Understanding Market Spread Volatility
Volatility in the market often results from a combination of factors, including geopolitical events, supply chain disruptions, and changes in demand. These factors can cause the spread between the highest and lowest market rates to expand rapidly. Smaller freight forwarders are typically the first to feel the impact, but as volatility persists, more players are drawn into the fray.
When the market experiences a spike, the spread between spot and long-term rates can widen dramatically. This scenario often leads to the risk of containers being rolled, a challenge that smaller forwarders face first. To avoid such issues, these players might resort to paying surcharges on existing contracts or switching to spot rates, which can sometimes be lower than the average.
Rate Spike Analysis: Far East to US East Coast
Let’s consider the specific example of the rate spike on the Far East to US East Coast route. The market saw a significant increase in the spread between the highest and lowest rates from $1,000 per FEU in December to $5,450 by the end of June. This was primarily driven by rising high-end rates. By the end of June, the highest rates had climbed by $5,640 per FEU, while the lowest rates increased by $1,200 per FEU.
However, in July, this spread narrowed to $1,730 per FEU. The lowest rates rose significantly, while the increase in high-end rates slowed. This reduction in spread often indicates the market is stabilizing after a period of catch-up where discounted rates for avoiding container rollovers are no longer available.
Market Extremes: Highs and Lows
The extreme values in the market, represented by the lowest and highest rates, reflect the conditions at the 2.5th and 97.5th percentiles, respectively. For instance, in early 2024, the low end of the Far East to US East Coast market was influenced by a few carriers offering competitive rates out of Japan. Over time, as the market adjusts, these extremes tend to converge unless there’s a collapse at the high end.
Mid-Range Market Dynamics
The mid-range market, represented by the spread between the mid-high and mid-low rates, is crucial as it covers 50% of the market compared to the 5% extremes. On July 24, the spread between mid-high and mid-low rates on the Far East to US East Coast was $490 per FEU, having peaked at $2,040 per FEU in mid-January. This year-to-date average spread of $830 per FEU is much higher than the pre-pandemic average of $200 per FEU, highlighting the ongoing volatility.
Trade-Specific Behaviors
Different trade routes can exhibit unique behaviors during volatile periods. For example, the Far East to Mediterranean trade experienced a high-low spread of $5,100 on January 15, shortly after the conflict in the Red Sea. Unlike the Far East to US East Coast route, where spreads increased dramatically, the Mediterranean route’s spread remained relatively stable, growing by $1,000 to $3,000 from April to July. This emphasizes the need for shippers to understand the specific dynamics of each trade route they operate in.
Analyzing Market Spread Dynamics
In the long-term market, the spread between the highest and lowest rates is also expanding, driven by different factors than the short-term market. For example, larger shippers often secure lower long-term rates. However, the recent spike has seen long-term rates influenced by the spot market. Contracts entering validity in July, negotiated during the market spike, have been higher than those they replaced. For example, high-end long-term rates on the Far East to North Europe trade increased from below $5,000 per FEU in May and June to $9,000 per FEU in July, an 80% rise.
Despite this, most new long-term contracts remain at lower levels, indicating that carriers are still focusing on maintaining key relationships by offering competitive rates. The lowest long-term rates for the Far East to North Europe route stayed at $1,230 per FEU, highlighting the carriers’ long-term strategic thinking.
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