June 2024 Critical capacity disruptions During May and into June, the combination of the diversions around Africa, worsening port congestion, especially in Asia, and a sudden surge in export demand from the Far East, has led to an acute shortage of both vessel capacity and equipment availability. The result has been a significant increase in spot rates, particularly in the Asia to Europe and Asia to North America trades. The overall SCFI index increased by 65% in just 5 weeks from the beginning of May, especially driven by Transpacific and Asia-Europe rate increases. The fundamental reason is that while there is sufficient capacity to go around Africa due to the Red Sea crisis, this leaves zero excess capacity to handle the growing congestion problems, especially in Asian ports where some vessels, for example, have waited up to 7 days in Singapore. And it's even worse when there is also a sudden surge in demand. This development has come as a surprise to all stakeholders as the combination of congestion and demand surge was not foreseen anywhere. As an example, the carriers presented Q1 2024 financial results during April, and at the time, their main message to the shareholders was an expectation of slowly declining rate levels throughout 2024 as the many new vessels were delivered. This shows certain similarities to how the market was impacted in early 2020 when freight rates surged, and capacity became short. If we should make a comparison to the pandemic, the disruption happened in two stages. Stage one was in the 2nd half of 2020, with rapidly increasing rates on the Transpacific trade lane driven by the pandemic demand boom. At this point, tightness in the market spread to the other trade lanes and rates elsewhere also surged until they reached a peak in February 2021. Rates began to abate slightly, but then the vessel Ever Given got stuck in the Suez Canal, dramatically worsening congestion problems, and rates saw the second stage of rates surging. This peaked in September 2021, as well as once again in January 2022. The market presently is roughly matching the peak levels seen from Stage 1 during the pandemic, so the question is if this will continue or normalize. There are three indicators that resemble the disruption we witnessed during the pandemic and would indicate that current conditions could persist. One indicator is the idle fleet, which is down at 0.6%, matching the disruptions in 2021 – and this is even despite the delivery of millions of TEU of vessel capacity since 2021. The second indicator is that charter rates are increasing rapidly, and the fixture length for the charters is also surging, rapidly approaching 2 years. The third indicator is smaller opportunistic carriers once again starting services on the major east-west trades using very small ships. An example is Ellerman Lines starting an Asia-Europe service with 2700 TEU vessels. Such a service is only feasible in an extremely strong market. DSV – Global Transport and Logistics We provide and manage supply chain solutions for thousands of companies every day – from the small family run business to the large global corporation. Our reach is global, yet our presence is local and close to our customers. Around 75,000 employees in more than 80 countries work passionately to deliver great customer experiences and high-quality services. Read more at www.dsv.com
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