factors force shippers and freight forwarders to react quickly, leading to significant fluctuations in spot and long-term rates.

How do mid-high and mid-low spreads differ from market-high and market-low?

Mid-high and mid-low spreads encompass 50% of the market and provide a more balanced view of market conditions compared to the market-high and market-low, which represent only 5% of transactions.

Why are there variations in market spread across different trade routes?

Different trade routes can exhibit varying patterns due to specific regional dynamics, operational efficiencies, and market demands, making it crucial for shippers to understand their position across multiple routes.

How do long-term market trends impact ocean shipping rates?

Long-term market trends, influenced by spot market conditions, can lead to increasing long-term rates. However, carriers often offer lower rates to larger volume shippers to maintain strategic relationships and ensure stability in logistics operations.

Narrowing Market Spread Indicates Easing of Ocean Container Shipping Volatility

Table of Contents

Introduction