Container shippers hedge volumes in uncertain market

Uncertainty for the immediate future has seen shippers and forwarders grapple with a variety of variables, including the volatile Middle East conflict and a US election that seemed to be heading Donald Trump’s way, now appearing less certain, while the immediate economic outlook in the US remains a concern.

Linerlytica reports that the SCFI has fallen for the fourth consecutive week on fears of a US recession, however, the SCFI does not include Mexican volumes, and the contract rates to Mexico increased substantially on 1 July, while Mexican spot rates have seen a decline.

Xeneta’s chief analyst Peter Sand believes: “Mexico effectively takes some risk off the table,” he added, “The July jump in contract rates indicates that some shippers and forwarders are hedging in an uncertain market by committing 10-25% of their volumes to Mexico, so they are not caught out by increased tariffs.”

Less than one year ago, in mid-late September, the contract rates out of Asia to Mexico were hovering at $2,630 per feu, three months later on 31 December contract rates had declined more than 20% to a little over $2,000 per feu, reflecting the end of the peak season.

Rates to Mexico stayed at that level for the whole of the first quarter of 2024, before declining again by 5%, $1,893 per feu on 1 April. Minor fluctuations persisted until the end of Q2 and then on 1 July a $700 leap, more than 35%, saw Mexico bound contracts jump to over $2,550 per feu, falling again on 1 August by $150.

Related:Outlook for container shipping ‘extremely uncertain’

Xeneta’s XSI index, which measures long-term rates, is showing a narrowing of the gap between spot and contract prices on the major export trades out of Asia to the US and Europe.

Xeneta confirmed that global contract rates were on the rise, driven by the higher spot rates, the XSI saw contract rates increase 2.5% month on in July to 151.5, still 4% down on December figures.

Crucially, however, the XSI sub-index which measures Asian exports, including the major headhaul trades to the US and Europe, increased 12.6% to 178.8.

Even so, Xeneta concedes that the shift in contract rates is small, but “Significant in terms of indicating a changing market sentiment, given that average spot rates are now peaking on the major fronthaul trades out of the Far East and long-term rates are starting to rise.”

Xeneta’s senior shipping analyst Emily Stausbøll agreed that the inflated spot rates were pushing contract rates upwards too, however, she added: “Some are still insulated. This is why the narrowing of the spread between the long-term market and short-term market is important - if spot continues to fall it means less upward pressure on long-term rates.”

Related:Xeneta sees first crack in container carrier spot rate consensus

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Meanwhile, European headhaul rates have remained firm as carriers commit increased levels of capacity, due to the diversion of vessels away from Suez to the African Cape, absorbing much of the expected over-capacity for this year as vessel deliveries have soared.

With the uncertainty around the Middle East conflict and when carriers will return their vessels to the far shorter Suez route, Stausbøll explained that shippers and forwarders have taken different contracting approaches.

There are those shippers at the lower end of market with long-term rates who are happy with those rates going forward. “The majority of long-term contracts sit in this area,” said Stausbøll.

Those shippers on higher rates, but with shorter contracts - meaning they are not stuck at the current rate level for 12 months. These shippers will be getting new rates every few months, a for a point and are not locked into higher rates should ships return to the Suez Canal.

In addition, there are shippers who have accepted Red Sea surcharges onto existing contract rates, with a mechanism to remove/modify this surcharge on a monthly or quarterly basis as the Middle East situation changes.