There is no longer denying that the Asia to U.S. market is showing signs of weakness. Major retailers have distribution centers that are already at capacity, so purchase orders are being delayed or cancelled altogether.
Usually during the months of September and October, shippers are forced to pay peak season surcharges to secure space on vessels. That will not be the case this year. Spot rates have been slowly decreasing since June. This downward trend in the spot rate is expected to continue through the end of the year.
A larger issue for carriers is how they plan to address contract rates through the end of the year. The gap between contract rates and spot rates has grown significantly over the last few months. Carriers initially balked at the idea of reducing contract rates. However, the constant pressure from contract shippers along with the softer market have carriers rethinking their pricing strategy. Most carriers have finally accepted the reality of the market and are offering discounted short-term rates within the scope of a contract. The discounted rates usually last for two or three months depending on the carrier.
Unless there is a major uptick in demand, shippers should expect that any current short term contract rate agreements will be extended beyond the expiration date. Until the spot rate bottoms out, shippers should also expect further short-term rate reductions.
It is not the time to feel pity for the carriers. They still have a tremendous amount of cash and are moving cargo at rate levels significantly higher than the pre-pandemic levels. The carriers have many tools at their disposal, such as blank sailings, to keep rates from crashing to 2019 levels. Shippers need to pay very close attention to how carriers manage capacity between now and the end of the year. Sooner or later the carriers will take some form of action in hopes of turning the rates in the opposite direction.
