Transportation & Logistics Analysis

Shipping companies keep their heads above water in first quarter

March 14 2024

Subscriber content only

BAROMETER. The rise in freight rates in the Asia-Europe trade is slowing but transpacific rates are continuing to climb. The crisis in the Red Sea is have a particularly heavy impact on the Mediterranean market.

Most container ships are continuing to go round the Cape of Good Hope to avoid coming under attack in the Red Sea but, overall, developments in February show that the market is amazingly adaptable. The Covid experience has clearly led to companies drawing up plans to improve their general resilience. Fears that European ports could become saturated in February turned out to be unfounded. The volume of cargo to be handled turned out to be fairly modest for a so-called "high" season.

Although the market was not totally destabilised, it would be a big exaggeration to suppose that all is well. The current situation is difficult for the shipping companies to manage from an operational point of view, as they try to maintain quality of service. It has also led to a deterioration in their emissions performance. According to Constante Dijkastra, a shipping specialist at the environmental association, Transports and Environment, who was interviewed by French language publication Novethic, a ship going round the Cape of Good Hope increases its CO² emissions by 45%.

A penalizing crisis for shippers

The crisis is even more penalising for shippers, the great majority of whom drew up their budgets on the basis of a then sensible market consensus which put Asia-Europe freight rates at $1,500-1,800/40'. Today, however, prices are oscillating at around $3,500-4,000 on average, although shippers with contracts have some additional negotiating room, even if their contracts have been suspended.

Shippers who deliberately stuck to spot rates, after a highly profitable 2023, have been paying a severe price since November 2023. The first lesson to be learned, therefore, is that, like negative interest rates, spot prices cannot stay below contract prices for long. Such a situation is a market anomaly and the return to normal always comes a shock. In our annual market analysis of the 2023-2024 contract negotiations, which was published on 4 October, which is to say before the start of the disruption in the Red Sea, Upply recommended shippers to sign up early for their new contracts.

It is true that the usefulness of contracts is limited in the shipping sector. With shippers unable to make reliable forecasts regarding cargo volumes and shipping companies unable to provide empty containers or the agreed number of slots on the first ships to leave, there is bound to be friction over contract execution. Nevertheless, it is better to have a contract which is a little bit shaky than no contract at all.

An unexpected boost for shipping companies' finances

In the final quarter of 2023, shipping companies' financial results were either in the red or, among the better performers, just profitable. However, the Houthi attacks resulted in an increase in freight rates which brought prices per container to above companies' break-even levels. First quarter financial results were saved.

At the start of the autumn last year, the shipping companies were worried about the wave of new capacity due to come on to the market in 2024-2025 at a time when freight rates were already in decline. Today, the crisis in the Red Sea has become an unexpected windfall as they scramble for ships to fill gaps in loops which have suddenly become much longer (...)

Subscribe to the newsletter

Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
See all its articles