Ocean carriers suspend Asia-Europe contract offers until Red Sea ‘settles’

Ocean carriers have stopped, for now, offering long-term agreements to the Asia-Europe market because the Red Sea shipping disruption is making it impossible to assess the factors that determine fixed contract rate levels.

Long-term deals will not be offered “until the Red Sea situation settles,” a spokesperson for Hapag-Lloyd told the Journal of Commerce, citing a lack of clarity in how long diversions will be required, the unknown effect on equipment availability and the impact ships arriving out of windows will have on port utilization.

“All this needs to be factored in to determine a long-term contract rate level, which is not possible at this very moment,” the spokesperson noted. “We expect the pre-Chinese New Year peak to extend past Chinese New Year, simply because there is a lack of ship and equipment capacity, which is already visible. Consequently, capacity is insufficient to ship out the total demand before Chinese New Year.”

How and when the Red Sea situation will be resolved remains unclear. Air strikes were conducted Thursday night by US and UK fighter planes on targets in Yemen from where Houthi militants have launched attacks on commercial shipping since early December. Most ocean carriers have rerouted their ships around the Cape of Good Hope in southern Africa to avoid the Red Sea, adding 10 days to Asia-North Europe voyages and two weeks on Asia-Mediterranean journeys.

Forwarders have indicated that the suspension of long-term rate offers extends beyond Hapag-Lloyd to other carriers, but those contacted by the Journal of Commerce have yet to respond.

Michael Amri, head of ocean freight at Hellmann Worldwide Logistics, said it did not make sense for carriers to offer long-term deals now with so much market uncertainty.

“Some shippers will have to launch tenders now because their contracts are expiring, but I would advise them to do a quarterly contract and see how the market is after Chinese New Year,” Amri said.

“A lot of the carriers are refraining from giving out long-term deals because the long-term deal would probably normalize at a lower level than what the rate is now,” said Trine Nielsen, head of ocean for Europe, Middle East and Africa at Flexport.

“Carriers are simply seeing how they maximize in the current situation and then fix long-term deals on the back end,” Nielsen added.

Space guarantee charges make a comeback

The sudden increase in transit times has come as European importers scale up their shipments to get cargo on the water before China factories close from Feb. 10 for the long Lunar New Year holidays. On top of disrupting carrier on-time arrivals, the delays are leading to vessel space constraints and difficulties in repositioning empty containers to Asia.

The space and equipment issues have seen carriers reinstating a pricing strategy employed during the severe port congestion that followed the COVID-19 pandemic — space guarantee charges. Rate benchmarking platform Xeneta estimates the charges range from $400 to $1,500 per container, with Flexport reporting some carriers were charging even more to guarantee space.

The Asia-Europe logistics chief for a global retailer told the Journal of Commerce that carriers were honoring volume agreed to in annual contracts that run from July to June and had not yet asked for space guarantee premiums. But a peak season surcharge was being levied on top of the long-term rate, the source said, adding the surcharge amount so far was “reasonable.”

Xeneta data this week shows ocean freight rates between Asia and North Europe have increased 124% since the crisis escalated in mid-December and are now at $3,498 per FEU, with rates into the Mediterranean up 118% to $4,179 per FEU. Rates from Asia to the US East Coast have increased 45% to $3,090 per FEU.

Shortage of boxes

Evidence of equipment shortages can be seen in the container availability data from online container logistics platform Container xChange.

Christian Roeloffs, the platform’s cofounder and CEO, said shippers and forwarders were trying to fulfill orders ahead of Chinese New Year, which was increasing demand for containers at Asian factories.

“Shipping companies are demanding more containers now as they avoid the Red Sea … therefore, shipping companies and leasing companies have placed more than 750,000 TEUs [of] container orders out of China in the last two months,” Roeloffs noted in a market update Friday.

Matthew Burgess, vice president of global ocean services at C.H. Robinson, said the ripple effects of the unfolding conflict in the Red Sea will continue to be felt for some time.

“Even if the conflict was solved tomorrow, the cascade of disruptions has already begun, and it will take significant time for the logistics market to return to more predictable cycles,” Burgess said.

“The pauses in transit and rerouting of vessels from the Suez Canal are already placing a strain on capacity globally, not only in the Red Sea,” he added. “While space limitations are most prominent on the Asia-Europe trade lane now, and are expected to continue for multiple weeks, we’re seeing the impact across other lanes as ocean carriers shift vessels to lanes with the highest shipping demand.”

Forwarders have encouraged shippers to book as far in advance as possible to secure capacity as the market becomes more competitive.

Still, the likelihood that Red Sea diversions will continue for the foreseeable future actually adds an element of stability to the Asia-Europe trade, according to Nielsen.

“If carriers continue to sail south, that situation will normalize as the planning factors kick in,” she said. “We told our customers early on to incorporate additional lead time into their inventory planning because this is where the impact will be felt as customers replenish inventory.”

By: Greg Knowler / FreightWaves