Rise in transpacific contract rates could be long-lasting

Contract rates usually follow the trend of spot rates, with a time lag built in. But recent contract rates for the transpacific are 15% above where key Chinese index SCFI suggests they should be, and could remain above trend for some time.

Transpacific shippers could be facing a new level of contract rates after the measure broke with their historical correlation to spot market rates.

An analysis of both contract and spot market rates shows that contract rates have largely tracked spot rates during the past five years, with a three to four-week time lag after which contract rates catch up with spot rates.

“There is a high correlation between the Shanghai Containerised Freight Index [spot] and the China Containerised Freight Index [contract] rates for the Asia–Europe trade, peaking at a three-week lag time,” Sea-Intelligence said.

“Essentially, this means that with a 95% correlation, the SCFI is able to predict the CCFI contract index three weeks into the future. This in turn means that the contracts being negotiated are heavily influenced by the prevailing spot rates.”

On the Asia–Europe trade, this correlation has held firm during the pandemic, other than a slight easing of contract rates during the summer of 2020.

“By autumn, this gap was closed, and aside from some week-on-week volatility, the deviation from the model remains essentially zero in the current market environment,” the analyst said.

“This means that contract rates on Asia–Europe remain extremely tightly linked to the spot developments. Of course, this also means that if a shipper believes spot rates are going to retract from the current elevated levels, now may not be the best time, from a pricing perspective, to sign longer-term contracts.”

During the next few weeks, shippers could expect Asia–Mediterranean contract rates to “flatten” and for those to northern Europe to decline slightly.

The same has historically held true for the transpacific trade, with US east coast destinations following spot rate developments with a four-week lag.

“In the early phases of the pandemic, we see the contract rate index develop well in line with the model indicated by the spot rates, maintaining the same market correlation as in recent years,” said Sea-Intelligence.

“However, it is also clear that in December 2020, the contract rates start to move  above the level expected from the spot market. The spot market developments would normally have led the contract rates to level out, however, it is very clear this did not happen.”

Both transpacific trade lanes are now at a point where the contract level is 15% higher than would be expected based on spot market developments.

High contract rates could be attributed to shippers trying to secure transport during the current disruption in the market. Shortages of equipment, terminal and inland capacity have led to cargo rollovers and delays.

But if this were the case, it would also be behind the rise in spot rates.

“What we are seeing here is in reality, that the contract market is even more affected than the spot market,” it said. “This could very well be a signal, that the contract market is in the process of reversing the level shift which took place in 2016.”

While the situation may turn out to be a short-term aberration that self-corrects when the shortages are resolved, that the deviation from the norm only exists from December indicates higher contract rates may be more long term.

“To put it very simply, from a shipper perspective, prepare for permanently higher contract rates on the transpacific, but also that the current levels right now might have overshot the mark,” Sea-Intelligence said.

Source: Lloyd´s