Journey into the unknown

As chaotic as the global trade situation has been since the Trump administration‘s tariff offensive, the prospects for the sea freight business are just as unpredictable. It was already clear that 2025 would not be a normal year. The ongoing security crisis in the Red Sea with the rerouting of all major alliance liner services around the Cape of Good Hope and the prospect of further port strikes – particularly on the East and Gulf coasts of the USA – did not inspire optimism among market participants.

Although the major US port workers‘ strike was averted in January, the problems in the European ports increased. Labor disputes, warning strikes, infrastructure problems and delayed ships have caused extreme operational disruptions between Le Havre in the west and Hamburg in the east of the North Range since the beginning of the year. With the collapse in cargo volumes in the China-US trade due to the escalation of tariffs and counter-tariffs, the chaos is now perfect.

This means that the growth in transport demand is no longer a stabilizing constant for liner shipping. At least in the short term. Bookings from China to the USA are said to have slumped by up to 50 percent in April after Trump ignited his tariff fireworks. As in times of the coronavirus pandemic, the strategic motto for carriers is now once again: sail by sight.

Maersk‘s first interim report at the beginning of May made it clear just how difficult it is to make forecasts in the current situation. The Danes‘ market expectations for container traffic in the current year lie in a conceivably wide range between minus 1 and plus 4 percent. After a strong first quarter, which was characterized by frontloading, Maersk is still expecting growth in the market for the second quarter, ‘especially if shippers take advantage of the 90-day customs break’. The situation will become completely unpredictable from July at the latest. Either container traffic will begin to shrink or – assuming the customs duties are withdrawn – it will experience a boom again, according to Maersk‘s assessment.

Rate level falls noticeably

This marks the beginning of a new chapter for the liner shipping companies. After a long phase of full fleet utilization due to solid cargo growth and longer voyage distances as a result of the Red Sea bypass, carriers must now start to reduce capacity. Otherwise, the volume losses threaten to be exacerbated by price losses.

Although freight rates are still relatively high from a historical perspective, the trend has been pointing downwards for months. Drewry‘s World Container Index (WCI), which tracks spot rates on the three main routes Far East/Europe, Far East/North America and Transatlantic, has now slipped 34 percent below last year‘s level. Twelve months ago, the market was still speculating that rates would trend towards the all-time highs reached during the pandemic, but today opinions are divided as to whether this is even enough for a seasonal rise in prices.

This is clear from the futures prices on the futures exchange in Shanghai for spot freight on the Far East-Europe route. Until a few weeks ago, the ‘SCFIS Europe Futures’ (EC) traded there for some time were still showing substantial premiums compared to the current spot level for the rest of the year.

Contracts for June and October are now even trading below the current spot level. Only for August are market participants trading rates that are around 13 percent higher than at present. The starting level is already very low, with rates somewhere between USD 1,400 and 2,000/FEU (Main Port in China to Rotterdam/Hamburg).

The scenario that many market participants have in mind is that the carriers will withdraw their superfluous ships from the transpacific trade and transfer them to the Asia-Europe route instead of temporarily withdrawing them from service altogether.

As the economic development in Europe is not expected to result in any major leaps in import demand, overcapacity would inevitably build up and push freight levels down. The container lines are apparently taking their time to decide where to put all the ships.