The recent agreement between the US and China, along with the tentative return of some container ships to the Suez Canal, has mixed and potentially disruptive ramifications for the container shipping market.
Ramifications of the US-China Trade Agreement
The broad agreement between the US and China, which includes a one-year pause on respective port fees and a reduction in tariffs and strategic trade barriers, is expected to have a mixed impact on container markets:
- Limited Direct Impact on Carriers: The port fees, which were paused, primarily targeted COSCO and Matson. Their impact on other carriers and overall global fleet deployment was limited, meaning the direct market effect of the pause is not substantial.
- Threat to Rate Restoration: More stable trading conditions resulting from the easing of tensions could derail carriers’ efforts to restore freight rates. Carriers had recently benefited from market turmoil, with the Shanghai Container Freight Index (SCFI) rebounding by 40% in the prior month.
- Immediate Rate Retreat: Freight rates are already retreating after their recent gains. Rates for North Europe and the US East Coast are coming under pressure. In contrast, rates to the US West Coast are “still holding up,” despite the absence of capacity discipline on that route.
Ramifications of Suez Route Redeployment
CMA CGM’s decision to send two FAL1 ships eastbound on the Suez Canal marks the first tentative step toward returning to the Red Sea route after two years of diversions around the Cape of Good Hope. This move has significant potential ramifications:
- Tentative and Selective Return: A wholesale return to the Suez route is not expected in the near term due to the high risks to vessel and cargo safety. CMA CGM’s redeployment is highly selective, focusing only on eastbound backhaul voyages to bring ships and empty containers back to Asia quickly after severe delays at European ports. Notably, they have not diverted any North Europe headhaul ships westbound through the Suez.
- Potential for Market Disruption: If all the containerships currently using the longer Cape route were to be redirected to the Suez, the market could be severely disrupted:
- Capacity Release: Over 130 ships with a total capacity of 1.95 million TEU could be “released.”
- Global Fleet Impact: This released capacity represents 5.9% of the global fleet.
- Market Impact: Such a sudden release would trigger severe disruptions to the freight and charter markets, likely leading to a steep decline in rates as capacity floods back into the system.
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Source: Liner Lytica
