Maersk Admits Freight Rate Power Shifted in Carriers’ Favor & Red Sea Return Emphasizes Shippers’ Disadvantage

Freight Rates behave differently this decade than they did through previous periods. The prices shippers pay climb, even skyrocket, seemingly with every disruptive event. But freight rates don’t fall like they used to, even in the face of overcapacity.

Since the pandemic hit, we’ve talked about carriers’ abilities to control capacity through coordinated blank (cancelled) sailings. In fact, Universal Cargo’s blog warned for years leading up to 2020 about the dangers of carrier alliances dominating the international shipping industry and shrinking competition. Now, the floor for freight rates seems much higher than it used to be. The market has shifted, giving carriers more pricing power while putting shippers at a disadvantage.

But don’t take our word for it. The world’s second largest carrier by capacity is saying so.

Greg Knowler reported in the Journal of Commerce (JOC):

Container shipping has become a more asymmetrical business since the pandemic, with freight rates capable of surging far more sharply during times of disruption than they can fall during periods of oversupply, according to Maersk CEO Vincent Clerc.

A $300 freight rate increase that once took weeks to negotiate before COVID-19 can now be secured in an afternoon, Clerc told reporters this week, illustrating how sharply pricing power in container shipping has changed over the past six years.

Have Shippers Gotten Too Accustomed to Freight Rate Rises?

When freight rates skyrocketed during Covid, there were many voices from shippers shouting that carriers were profiteering.

There were some shouts of profiteering when carriers skyrocketed freight rates after attacks on ships happened in the Red Sea, causing carriers to divert container ships.

However, with price hike after price hike following every disruptive event, including wars (which are often the first thing people think of in terms of profiteering) shipper complaints have seemingly gotten quieter and quieter. It’s almost like carriers have worn shippers down with the pervasive number of freight rate hikes to the point that shippers have just gotten used to it. And, as reported in the JOC article, Maersk points to shippers now being accustomed to accepting freight rate increases when capacity is constricted as a reason for a higher floor to freight rates:

“You cannot lose more than you could before because there’s a natural floor to the price, and you can make a lot more than you could before,” Clerc said, noting customers are now accustomed to accepting higher rates when shipping capacity is suddenly constrained.

I’d point out that capacity constraints are often created by the carriers themselves through blank sailings as a great deal of capacity has been entering the market over the last several years, with even more capacity on the way. Overcapacity used to create unhealthily low freight rates for carriers. That was part of the symmetrical nature of the freight rates that used to exist when they’d fall to shippers’ favor and then rise to carriers’ favor. Gaining capacity control over the market, particularly through carrier alliances and coordinated blank sailings, Carriers are no longer afraid of freight rates falling to unhealthy levels through overcapacity.

In fact, Keith Wallis reported in the JOC about Maersk spending around $9 billion for up to 42 container ships, including twelve 24,000-TEU vessels. This when the industry is already looking at what should be a period of overcapacity.

Incredible profit levels for carriers during and after the pandemic, when carriers really flexed their ability to manipulate capacity through blank sailings, gave a big boost to carriers’ confidence. Just look at Maersk’s profits alone, as reported by Knowler:

In 2020, the year COVID-19 was declared a pandemic, Maersk reported an annual net profit of $2.8 billion. That ballooned to $17.9 billion in 2021 and peaked at $29 billion in 2022.

That kind of profit gave carriers big cushions for periods of low freight rates, but carriers also learned how to keep freight rates from falling too low or for extended periods of time. Again, Maersk’s executive opened up about it for Knowler to report:

While rates can still fall sharply when there are too many ships, Clerc said they cannot fall indefinitely because carriers can withdraw capacity and higher operating costs have created a floor.

…

Clerc said the improvement in pricing power initially appeared to be a temporary consequence of COVID and the pandemic’s impact on supply and demand. But it has persisted through subsequent disruptions, including the Red Sea diversions, US-driven tariff uncertainty, and the Middle East war.

Now shippers know and seemingly fully accept that any kind of disruption means a jump in freight rates. It’s also become an accepted fact that when demand falls and overcapacity should make freight rates plummet that carriers will use blank sailings to limit those freight rate drops.

Early Return to Red Sea Shipping Exemplifying Limited Drops Compared to High Increases

When carriers diverted ships from the Red Sea, freight rates exploded. It came at a good time for carriers when overcapacity was supposed to put downward pressure on freight rates. Instead, rerouting voyages down and around Africa ate up a significant amount of capacity. It took more ships and more time to move the same amount freight.

Now that shipping is returning to the Red Sea, that should be an injection of capacity into the industry. Classic supply/demand principles would tell you that should result in lower freight rates. However, shippers are not seeing those early returns at the level they should normally expect.

In a JOC article specifically about transits freight rates through the Suez Canal, and thus the Red Sea, Knowler reports:

Ocean carriers are now moving 213,000 TEUs a week on Asia-Europe routes via the Suez, cutting 14 days off the voyages and consuming up to 30% less fuel than sailing the longer route around the Cape of Good Hope.

A third of deep-sea traffic diverted since Houthi militant attacks began in late 2023 has now returned to Red Sea and Suez transits — but don’t expect that to show up in freight pricing, said Destine Ozuygur, senior analyst at Xeneta.

There has been some dropping of freight rates that coincide with the return to the Red Sea/Suez Canal and falling demand from the peak season naturally cooling down. However, freight rate drops don’t happen at nearly the level they rise, and carriers still have charges to tack on to help temper falling rates.

It should be noted that there are legitimate factors outside of carriers’ control that constrain capacity and/or add to their costs. Carriers have become good at passing such costs on to shippers. Here’s a taste of surcharges going into effect today for shippers relating to the usage of the Red Sea and Suez Canal reported by Knowler in the JOC:

Despite the shorter voyages, there were added costs that had to be factored into Suez transits, Ozuygur said.

“I doubt the reduced fuel cost will offset what carriers are charging shippers because of the higher insurance rates, piracy risk surcharges, and Suez tolls, and how would that change the Med premium?” she said.

Mediterranean Shipping Co. last week announced a piracy risk surcharge of $55 per TEU and a Suez Canal surcharge of $36/TEU that will be applied from Sept. 15 on all Asia-Mediterranean and Black Sea routes.

“The security situation of piracy risk around the Arabian Peninsula is affecting vessel operations and transit routes, causing disruption throughout our network,” MSC said in an advisory.

The Suez Canal Authority in July added a 12% surcharge for container shipping to its standard toll fees, with a one-way transit costing up to $1.5 million for an ultra-large vessel of 14,500 to 23,000 TEUs.

The Good News

Despite the pricing power shift that has happened in carrier’s favor when it comes to international shipping, there are still factors that create downward pressure on freight rates. Carriers can mitigate that downward pressure, but they can’t completely negate it. Freight rates do drop.

And when downward pressure factors stack up, there can still be significant freight rate drops for shippers. There are a few such factors, and large ones at that, to make freight rates better for shippers in 2027. Check those out in a Universal Cargo blog post from a couple weeks ago: 3 Reasons 2027’s Market Will Be Great for Shippers with Downward Freight Rate Pressure.