How long can the high freight rates and scarcity of containers persist?

In just five weeks since the end of April, freight rates for European routes have skyrocketed by over 70%, and rates for routes to the west coast of the United States have increased by nearly 60%, surpassing the rise during the Red Sea crisis. During this period, the frequency and magnitude of freight rate increases have basically caught up with the peak period of the pandemic in 2020/2021!

Moreover, as the overall cargo volume from Europe and the United States continues to rebound, with a shortage of containers and congestion at multiple ports, it is feared that short-term market freight rates may continue to rise through June.

However, analysis from shipping companies and research institutions indicates that with the delivery of a large number of new ships and the injection of additional capacity, the new capacity added in the first half of the year is sufficient to meet the demand for rerouting. Concerns about overcapacity in the second half of the year have emerged, and high freight rates are expected to gradually decline, with the earliest decrease expected in July and the latest in October.

It is understood that with the double increase in freight rates and capacity, the shipping industry has temporarily gained the upper hand in a game of risks and opportunities. The industry estimates that the turning point may occur in the second half of the year.

Two key observation points are: the evolution of the Red Sea crisis and when the Palestine-Israel conflict will end; and the early start of the peak season for European routes and the replenishment of inventories in the United States, with attention focused on the cargo carrying capacity.

The Palestine-Israel conflict has lasted for seven months, and foreign media have reported that both sides are expected to restart negotiations this week. Shipping companies such as Yang Ming and Wan Hai have stated that the Red Sea crisis is becoming increasingly complex, with both new and old ships being put into use in the market, and the global idle capacity stands at only 0.7%. Due to changes in vessel routing, longer voyages, the deployment of vessels of varying sizes, and weather affecting schedules, there has been a shortage of containers. With rising demand in Europe, many cargoes destined for the eastern Mediterranean are being transshipped in the western Mediterranean, leading to congestion in the western Mediterranean.

Market demand also determines the trend of freight rates. The industry said that this wave of price increases was mainly driven by the effects of the Red Sea crisis and the centralized shipment from the mainland, which prompted shippers to ship goods in advance and the peak season of the European route to be advanced. Looking ahead, the shipping industry is concerned about two trends: first, the peak season is advanced, and will continue or shorten in the third quarter of the traditional peak season; second, high freight rates will be reflected in the terminal price, affecting consumers' purchasing power and worrying about a decrease in orders.

However, the optimistic forecast represented by LINERLYTICA believes that, given the short-term market effective demand growth of 13.1%, which is higher than the short-term capacity growth of about 11%, LINERLYTICA expects a shortage of ship capacity until October.

In the face of the recent sudden rise in freight rates, Rolf Habben Jansen, CEO of Hapag-Lloyd, admitted at the press conference of its first quarter earnings report that it was unexpected and shocking, because he did not see any unusual situation on the demand side of the market.

Rolf Habben Jansen also cautioned against overinterpreting the significant fluctuations in freight rates this round. "On the other hand, we should not be overly excited about the strong demand in the next few weeks. Until three weeks ago, we were seeing a fairly normal pattern for this year, and now we are seeing freight rates skyrocket. We need to see how the situation develops in the coming weeks."

The CEO of Hapag-Lloyd believes that shippers' nervousness may be a partial reason for the sudden surge in freight rates recently.