Hopes that container freight rates on China export trades have bottomed out appear premature.

Prices for forward contracts point to a market that is betting on freight rates on trades to Europe having further to fall.

That is despite the first rise in container freight rates for many months.

Drewry’s composite World Container Index increased by 0.7% to $2,135 per 40-foot equivalent unit (feu) in the week to 5 January, its first rise in 43 weeks.

The rise was helped by a jump in rates from Asia to North Europe, where rates rose $76 on 3 January to $2,712 per feu, according to the Freightos Baltic Index (FBX).

That rise is not expected to be sustained, with forward markets pricing freight on the trade up to $600 lower than spot markets.

Quarterly forward contracts from April this year for the FBX11 route are down to between $2,050 and $2,400, according to Baltic Exchange Forward Assessments.

They drop to $1,600 per feu for early 2024, compared with spot rates of more than $4,000 per feu in early December.

The sharp correction in spot rates has been reflected in futures contracts, writes Peter Stallion of derivatives broker Freight Investor Services.

US optimism

The sentiment is more bullish for the trades from China to the US, where rates are 90% lower than a year ago.

Forward markets are pricing in a rise in eastbound transpacific container freight rates, albeit not significant.

China’s removal of Covid-19 restrictions and potential restocking demand could drive a recovery in shipments after the Chinese New Year and lift rates in the near term, according to analysts at HSBC Global Research.

That optimism was reflected on the trade from Asia to the US West Coast, where spot rates levelled at $1,398 per feu on 5 January.

That has resulted in a market in contango, where forward prices are higher than current spot prices. Prices rise to $2,000 for a forward contract on the trade for the third quarter of this year.

The 14,336-teu MSC Kanoko (built 2019) at Los Angeles. Rates from China to the US West Coast have fallen by around 90% over the year. Photo: MSC

The pattern is played out on the trade from China to the US East Coast, where spot rates have dropped to $2,946 per feu.

That has generated buying interest at around a $200 premium above the spot rate for 2024, according to Stallion.

“The rationalisation of market prices has started to draw in firm buying and selling interest at a much tighter spread than what we saw through the majority of last year,” he added.

CNY worries

Bullish sentiment is tempered in the run-up to Chinese New Year, when average freight rates should be rising.

Instead, the China Containerized Freight Index, which measures average Chinese export container rates, has dropped by 27% since mid-November.

Niels Rasmussen, chief shipping analyst at Bimco, said that amounts to the container market’s worst performance ahead of the lunar holidays for 13 years.

Bimco’s expectation is that supply growth will outpace demand growth in 2023 due to the high number of planned newbuilding deliveries, adding further pressure on freight rates.

It said the supply/demand balance is not expected to improve unless all liner operators take action to match capacity offered to market developments, which they appear unable or unwilling to do.  

“Belatedly, it is now clear to us that carriers have lost control of the container market, have failed to pro-actively manage capacity and will act on capacity only when they are forced to do so by heavy losses,” Drewry writes in its container forecaster.

Demand delay?

If a recession is avoided and inflation is brought under control, the market could return to more typical demand and rate patterns in the second quarter of peak season this year, writes Judah Levine, research lead at freight portal Freightos.

But he added that the trend is “a return to seasonality and a sustained unwinding of the surge that kept rates extremely high for much of the past two years”.

All eyes are on what happens in the second quarter, when inventory correction is expected to have run its course.

“Whether there will be a surge in demand following the end of the inventory cycle depends on the depth and duration of the current economic downturn,” writes analyst Lars Jensen of Vespucci Maritime.

“At best, such a surge might happen in peak season 2023, but worse, it might be postponed until early 2024 in the lead-up to the lunar New Year.”