FBX Index September 2023: Carrier discipline wavers and Atlantic has collapsed

During July and the first half of August, the Pacific head haul trade saw continued sustained increases in spot rates, a trend that also impacted the key Asia to Europe trades from the beginning of August. Looking at underlying data this appeared to be driven by increased activity amongst the carriers in blanking sailings to better match capacity to demand.

However, by the end of August, the trend began to reverse and spot rates levels were again seeping on these key trades. This is a concerning indication as we are now at the time of the year when the peak season should be at its strongest on these two trades. It is therefore showing that the underlying peak demand remains weak and carriers apparently do not (yet) have the willingness to pull even more capacity out of the market to support the rate levels.

In broad strokes, the Asia-North Europe trade is affected the worst and is in essence at the same level as seen in the peak season of 2019 before the pandemic. This is problematic as general cost inflation has risen significantly in recent years and furthermore the carriers have had to implement the IMO2020 rules, which means shifting to the much more expensive low-sulphur fuel.

Pacific rates are still somewhat higher than pre-pandemic but they cannot be said to be strong.

However, the situation is much worse in the Atlantic trade from Europe to the US, which is said to have collapsed. Demand in this trade was growing at a healthy clip during the pandemic. Measuring year-on-year demand growth is difficult owing to the large initial pandemic swings. If instead demand on the Europe to North America trade is measured as an annualised average growth versus 2019, then November 2020 saw a growth of more than 10%. During 2021 and into the spring of 2022, the trade showed an average annual growth rate versus 2019 of around 5%, which is a high growth rate for such a mature trade.

This was at the same time when supply chain bottlenecks were at their worst and as such there was a lack of vessel capacity. This drove up freight rates everywhere including the Atlantic – but the Atlantic increase started a bit later than the key export trades from Asia. Once the market reverted back towards normality, the Atlantic remained higher for longer than the other main trade. As vessels became more readily available in the market carriers injected more capacity into this lucrative trade. The effects were of course completely predictable and in the middle of 2023 spot rates were essentially cut in half over just a few weeks. We are now at a point where spot rates are significantly below pre-pandemic rates.

Making matters worse, demand has dropped sharply. The latest data from Container Trade Statistics in June 2023 showed volumes being more than 4% lower than in 2019 and having been below 2019 levels for five consecutive months.

At the same time, the carriers’ injection of capacity has grown sharply. In June the carriers were operating 18% more capacity on the North Atlantic trade as compared to 2019, according to data from Sea-Intelligence, versus a declining demand. Looking ahead it does not get better. In July and August combined, the carriers operated 19% more capacity than in 2019. Based on the carriers’ currently scheduled vessels this will peak in October 2023 where they will operate 21% more capacity than in 2019.

Hence the Atlantic has de facto collapsed due to a combination of declining demand and carriers piling in excess capacity at the same time.

With the Asian export trades showing weakness now, the concern would be for the developments in October after Chinese Golden Week where demand tapers off. Presently the carriers have essentially not announced much in the way of cancelled sailings in early October. This will not be the actual situation. Shippers should monitor their carriers closely and start preparing for large-scale blank sailings to be announced in the coming few weeks for the month of October.
Source: Vespucci Maritime