The gap between short-term and long-term ocean freight rates has widened, resulting in a market stalemate.

• Since September 2021, the gap between short-term and long-term ocean freight rates has been the widest, amounting to $2,500.
• After six consecutive weeks, ocean spot freight rates have fallen following a spike caused by Red Sea diversions.
• The crucial months for ocean carriers to secure their annual freight contracts with shippers are March and April, and currently, neither party is willing to concede.

This year, annual freight contracts with shippers, including the world's biggest retailers, are becoming increasingly challenging for ocean carriers to secure during the months of March and April.

The spread between spot market rates and long-term freight contract rates for Asia to U.S. West Coast containers has reached its highest level since September 2021, when the spread between short-term rates and long-term rates was $2,900.

The Red Sea diversions have caused shippers to hesitate before signing with ocean carriers, who are looking to charge higher spot rates, while shippers are waiting for a steeper decline in prices.

The Shanghai Containerized Freight Index dropped by 6% for the sixth-consecutive week, causing ocean spot freight rates to tumble. Ocean carriers were unable to implement a mid-March rate increase, and the expectations of an April rate hike are dwindling due to soft demand.

Xeneta's chief analyst, Peter Sand, tells CNBC that shippers are waiting to determine if the spread narrows before deciding how much to purchase on the spot market versus contract.

The decline in ocean freight rates and contracts, which affected the profits of ocean carriers such as Hapag-Lloyd and Maersk, led to a drop in earnings for these companies in Q4.

According to Christian Roeloffs, co-founder and CEO of container trading and leasing platform Container xChange, there is a significant imbalance between supply and demand price expectations for containers.

The current spot rate environment is benefitting shippers.

Sand stated that "[Ocean] carriers are seizing this present market chance to profit,".

Ultimately, he says time is on their side.

"By the end of April, all contracts signed last year will expire, and shippers may need to ship all product on the spot market. However, no large-scale shipper can go all in on the spot market as it is not the preferred option, according to Sand."

Shippers can manage rates through the terms of the contract duration and by incorporating renegotiation clauses, as per Sand's statement.

According to Michael Aldwell, executive vice president of sea logistics for Kuehne+Nagel, many businesses are delaying decision-making.

Will the Red Sea congestion issue persist? How severe is it? Will short-term freight rates continue to rise after the initial spike? In the upcoming weeks, businesses are expected to make more agreements. Given the uncertainty, this makes sense, Aldwell stated.

Full year 2024 outlook for ocean shipping

The logistics industry is facing disruptions that will persist throughout the year, but the increase in shipping costs has not been as significant as the rise in spot rates during the Red Sea attacks and Panama Canal drought, resulting in a pricing reversal.

Rogers stated that the rates are likely to decrease further and this trend may persist until the end of the year.

Vespucci CEO, Lars Jensen, stated that he anticipates the spot rate decline to persist, although rates will fluctuate based on the specific global trade lane.

"According to Jensen, there will be significant increases in contract rates from Asia to Europe and Asia to U.S. East Coast due to the absence of the Suez. However, he is not convinced that there will be a dramatic increase in contract rates to the U.S. West Coast."

According to Zvi Schreiber, CEO of Freightos, although the cost of shipping from Asia to the West Coast is lower than that of the East Coast due to its shorter distance, it has increased due to the impact of geopolitics and climate change.

"Schrieber stated that the Suez diversions have a significant impact on the entire network. Although the Panama Canal is currently recovering from its drought, it is still operating below its full capacity. The canal relies on rainfall to fill the locks, and importers prefer to bring their goods to Long Beach port because they are not dependent on the Panama Canal."

The Port of Los Angeles experienced a 60% increase in container processing in February 2024 compared to the same month the previous year. This was the seventh consecutive month of year-over-year growth at the nation's busiest port. Over the past two months, the port has seen a 35% increase in container processing compared to the same time frame in 2023.

A potential longshoremen strike in the fall could pose another challenge for East Coast ports.

Roeloffs stated that buyers anticipate price decreases in the near future, while sellers are withholding their inventory because they expect prices to remain constant due to limited capacity.

Roeloffs stated that the Red Sea diversions and an unbalanced trade environment are exacerbating problems in the container market. He cited China-Russia trade as an example, with Chinese exports to Russia increasing by 12.5% year-over-year in the first two months of 2024, while imports rose by 6.7%.

The increasing trade disparities have influenced the amount of work required in the supply chain to relocate empty containers.

"According to Alan Murphy, co-founder and CEO of Sea-Intelligence, there is a 20% increase in the need to move empty containers. However, the consequences of this increase are not yet visible because the empty containers have not been repatriated. The question is whether the surplus of empty containers is in Asia or across North America or Europe. Longer transit times can extend supply chains and tie up more equipment in them. This could be a downstream consequence of the Red Sea crisis, which could push rates up again."