by Lloyd's List
29 July (Lloyd's List) - THE surge in spot container freight rates due to Red Sea diversions is boosting carrier profits on fronthaul mainline trades, but spot rates on backhaul trades are not increasing. In some backhaul lanes, rates are actually falling.
Lloyd’s List was told that the backhaul effect is one reason why shipping profits of French carrier CMA CGM did not increase in 2Q24 versus 1Q24, despite double-digit gains in mainline spot rates.
Sea-Intelligence said in its Sunday Spotlight report that spot-rate gains in the Asia-Europe and Asia-US fronthaul trades “closely match” patterns seen during the Covid-era supply chain crisis, yet the pattern on the backhaul trades “has been nothing like the pandemic period”.
Container shipping investors have been closely tracking spot indexes for evidence of how quarterly profits will evolve. However, the situation on backhauls further diminishes the correlation between spot-rate indexes and liner results.
Carriers do not generally provide data on fronthaul versus backhaul volumes, but Ocean Network Express (ONE) does publish utilisation rates in both directions. Over the past eight quarters (through March), ONE utilisation rates on Asia-Europe and Asia-US fronthauls were roughly double backhaul utilisation rates.
If, on a back-of-the-envelope basis, one assumes a 50-50 contract-spot mix, no rate upside on backhauls, and backhaul volume that’s half fronthaul volume, recent spot gains would affect only 33% of overall volume. If contracts covered 60%, the 2024 spot-rate spike would affect 27% of volume. At 70% contract coverage, just 20% of volume.
WCI fronthaul vs backhaul rates
Weekly spot-rate assessments from Drewry’s World Container Index (WCI) highlight the how fronthaul-backhaul dynamics amid Red Sea disruptions significantly diverge from those during the supply chain crisis.
Lloyd’s List looked at the change in weekly spot rates compared to a pre-pandemic benchmark: the average rate in the week ending January 3, 2019.
In the fronthaul Shanghai-Rotterdam lane, the change in WCI rates peaked during the pandemic in October 2021, when rates were 611% higher than that benchmark. Spot rates dropped below well January 2019 levels throughout 2023. Then came Red Sea diversions. As of the week ending Thursday, Shanghai-Rotterdam rates were 297% higher than the pre-Covid benchmark, at $8,260 per feu.
Not so in the Rotterdam-Shanghai lane.
WCI rates in this backhaul trade peaked at 201% above the benchmark in July 2021, then sank below pre-pandemic levels in July-December 2023. They did enjoy a spike in early 2023 coinciding Red Sea disruptions, but it was brief.
The WCI Rotterdam-Shanghai index has declined 29% since late January 2024. As of the week ending Thursday, the index was up only 8% versus January 3, 2019, at just $627 per feu, its low point year to date.
The Asia-US west coast trade shows the same pattern.
The fronthaul Shanghai-Los Angeles WCI index peaked at 497% higher than the January 2019 benchmark in September 2021, then sporadically dipped below pre-pandemic levels in January-November 2023, after which it shot back up again. The latest index reading is $6,934 per feu, 233% higher than the early January 2019 index assessment.
The backhaul Los Angeles-Shanghai WCI index jumped to 188% higher than the benchmark in August 2021 during the supply chain crisis. Although it is still higher 27% above than December 2019 levels, it has flatlined since mid-February.
The Europe-US east coast trade has shown a contrasting pattern because this trade is inherently different than Asian trades. US imports from Asia are more focused on manufactured consumer goods, whereas US imports from Europe are dominated by building supplies, food and beverages.
This market shows a surge during the pandemic in both directions but no upside for the fronthaul trade amid Red Sea disruptions.
Fronthaul Rotterdam-New York WCI rates were 259% higher than December 2019 rates in November 2022 – peaking later than Asian fronthaul trades – but down 5% versus the benchmark as of last week, at $1,954 per feu, a fraction of Asia-US and Asia-Europe spot rates.
Backhaul New York-Rotterdam WCI rates topped the pre-Covid benchmark by 126% in November 2022, and are now up far less, 26%, at $736 per feu.
Why it’s different this time
According to Sea-Intelligence, “The shortage of vessel capacity, which is a key driver of the headhaul increases in 2024, is the exact same [driver] as during the pandemic, which is also a core reason for the headhaul spot-rate development being so similar.
“Backhaul trades are more governed by the dynamics related to empty-equipment relocation and less to supply-demand dynamics related to vessels.
“The fact that spot-rate developments on the backhauls have not followed the pandemic patterns is therefore a very strong indicator that the structural equipment shortage problems that plagued the market during the peak of pandemic disruptions are not of the same severity in 2024,” concluded Sea-Intelligence.
Indeed, the challenge for backhaul exporters during the pandemic was less about freight rates and more about finding a container. During the supply chain crisis, liners opted to load empties for return to Asia rather than take the time to load exports, given that inland logistics networks were snarled.
Exporters are not currently experiencing anywhere near the same inland logistics issues affecting container availability, because today’s market dynamics are being driven by vessel routing issues, not exceptionally high import demand, as was the case in the pandemic.
There could also be a negative demand factor in play on the backhaul side, related to European and US volumes to Asia.
Germany’s exports to China dropped 10% in May versus April, and US containerised exports are also down.
According to Census Bureau statistics compiled by freight economist and University of Michigan supply chain professor Jason Miller, US containerised exports in January-May totalled 46.1m tonnes, down 11.4% versus the same period in 2019, pre-pandemic.
The single largest driver of the 2024-versus-2019 decline is a 2.3m-tonne drop in US export cargoes of waste and scrap – traditionally America’s largest containerised export with the exception of “air”, i.e., empty boxes.
