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.
Unicorn market
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.
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.
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.
Post time: Aug-05-2021