Shippers jockey for limited vessel space, but some companies are getting priced out of the market for international freight transportation Photo of Eric Kulisch, Air Cargo Editor Eric Kulisch, Air Cargo Editor Follow on TwitterFriday, July 30, 2021 11 minutes read A stack of ocean freight containers with dollar bills added to image to show how expensive shipping has become. Container rates have hit the stratosphere this year. It's a function of too many shipments chasing too few boxes. (Photo: Jim Allen/FreightWaves)
The blows to the global supply chain never seem to end in 2021, resulting in delays that have sharply reduced the system’s effective capacity and put upward pressure on shipping rates that began reaching record highs months ago. Purchasing ocean transportation has become so expensive that many companies with lower-value commodities can’t afford to import anymore, analysts and logisticians say.
Vessel operators have no extra ships to meet a tidal wave of freight demand, containers are in short supply or can’t get quickly repositioned where needed, and destination ports are piling up with boxes because they can’t keep up with the volume. The logjam, which is adding weeks of delay for major export trades from Asia, has been exacerbated by a series of weather- and COVID-related events, as well as operational mishaps.
How extreme is the situation?
One ocean carrier told a company it would cost $32,000 to ship a group of standard containers from Shanghai to Los Angeles, Craig Grossgart, senior vice president of ocean at SEKO Logistics, said during a briefing for reporters late last month.
“It was a nice way for the carrier to say, ‘We’re not interested in any more business,’ ” Grossgart said.
The quote was an outlier — the type primarily for customers asking to move large backlogs of boxes all at once — but is an indication of how desperate some shippers are and how selective carriers can be when they hold the cards.
On Wednesday, the Freightos Baltic Daily Index adjusted its methodology for tracking ocean shipping rates to include for the first time premium surcharges required for bookings, substantially raising transparency into the real cost paid by cargo owners.
The index shows Asia-U.S. West Coast rates at $18,345, six times higher than a year ago, and the price for shipping to the U.S. East Coast quadrupled to $19,620 per forty-foot equivalent unit. Rates from Asia to Northern Europe climbed 4% since last week, and are more than eight times higher than a year ago and 2.5 times more than at the start of the year.
Soaring transportation inflation is more than some can absorb.
Importers of low-value commodities, such as wooden assembled furniture, that built their business models around $1,400 shipping rates have stopped placing orders because they are losing money under current market conditions, according to shipping analysts and practitioners.
“We’ve seen customers have to make really tough decisions, prioritizing what inventory they absolutely need and which they don’t. And at a certain point, some businesses are just being priced out,” Judah Levine, research lead at Freightos, said during a company webinar last week.
Shippers say they are unable to get containers or space on vessels at ports of origin, as demand for ocean freight continues to outstrip supply, keeping ports congested and prices high.
The main culprit is breakout consumer spending in North America, which has increased import levels by 10% in the first half of 2021 compared to 2019. The demand is pulling ships and equipment from other parts of the world, creating scarcity in those regions.
Consumer spending in the European Union is up 1.4% from 2019, comparable to normal annual growth.
The massive tide of imports has cascaded into air transport, trucking, rail and warehousing, overwhelming capacity in many commercial centers. Carriers canceled many sailings to help restore schedules.
A large container vessel heading to the Port of Houston. (Photo: Jim Allen/FreightWaves) As if that weren’t enough, Chinese factories didn’t take a normal break during the Lunar New Year holiday, preventing transport networks from taking up some slack. COVID outbreaks severely reduced productivity at ocean terminals, and then a big ship, the Ever Given, got stuck in the Suez Canal — adding to the backlogs.
Just when logistics managers thought there might be a chance to improve freight flows, more supply chain fires have flared up — literally.
The resumption of normal activity at the massive Yantian port in China following a partial COVID-related quarantine was cause for optimism. But this month:
Wildfires have disrupted inland intermodal traffic on two major rail lines serving the Port of Vancouver, Canada. Devastating floods in Europe knocked out factories and river barge service. COVID lockdowns have created factory and port backlogs in Vietnam and Malaysia. Civil unrest in South Africa forced ocean terminals in Durban to close. Typhoon In-fa is causing shipping delays in China. Meanwhile, major U.S. freight railroads are metering intermodal freight from ports to Midwest hubs to restore degraded service levels, with Union Pacific going as far as suspending service for a week from West Coast ports to Chicago.
The amount of time it takes for a box to get from a vessel onto a train at the docks is 18 days in Seattle, two weeks in Oakland and more than a week at the Port of Savannah, according to the latest data from Sea-Intelligence
The ocean delays have soaked up the equivalent of 25% of all trans-Pacific capacity, while demand has soared 25%, the container shipper analyst said.
“That is equivalent to taking every large vessel bigger than 18,000 TEU out of rotation, parking all the mega-vessels in the world,” Sanne Manders, chief operating officer for Flexport, a San Francisco-based freight forwarder, said Wednesday during a company webinar.
Transit times, including cargo staging at origin and the vessel voyage, from Shanghai to Chicago via the port of Los Angeles/Long Beach have more than doubled to 73 days from 35 days, he said. That means it takes 146 days for a container to circulate back to the point of origin for reloading, effectively reducing container capacity by 50%.
On Thursday, Drewry’s World Container Index increased 4%, or $344, to $9,330 per FEU, a 368% increase from the same week a year ago. Freight rates from Shanghai to New York soared 13%, or $1,562, to reach $13,434 per FEU and increased 6%, to $10,503, for transit to Los Angeles. But those are the averages for short-term transactions before any accessorial charges are tacked on.
The current floating average spot market rate – basically an average of averages – from Asia is $10,000 to the U.S. West Coast. Add $3,000 to $9,000 in equipment surcharges and priority loading premiums, and the effective rate to move a box is $13,000 to $19,000 — 10 times more than before the crisis, according to analysis by Flexport. Average rates are $2,000 more to the East Coast, putting the true shipping cost at $16,000 to $21,000. To Northern Europe, the effective cost is $15,000 to $20,000.
And the pain for shippers could soon increase as the traditional peak season kicks and carriers begin charging port congestion and demand-surge fees, while limiting intermodal bookings. Container line Hapag-Lloyd, for example, will apply a $5,000-per-FEU surcharge for trans-Pacific eastbound shipments starting in mid-August, and other carriers are formalizing similar fees.
Trans-Atlantic rates to the U.S. had been relatively stable but have spiked in the second quarter as carriers pull capacity to other regions of high demand. Shipping from Europe to South America, for example, has gone from about $800 to $900 a box to more than $3,000, Freightos data shows.
Large shippers that have annual contracts that are lower than spot rates are also paying significantly more for ocean transportation. Many carriers are not honoring the contract rates to take advantage of the frothy spot market. Since the start of the year, contract rates are up about 40% globally (about 15% to $4,400 on the Asia-to-East Coast lane), according to data from Oslo, Norway-based Xenata, which benchmarks and digitally analyzes freight rates. Rates increased 2.3% in June, after surging 9% in May.
Capacity in the Asia-U.S. West Coast lane is so constrained and demand is so strong that most shippers are engaging in offline bidding wars and leveraging relationships to get loads on a vessel.
Since not everyone is paying the benchmark rate, freight indices, especially the Shanghai Container Freight Index, have lost their accuracy, logistics managers say.
(For more information about SONAR click here.) The higher rates aren’t resulting in better service. In fact, schedule reliability — within a day of scheduled arrival — for ocean carriers is about 35% to 40% globally, and 25% at West Coast ports, according to Sea-Intelligence. Three-quarters of vessels that are late are late by 10 days.
Some carriers are omitting selected port calls altogether. The 2M alliance recently announced it would not be stopping at Rotterdam, Netherlands, on its Asia-North Europe loops for the next seven weeks, with THE Alliance following suit. Maersk and Mediterranean Shipping Co., meanwhile, are skipping Hamburg, Germany, on their AE7/Condor loop for another four weeks due to ongoing congestion.
While shippers of high-value goods that rapidly lose value with time, such as electronics and fashion, may be willing and able to pay almost anything to get trapped inventory moved, others have pulled back because shipping costs have erased profit margins.
They are forcing some companies to hold off on new orders, consider sourcing products in Mexico or Central America, or make other adjustments.
Xenata CEO and co-founder Peter Berglund said some customers are now paying $300 million per year for freight transportation that previously had a logistics budget one-third that size.
“If you’re Nike or Adidas moving sneakers, you can do it. But if the value of cargo inside the container is $30,000 and you pay $11,000 to move the box, then you have a huge problem,” he said on the June 30 edition of “WHAT THE TRUCK?!?” on FreightWavesTV.
Port of Los Angeles (Photo: Jim Allen/FreightWaves) An average 40-foot container holds about 300 refrigerators. Before the pandemic, the transportation price spread among them was $12 to $16 per unit. Now, it’s closer to $70, said Akhil Nair, vice president of global carrier management and ocean strategy in the Asia-Pacific for SEKO Logistics.
“That’s a significant percentage of the retail price when you can buy one for $300,” he said. “There will be some room to raise the prices to the consumer, but if that happens across the board, across all segments, I think that’s where [demand could eventually drop.]
When does it end?
The consensus among logistics executives is that the transportation crunch won’t ease before the Chinese Lunar New Year next February.
Robert Khachatryan, founder of Freight Right Global Logistics, is even more pessimistic about how long current conditions will last unless consumers get spooked by inflation or there is an outside event that slows the economy.
“I don’t expect demand to curtail or the dynamics to change probably until mid next year, and even that may not hold. It all comes down to, is there a new equilibrium for prices?” he said on a recent Freightos podcast.
“This isn’t even an ocean capacity issue, it’s an infrastructure capacity issue,” he added. “Even before we get to peak season, the Port of Los Angeles is operating at about 160% capacity, so it doesn’t matter how many ships you add if you were able to add ships, the problem is not going away. So the demand needs to go down by 60-70% for us to see a real improvement.”
U.S. consumers have plenty of extra spending power these days after saving more during the COVID crisis, with the monthly average savings rate nearly doubling to 13.6%. Enhanced unemployment benefits won’t end until September, and the government recently began issuing billions of dollars to families in advance payments for child tax credits, which the American Rescue Plan raised to $3,000 with a $600 bonus for children under the age of 6.
Shopping for fashion and back-to-school items is expected to be strong as people replenish wardrobes for work and buy materials for the classroom for the first time in two years.
There are, however, some cautionary economic notes.
The delta variant is spreading rapidly, there are growing numbers of breakthrough infections for vaccinated people and U.S. hospitalization numbers have quadrupled this month. People may not be as willing to travel or return to an office because of the increased risk of infection.
Meanwhile, consumer confidence has fallen dramatically, according to research from Morning Consult. And, while retail sales increased in June, the increase was largely due to higher prices. Spending actually declined, which could be a sign of slower second-half growth.
But, experts say, with inventories at record lows even if demand growth ends, restocking will continue to drive trans-Pacific trade for several months.
More immediately, the National Retail Federation is projecting import volumes at U.S. ports to spike in August at the front end of the traditional peak season, indicating to many industry observers that importers are placing orders early to avoid delays of holiday merchandise. Ocean imports are expected to taper in the fall, but with double-digit increases compared to 2019, the decline isn’t likely to significantly reduce rates or delays.
Logistics managers say peak season freight has already been pulled forward this summer and Henry Byers, FreightWaves’ ocean market expert, predicts that will result in the longest vessel wait times that have been seen since early February when 25 to 40 ships queued for up to eight days waiting for a berth. A huge number of containers also will be routed to East Coast ports.
“As of May we were shipping Christmas products already. We have people trying to get their product to the U.S. whenever there is space available,” said Khachatryan. “They’re not going to wait until September.”
SEKO Logistics is urging customers to book with carriers eight weeks ahead of planned departure because each week that goes by could add many more waiting in line, said Chief Growth Officer Brian Bourke. That type of pre-commitment requires strong communication and factory forecasts from shippers, he explained.
According to a fact sheet on the logistics provider’s website, retailers that need product on the store shelf by Nov. 1 should make sure it gets on a vessel by Aug. 21 for East Coast destinations and by Sept. 3 for Western locations.
Key dates for Christmas season store delivery. (Source: SEKO Logistics) “We’re asking clients to plan as far into the future and as accurately as possible for bookings of containers. And if those forecasts are accurate, seasonal planning can work better. When there are fluctuations, when you go beyond or under what’s expected, that’s when problems occur.
“That’s why communication and accuracy are all super important because it helps us lock in beyond three or four weeks,” Bourke said.
Freight forwarders describe a frenzied environment, similar to that of stock traders, and having crews working all night to confirm bookings with U.S. clients when container allocations open up in Asia. They encourage customers to book the moment they get word a carrier has released slots because reservations can be filled in less than an hour.
“If you flinch, it’s gone,” said Khachatryan. “All the shippers are seeing this and next year they’re going to start ordering earlier. So this is why we don’t think there is going to be a slowdown next year, possibly at all. Next year they may be shipping in March for Christmas.”
Analysts expect rates to increase further in the coming weeks and with trade growth forecast to exceed fleet growth there won’t be much relief in supply until new builds start to hit the water in 2023. As for the long-term future of container rates, Khachatryan predicted they won’t return to the low levels from before the pandemic.
“It will probably settle above $5,000 per FEU. And, in reality that’s the true market rate, where ocean carriers don’t lose money. You can’t have such a vital part of the industry constantly operate at a loss.
“When your freight rates are so high that cheaper products are basically priced out of the market, this change is permanent. Quite literally manufacturing is returning to the U.S. With a more automated manufacturing environment, it means these goods won’t ship by ocean.”