The decline of foreign trade freight rates has accelerated, or it may drop to the pre-epidemic level by the end of the year!

The decline of foreign trade freight rates has accelerated, or it may drop to the pre-epidemic level by the end of the year!

Spot freight rates for container shipping could fall to 2019 levels as early as the end of this year as freight rates fall faster than expected and port congestion eases, according to a new HSBC research report.

On Wednesday, the global bank lowered its demand forecast for 2023 and raised its capacity supply forecast for 2022-2024 to reflect that easing congestion at ports is releasing constrained capacity to the market.

“As a result, we now expect the Shanghai Containerized Freight Index (SCFI) to bottom out in mid-2023 and shipping industry profitability to bottom out in the second half of 2023,” said Parash Jain, head of shipping, ports and Asia transport research at HSBC Global Container Shipping Report wrote. It had previously forecast that ocean freight rates would bottom in 2024.

Jain pointed out that since the end of July, the SCFI index has dropped by 51%, a weekly decline of 7.5%, and the current spot freight rate is much lower than the contracted freight rate signed at the beginning of the year, especially on the trans-Pacific route. "We believe lower-than-expected demand, faster congestion relief and price competition for marginal goods contributed to the decline."

At the beginning of October, container ship orders were close to 7.1 million TEU. Alphaliner figures show that new ships with a combined capacity of 2.34 million TEU will be delivered next year, compared to 2.84 million TEU in 2024. The two-year average of deliveries was 2.6 times the average of the past 20 years.

According to Drewry, these new capacity additions, combined with the potential to be injected into the market as port congestion improves, will result in an effective net increase in fleet capacity of as much as 11.3% in 2023. Meanwhile, Drewry expects demand to grow by just 1.9%.

With this supply-demand imbalance, freight rates will continue to fall, Jain noted. “At a weekly rate of decline of 7.5%, spot rates are likely to reach the 2019 average spot rate levels by the end of 2022. We expect capacity constraints to become apparent at this level, especially when rates are lower than cost."

With freight rates falling so sharply, the HSBC report pointed to "significant downside risks" to shipping lines' profit levels over the next two years. The bank expects profits for shipping companies to remain resilient in the third quarter of this year, but to decline from the fourth quarter and continue into 2023.In September, HSBC estimated that excess capacity and falling demand would lead to a drop of more than 80% in the profits of shipping companies over the next two years.

Meanwhile, Jain noted that potential changes to shipping and logistics companies' third-quarter results and full-year forecasts could provide clues as to whether shipping companies can defend contract rates amid renegotiations.

In addition, HSBC said in the report that the recovery of capacity after the Golden Week in the first week of October, or the carrier's extension of the suspension to the fourth quarter, may determine whether the freight rate will stabilize soon.

According to Sea‑Intelligence's latest report yesterday, in Weeks 41-43, the weekly capacity deployed by shipping lines decreased significantly. However, even though the capacity of the trans-Pacific route has dropped by 26%-31% on average, and the capacity of the Asia-Europe route has dropped by 19%-27%, its freight rate has fallen sharply.

In addition, Alphaliner said recently that port congestion is no longer enough to prevent a sharp drop in container freight rates. Shanghai-Nordic spot freight rates fell by 48.5% in the third quarter, although port congestion in Europe is still far from resolved.