We have over the past few months seen a development in both demand and freight rates on the Transpacific which does not follow the “usual” patterns.

If we take ”normal” to indicate the patterns and relations we have seen in the past three decades in container shipping, what would we have expected? What is happening presently? And what might be in store for the market in the near to mid-term future?

Under normal circumstances, weak macroeconomic development also leads to weak demand development – partially because it puts a dampener on consumption, and partially because it leads to inventory reductions which also has a negative impact on container volumes.

Under normal circumstances, declining volumes leads to overcapacity and overcapacity has caused carriers to reduce their prices.

Hence, under normal circumstances the expectation would be that we should see declining demand, overcapacity and dropping rate levels. As is quite evident, we are seeing the exact opposite. What, then, has happened?

First of all, the traditional link between demand and macroeconomics has been broken. Despite the poor economic development in the US, container volumes are spiking. The latest data for inventories do show a decline during the pandemic, however sales has risen sharply and for the retail sector the inventory to sales ratio dropped sharply in June. It would therefore appear clear that the consumers have shifted a significant part of their spending away from services and into physical goods. This can explain the spike in volume despite the economic conditions.

Secondly, the carriers have shown a discipline in terms of capacity management we have not seen before. This is a direct consequence of the consolidation in the market. We are at a point where an alliance is now sufficiently large that it allows them to actively adjust capacity on weekly basis to better match demand volatility. After all, gradually adjusting capacity using blank sailings is much easier if you have 16 services and can adjust in steps of 6% rather than having 4 services and have to adjust in steps of 25%.

"We are now at a point where rates are reaching record levels to the USWC and is also close to doing the same on the USEC – at least when seen over the past decade."

The data clearly shows this. When the first CFFA report was launched in June 2020, the FBX level to USWC was at 2160 USD/FFE. We are now at 3345 USD/FFE. At that time the CFFA pricing for Q3 had a mid-level of 2350 USD/FFE and for Q4 it was at 2200 USD/FFE. We are now at a point where Q3  is at 3325 USD/FFE and Q4 is at 3200 USD/FFE.

This shows an extreme level of volatility and difficulty for the market participants in predicting even relatively short-term rate developments. Going forward this is unlikely to be any easier.

How long will the shift in consumption patterns in the US last? This will be inextricably linked to the pandemic development, whether people will be getting their jobs back as well as whether the US-China trade war will flare up again. These factors have the potential to sharply alter demand developments and are presently highly unpredictable. The current spike appears to be driven by a sudden surge – but surges tend to be temporary.

The same goes for the carriers’ capacity discipline. Only 4 months ago more than 25% of the capacity was removed from the Transpacific trade into the USWC. We are now seeing 10% capacity growth compared to last year and unless we start seeing blankings soon, the post-Golden Week period is on track for 25% capacity growth. Will the carriers be able to maintain the extremely strong discipline they have shown in the past 6 months? Historically they have never been able to, hence this will depend on whether we are truly seeing a permanent shift in their mentality.

Hence, strictly speaking, all bets appear to be off when it comes to accurately predicting the short to medium term freight rate movements. We appear on track for additional record towards Golden Week, but after that we could either see the current levels maintained, we could see a reversal down to more “normal” rate levels, or we could see an outright crash if the capacity discipline falters.

No-one known for sure which of these levels apply, however a baseline approach ought to be an expectation of some degree of decline in rate levels as carriers will continue to inject capacity as long as we have record rate levels. Then have contingency planning in place for the eventualities of either further spikes or a sharp drop – but these should not be the base case.

About Lars Jensen, CEO, SeaIntelligence Consulting

Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years experience hereof the last 9 within multiple companies he has founded, with the main focus as CEO of Seaintelligence Consulting