The container shipping industry is facing an unprecedented collapse in long-term rates Ship’s crew

The container shipping industry saw global long-term freight rates fall sharply in May as the contracted cost of shipping containers plummeted a staggering 27.5%, according to Xeneta’s Shipping Index (XSI®). This marks the ninth straight month of rate cuts and represents the largest monthly drop ever recorded on the platform.

“If industry watchers are wondering how bad things could get for airlines after April’s 10% drop in long-term interest rates, here’s the answer,” said Patrik Berglund, CEO of Oslo-based Xeneta. “This is the sharpest decline we’ve seen on the XSI®, which tracks real-time global interest rates, and it paints a bleak picture of the state of the industry.”

Xeneta believes the collapse in long-term freight rates reflects a new market reality.

Berglund stressed that while monthly declines have become the “new normal” this year, “this is a collapse,” he said.

“There are many reasons for this, but the main reason is that May marks the point at which existing 12-month contracts in the US come to an end and new agreements come into effect,” explains Berglund. “These reflect the reality of today’s subdued markets and are therefore much, much more affordable than their predecessors. The impact on the entire industry is visible to all.”

Particularly noteworthy is the decline in long-term rates after the pandemic-related surge in freight rates. However, Berglund is convinced that the era is now “finally over”.

“The global XSI® is now down 42% year-on-year. With ongoing macroeconomic uncertainty, disappearing trading volumes and a broader sense of geopolitical shifts, short-term industry forecasts do not point to a return to profitability anytime soon,” Berglund said. “This is a cause for concern for shipping companies who have relentlessly managed capacity by adjusting ship speeds, restructuring services and canceling sailings, but all their efforts seem to be in vain. Those with significant stakes in long-term contracts will increasingly feel the financial strain.”

From a regional perspective, the XSI® illustrates the clear decline in long-term developments in the USA. The US import sub-index fell a stunning 40.6% month-on-month, resulting in a 54.6% decline from its peak in October last year.

In U.S. dollars, that represents a drop in the average contracted price for shipping containers between the Far East and the U.S. West Coast by $6,140 per FEU (40-foot unit) year-over-year, a massive 76% drop, according to Xeneta this important global route. Total import volumes reveal a grim reality: Volumes to the US fell 21.1% in the first quarter, while volumes from the Far East fell 25.9%. However, the US exports sub-index saw limited growth, posting a 5.1% month-on-month rise.

The fall in the US import sub-index was offset only by the fall in exports from the Far East, which fell 38.6% in May alone. This sub-index has now lost more than half of its value in 2023 and is down 58.5% compared to the previous year. In terms of volume, container exports from the Far East fell by 10.5% in the first quarter and are now just 3.3% higher than the figures for the same period in 2019.

“With declining demand for container exports from the Far East and a lack of demand for imports into the US, we are in a sort of ‘retreat’ of the two forces that traditionally drive growth in world trade,” notes Berglund. “In such a climate, airlines can do very little to protect their valuable long-term rates, especially given that ships on order during the pandemic boom are now beginning to add to the industry’s overall capacity.”

“This is a headline-grabbing monthly decline in contracted rates,” he concludes, “but it’s not the end of the story.” There are more developments to come in what will be a very challenging year for the carrier community Horizon. Watch this room.”

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