The freight rates to and from the East Coast South America have been steadily dropping week after week, according to the latest Platts Americas Container Freight report by S&P Global, released on December 19.
PCR31, which stands for the main route from North Asia to the East Coast of South America, went down 20% last week alone, from USD 1,500/FEU to USD 1,200/FEU. Asia-Brazil rates have fallen by USD 600 since December 1st, 2022.
The present situation stands in stark contrast to the freight market in December 2021, when tariffs from imported cargo from the Far East to the East Coast of South America peaked at US$12,800/FEU. At the time, high sea freights affect many companies in Brazil.
As per a recently released study by the National Confederation of Industries (CNI), in recent months, three out of five companies – exporters or importers- have been highly affected by the current state of the maritime market. The increase in international freight prices was the main complication for 90% of companies that work with foreign trade. At that time the research was published, 83% of exporters and 71% had to suspend or postpone shipment operations.
As for this year, the rise in freight rates meant that cargo traditionally transported in containers began to be treated as general cargo on non-regular ships. In some cases, bulk carriers were adapted to accommodate containers. Air freight, for example, considered a “premium” logistics modal, experienced a record increase in use.
Demand drop
Many factors have been leading freight rates down nowadays, one of them being Brazil’s decreased trade with other countries.
In October, for example, Brazil’s containerized exports fell 5.08% compared to the tenth month of 2021, according to recently published container movement data by Datamar’s business intelligence team.
Year-to-date (January to October), the South American country exported 83.571 TEU short from the same period last year, a 3.5% drop.
Brazilian container exports | Jan 2019 – Oct 2022 | TEUs
Source: DataLiner (click here to request a demo)
Imports
Even though Brazil imported in October a container volume 12.9% higher than in the same month of 2021, the year-to-date figure dropped 4.4% in the first ten months of 2022 from Jan-October 2021. There were 98,405 less TEUs imported in 2022 compared to the previous year.
See below a chart comparing the evolution of Brazilian container imports month-on-month:
Brazilian container imports | Jan 2019 – Oct 2022 | TEUs
Source: DataLiner (click here to request a demo)
The following chart outlines the record of exports and imports:
Brazilian container exports and imports | Jan 2019 – Oct 2022 | TEUs
Source: DataLiner (click here to request a demo)
The drop in demand is not exclusive to Brazil. The recession has hit several economies around the world. The war between Russia and Ukraine has been a driving force behind that. Europe, which is now entering its winter season, is facing a gas shortage – as the war affects supplies of Russian gas to the European market, hurting its economy.
According to official data released by the Chinese government, in November, exports from the Asian country fell at the fastest rate in more than two years, the latest indication of how trade restrictions and a drop in global demand for goods are suffocating the economy.
Shipments from China fell 8.7% year-on-year in November, the biggest drop since February 2020, when a nationwide lockdown brought economic activity to a standstill. Economists had forecast a drop of just 2%.
With decreasing economic activity, the space available on ships become greater.
Decluttered global logistics
Another improvement factor lies on the port congestion issue. In the first half of 2022, the “covid zero” strategy adopted by the Chinese authorities led to massive port congestion. The restrictions affected the roads in and out of the port, resulting in a backlog of containers and a 30% reduction in productivity. There was a lack of port workers to process the necessary documents to unload goods or carry out the exit inspection. In the United States, port congestion was also immense in the first half of the year.
Now, with the situation partially resolved, the balancing out of the supply chain has allowed freight rates to drop.
Newbuild containerships
If there was a shortage of ships during the peak of the Covid-19 pandemic, the situation has changed. The capacity of shipowners’ fleets should be expanded in 2023 and 2024, with the arrival of ships ordered in 2020/21, the height of the shortage of space.
According to Alphaliner, in 2023, 343 ships with the capacity to transport 2.3 million TEUs will join maritime fleets, representing an increase in capacity of 8.1%. Conversely, global demand will only grow by around 2.7%, generating a mismatch between supply and demand.
In total, 917 vessels (7 million TEUs) have been ordered, equivalent to 27.4% of the national fleet in operation.
Also, in 2023, the market expects increased ship dismantling, a trend that had already been postponed due to the now-overcome lack of space on cargo carriers. More tonnage recycling can reduce the excess space and hold prices a little.
From the first day of 2023, new IMO rules will come into force, and it will be mandatory for all ships to calculate their Existing Ship Energy Efficiency Index (EEXI) to quantify their energy efficiency and start collecting data for the annual operational carbon intensity (CII) indicator. As a result, more modern ships will gradually replace inefficient and polluting ships.
Prospects
Despite the expected increase in vessel dismantling, it is unlikely that it alone will be enough to balance out the capacity of newbuilds entering the market.
Charter contracts for general cargo carriers were on the rise at the beginning of the year, but now have been steadily dropping. The expectation is that the value of these contracts will fall even more once the segment feels the impact of a declining container market.
Sea-Intelligence CEO Alan Murphy reports that both schedule reliability and the average delay for vessels have returned to levels more consistent with 2020 than the levels seen over the past two years. Analyzing the performance across 34 different trade lanes and more than 60 carriers during October 2022, Sea-Intelligence shows that schedule reliability surpassed 50 percent for the first time in two years, while the average delay calculated in the number of days is at its lowest point since November 2020.
Overall, schedule reliability is up seven out of the last ten months, after plummeting to a historical low of just 30 percent at the beginning of 2022. The decline began in late 2020, reaching a point where less than one-in-three vessels were maintaining their schedules in 2021.
Overcapacity appears to be returning, and much will depend on how shipowners manage to align their carrying capacity with actual demand. Considering the improvement in port congestion in China and the US, a reduction in consumption and the recession in several countries, it is possible that a perfect storm is on the make and freight rates will drop much more than expected. In this scenario, the use of reliable data intelligence sources becomes stands with even greater importance.
