Geopolitics, container shipping pricing, and Taiwan’s gloomy sign

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Xeneta: Long-term China-Taiwan rates are now similar to China-LA rates.

A container ship travels 600 nautical miles from Shanghai to Kaohsiung, Taiwan. A container ship travelling from Shanghai to Los Angeles travels 9.5 times longer — 5,700 nautical miles — and consumes significantly more fuel. Despite this, current long-term contract rates for these two very distinct trades are now almost the same, at around $2,000 per forty-foot comparable unit, according to Xeneta.

According to Xeneta, contract rates on the short-haul route between China and Taiwan have risen since the beginning of the year. Geopolitical risk is to blame.

“It’s quite fascinating: $2,000 from China to Taiwan, the same as crossing the world’s largest ocean.” “That is something to consider,” said Erik Devetak, Xeneta’s chief product and data officer.

While the China-Taiwan scenario is unique, geopolitical tensions are rising worldwide. What is happening in this ocean trade could have huge ramifications for future global supply chain costs if it is replicated in a much wider corridor.

“This circumstance [China-Taiwan rates] is really unique… “However, we’re going to see a lot of this,” Devetak predicted. “Geopolitics is going to make a difference in the future.”

Rates between China and Taiwan vs. China and Japan
Xeneta studied two intra-Asian lanes to highlight the magnitude of recent movements in long-term rates: China-Taiwan and China-Japan.

“At the beginning of this year, the rates were roughly equal. You paid the same to Japan as you did to Taiwan. “The two have clearly moved in very different directions,” said Xeneta market analyst Emily Stausbell.

“The gap between them is growing wider. It has risen to about $750 [per FEU], which is roughly half the rate you’d pay merely to enter Japan,” she explained.

long-term contract pricing (Chart: Xeneta April State of the Ocean Freight Marketing webinar)
“It’s not quite the same in the spot market,” Stausbell went on to say. “The spot market spread is rising, but not to this extent, owing to the fact that this is a trade fraught with geopolitical risk.”

“When you’re looking at doing those long-term contracts, the risk is much heavier than it would be on the spot market with that shorter time scale where you’re more certain of how things are going to go.”

“There are risks of disruptions, from military exercises and so on,” says Devetak. That danger is more of a long-term uncertainty, therefore the longer the contract, the more risk you take. I believe we are starting to see ocean carriers take geopolitical risk into account when pricing long-term contracts. Going for a long-term contract in Taiwan is risky.

“I also wonder how geopolitics will affect the length of contract people are willing to take,” he added. “With a more uncertain world, in terms of geopolitics and thus indirectly in terms of supply chains, longer-term commitments potentially become less appealing to the supplier.”

Except for Taiwan, spreads are narrowing.
Freight rate disparities between different port pairs were widespread during the COVID-era boom, but they are presently narrowing. The disparity between China and Taiwan rates vs other port pairs is an outlier, highlighting the importance of geopolitical risk.

“We’ve seen it moving in the opposite direction to what we’ve seen in other trades, where they’ve really been coming down,” Stausbell explained.

“If you look back a while, you can see that the rates out of China were much lower than the rates out of Japan, Korea, and Taiwan when they exported to the United States or North Europe.” Those outbreaks have now returned to where they were prior to the epidemic.

“In the past, the spreads were really driven by [ocean transport] capacity constraints,” Devetak added. Until recently, that was the driving force. This year’s spread driver is extremely different. It is most emphatically not capability. Even in intra-Asia, where demand has risen faster than expected, there is no capacity constraint.”

“Spreads are generally coming down,” Stausbell added. Only in trades where there is something more special going on do we witness the contrary.”

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