THE GOOD news for importers: There are growing signs that the Red Sea-crisis-induced surge in spot rates for containerised goods is peaking. The bad news: Spot rates are still exceptionally high and new supply chain risks could be just around the corner.

The Shanghai Containerised Freight Index (SCFI) has declined for a second week in a row. As of Friday, the SCFI global composite stood at 3,542 points, down 5% from the week ending July 5.

That said, most of the pullback in the SCFI composite is being driven by declines in the one high-volume lane that is not directly affected by Red Sea diversions: the Shanghai-US west coast trade.

The SCFI put Shanghai-US west coast spot rates at $7,124 per feu, down 12% or almost $1,000 per feu versus the week ending July 5 – but still at levels recorded in July 2022, at the tail end of the supply chain crisis. For historical context, spot rates had never been close to these numbers prior to the pandemic.

The SCFI index for Shanghai to the US east coast was at $9,751 per feu as of Friday, down only 2% from the week ending July 5. The SCFI indexes for north Europe and the Mediterranean show rates hitting a plateau and holding near post-Covid highs, at $10,000 and $10,722 per feu, respectively.

Drewry’s World Container Index (WCI) tells a similar but slightly different story. As with the SCFI, it shows the Asia-US west coast market as the main culprit for easing rates, yet it shows continued gains in other mainline trades.

The WCI assessment for Shanghai-Los Angeles for the week ending Thursday was at $7,288 per feu, down 3% from the prior week.

The pace of gains in the other three main trades has slowed versus the precipitous rise in May-June, but rates are still headed up. The WCI’s Shanghai-New York rates gained 2% week on week to $9,612 per feu, Shanghai-Rotterdam rates increased 3% to $8,267 per feu, and Shanghai-Genoa rates rose 1% to $7,727 per feu.

Demand driven by ‘pull-forward’ effect

Calling a top in container spot rates has proven notoriously difficult in recent years.

There were numerous instances during the pandemic era when rates appeared to plateau or even decline, only to resume their ascent and climb to dramatically higher levels. More recently, spot rates were seen peaking in 1Q24, only to jump drastically higher in recent months.

The consensus is that recent rate gains are being caused by added voyage distance from Red Sea diversions combined with artificially high near-term demand due to a pull-forward of import timing.

If so, demand should theoretically run out of steam as the pull-forward effect expires, and even if the Red Sea does not open soon — and there are no signs it will — the voyage-distance upside should ultimately be overwhelmed by the ongoing and massive wave of newbuilding deliveries.

Analysts have attributed the pull-forward effect to three drivers. First, general concerns over delivery timing due to Red Sea disruptions, prompting importers to bring in peak-season goods early. Second, concerns over labour action by the International Longshoremen’s Association (ILA), which represents dockworkers at US east and Gulf coast ports and has threatened to strike Oct. 1. And third, efforts to bring in goods before tariffs by the Biden administration on cargoes such as electric vehicles and solar cells enter force.

According to Stifel analyst Ben Nolan, “A good deal of the strength in rates is attributable to longer tonne-miles as a result of ships having to sail around Africa rather than [using] the Suez Canal. However, that would explain the move in rates shortly after the beginning of the year, but does not explain the increase in rates since May.

“We expect much of the recent uplift to be a function of shippers front-running a possible strike at US east coast ports by the ILA. Broadly speaking, consumption is not remarkable, particularly in North America, but imports are strong.

“At some point, either demand will have to rise or imports will need to decline,” wrote Nolan. “Perhaps the decline in box rates seen last week is no more than a single data point, or maybe it is the first indication of a broader shift.”

Risks ahead from ILA strike, Trump tariffs

Emily Stausboll, senior analyst at Xeneta, cited the apparent peak in spot pricing in a report on Friday, but also cautioned on two potential wildcards ahead: the ILA strike and import pull-forward if Donald Trump is elected as the US president in November.

She said data indicates “a growing number of shippers and freight forwarders no longer feel they need to pay higher and higher spot rates to ensure their containers are transported. The impact of a cooling upper end of the market can be seen in the slowing down in average spot-rate growth.”

Stausboll said the drop in Asia-US west coast spot rates “is perhaps a small yet significant crack in the dam, in that it demonstrates carriers have failed to make the mid-month [July] general rate increase stick, and shippers are regaining some negotiation power. It is also an example of how quickly market sentiment can change if shippers begin to feel more confident about available capacity.”

While she expects rates to soften going forward, as they did in March and April, she also advised caution.

“There is now a very real prospect of union strike action on the US east and Gulf coasts, while a Trump presidency could see businesses rush to front-load imports ahead of increasing tariffs on imports from China, as well as from the rest of the world,” she warned.

Divergent paths for liner stocks

The majority of carriers’ business is on contract, not spot, but the spike in spot rates caused by Red Sea diversions has clearly been captured by shipping lines. Carriers were expected to report big losses this year but have instead logged millions in gains, and their full-year earnings guidance continues to increase.

The effect on the four main liner stocks traded in Western equity markets — Zim and Matson in the US and Maersk and Hapag-Lloyd in Europe — have been mixed. Spot-rate gains and guidance upgrades have affected some stocks more so than others.

The stock of Matson, which provides expedited China-US west coast service in addition to Jones Act service, has been the biggest gainer over the past year, up 46% and steadily climbing over the period. Adjusted for dividends, Matson’s share price reached the highest point in its history on July 17, exceeding its Covid-era peak.

The most heavily traded container liner stock is Zim. Its adjusted share price is far below pandemic highs, but up 29% over the past year. Zim’s stock saw big gains after the initial Red Sea disruptions, as well as after the recent spot-rate run-up.

On a bearish note, Zim is particularly exposed the risk of an ILA strike at US east and Gulf coast ports. Such an event would cause spot rates to spike but would heavily curtail Zim’s throughput.

European liner stocks have underperformed US liner stocks. Although they have followed the same general pattern as Zim’s stock (up in the first quarter and again in the third), Maersk’s dividend-adjusted share price is down 17% over the past year, and Hapag-Lloyd’s is down 20%.