When will freight rates return to ‘normal’?

The leading container shipping lines are releasing their Q1 2021 operational statements, which show a sharp increase in freight rates compared to Q4 2020 reports. Not only in the sense that rates are increasing, but the pace at which the rates increase is also accelerating, but when will the increases slow and eventually reverse?

Global freight rates are up around 60% year-on-year, versus an increase of 22% in Q4 of 2020, with Asia/Europe increasing of 120% year-on-year with an increase of 33% year-on-year in Q4 2020.

Looking short-term, over the next 2-3 months, we will continue to see bottleneck problems, with disruption, capacity shortages and high pressure on rates.

Currently demand growth is high on most trade lanes and extremely high into North America, which absorbs a significant amount of vessel capacity which, in turn, pulls vessels away from trades with lower demand growth.

The International Monetary Fund (IMF) has just published their new global economic outlook, and they have revised economic growth projections for 2021 and 2022 upwards.

They now expect global GDP to grow 6.0% in 2021 and 4.4% in 2022.

For the US the growth expectation for 2021 is higher at 6.5%, while for China and India it is much higher at 8.4% and 12.5% respectively.

This means that we should anticipate strong container demand growth to persist through not only 2021 but also 2022 based on these economic projections.

The current high freight rate levels will be sustained by ongoing bottleneck effects and the ripple effects from the Suez blockage, delaying the lines ability to re-balance container stocks and eradicate port congestion.

In all likelihood, bottlenecks and disruptions will continue until sometime during Q3 2021 and if the summer peak is stronger than normal it could be knocked back to Q4 2021.

Carriers do have more vessels on order, but no capacity will come on stream before 2023-2024 and vessel deliveries in 2021 and 2022 are minimal.

Charter rates for container vessels have consequently grown rapidly and are now at very elevated levels, implying a tight market for vessels in the next couple of years.

For Q3, and possibly into Q4, we will continue to see a very tight market in terms of capacity and freight rates will be under continued pressure to remain high, driven by shippers who prioritise movement over transactional freight costs.

Coming into late 2021 and further for 2022 the bottlenecks should finally disappear and a more normal supply/demand environment emerge, which will reduce freight rate levels, but due to continued strong demand growth and limited additional capacity the reduction is unlikely to be to the same levels seen before the pandemic for many years to come.

Metro negotiate rates and volume agreements with a broad portfolio of carrier and alliance partners, to offer our shippers the widest range of service offerings, port-pairings and rates. Fixed validity contracts that provide supply chain security and peace of mind.

For further information contact Grant Liddell, who would be delighted to talk to you about your situation.