Why are Container Freight Rates Increasing?
The cost of shipping has grown dramatically since 2020 and the new normal is all about the strong battle for capacity for sea freight. With additional capacity only coming slowly, freight will remain at unprecedented levels this year, and in the long run, might go beyond pre-pandemic levels.
As the global economy rebounded from the pandemic and commodities demand of COVID-19, the cost of shipping containers increased, and the lack of containers placed the supply chains under pressure. More recently, a combination of increased retail orders and a decreased turnover owing to outbreaks of COVID-19 in various countries led to higher pricing.
Since autumn 2020, shipping prices have also grown significantly, but during Q1-2021, the prices of various freight rates have risen further along key commercial routes (dry bulk, cargo containers). The fees for several commercial routes quadrupled as compared to last year, and have shown a comparable increase in the charter prices for container ships.
In the near term, there is no indication of respite and prices will probably continue to rise in the second half of this year as the increasing world demand continues to meet limited growth in shipping capacity and local lockouts.
Why are these prices rising?
Global imbalances are still pushing prices up
Problems that had accumulated since the start of the pandemic included mismatches in the supply and demand for products, with nations closing down and opening up at various periods, as well as shipping firms limiting capacity on important routes and a scarcity of empty containers.
Global demand, however, has rebounded strongly as the recovery continues. As economies continue to open up and stock increase, competition for maritime freight capacity has also increased in tandem.
Global shipping costs
Source: Sea-Intelligence
According to Xeneta statistics, the spot price per container on the China-US East Coast route, one of the world's busiest container routes, has climbed more than 500 percent year on year this week, reaching $20,804. On July 27, it was a little under $11,000. According to Freightos statistics, the China-Europe rate is approximately $14,000. Freight prices from Europe to the US East Coast range between $9,000 and $10,000 per container.
In recent weeks, the average freight costs have climbed to more than one-third of USD 3600 per TEU on North Europe and the US East Coast, due to increasing US imports, harbour congestion, container shortages, and the ship's available capacity.
As we can see from the chart below, North Europe to North America East Coast freight rates have seen a dramatic increase over a year reaching from USD 2500 to USD 10000:
North Europe to North America East Coast
Source: https://fbx.freightos.com/freight-index/FBX22
As per the chart below, North Europe to China/East Asia freight rates have also shown an increase but not as dramatic as North Europe to North America East Coast with the latest rates reaching the USD 1500 level from USD 1000 level in Nov 2020:
North Europe to China/East Asia
Source: https://fbx.freightos.com/freight-index/FBX22
Port Congestion and Restrictions Continue to Cause Delays
As the link between cancelled and delayed sailing shows, congestion is a problem. In 2021, shipping performance was on the same level as in 2020, in terms of lower rates for vessels on time and higher rates for vessels facing delays on average.
There are some indicators that average performance will begin to improve since the proportion of vessels arriving on time has stopped showing a downward trend in April and average delays have improved. However, the overall performance remains the lowest in 10 years of record.
Although operations have restarted, congestion and the ongoing necessity for steps to limit the spread of COVID-19 ensure that delays continue to accumulate. Following a verified incidence of COVID-19, the world's largest shipping port by cargo volume, Ningbo-Zhoushan Port, has shut down one of its main terminals, placing further strain on the global shipping sector and disrupting supply chains. The typical ship wait time at the Ningbo port was one to three days.
Delays in China-EU marine trade have increased from a half-day average in July 2020 to 2.18 days in July 2021. The average ship delay in June 2021 on the key Shenzhen-Hamburg and Shanghai-Hamburg routes was 7.86 days and 8.44 days, respectively. The average delay for ships travelling from Tianjin to Antwerp, Belgium in June, on the other hand, was 11.42 days.
While the progress of vaccination programs has been made in China and other key trade nations, the interruption will remain a danger over the next several months.
There being a severe lack of alternatives to what we know as ocean freight means it’s hard to avoid the surging transport costs. Alternative routes of transit for higher value items, for example by air or by rail, would typically be a possibility, but the capacity is limited at the moment, with rates rising. The expenses of freight have increased from approximately 5 percent to over 20 percent. Customers may begin to experience the effects through price hikes or changes in product availability.
An unbalanced recovery throughout 2021
Some nations are now exporting more products than before the pandemic, while others, notably the United States, are still lagging behind the general rebound in output. Trade commerce will expand further as major trading countries and their partners continue to recover. With competition for maritime freight capacity expected to increase, the uneven recovery will worsen some of the challenges in world trade, such as misplaced empty containers. All of this adds up to additional downward pressure on freight prices in the short term.
Reduced blank sailings will aid in alleviating capacity limitations.
Capacity on key maritime routes has rebounded to levels before the major lockdowns in 2020, while blank sailings (cancelled port visits) continued to reduce 10% of scheduled capacity during the first quarter. There are hints of improvement this quarter, which is expected to average 4%. However, cancellations are occurring in part due to congestion, thus there is always a danger of shipping capacity being removed at short notice.
Other notable challenges in the market
Contract rates have risen by roughly 40% internationally since the beginning of the year (by about 15% to $4,400 on the Asia-to-East Coast channel). Large shippers who have lower rates in their yearly contracts than spot prices have to pay substantially more for maritime shipping.
Certain port calls are being omitted entirely by some carriers. The Alliance has followed the 2M alliance's announcement that it will not stop at Rotterdam, Netherlands, on its Asia-North Europe loops for the next seven weeks. Meanwhile, Maersk and Mediterranean Shipping Co. are bypassing Hamburg, Germany, on their AE7/Condor circuit for another four weeks due to ongoing congestion.
Capacity on the West Coast of Asia-US route is so limited and the demand so high, that most carriers commit offline bidding wars and related activities to carry goods on a ship.
What does the Future Hold and When Does it End?
Price pressures will be eased when additional container capacity is introduced, but that is not bound to happen before 2023.
Analysts predict prices to rise further in the following weeks, and with trade growth expected to outpace fleet expansion, there won't be any respite in supply until new ships begin to enter service in 2023. In terms of the long-term outlook of container prices, they will most likely settle above $5,000 per FEU, indicating a competitive market for container rates.
As recovery continues to happen and with a forthcoming increase in the capacity of the sea freight system, it is unlikely that a reduction in shipping costs will go back to pre-pandemic levels.
In the short term, freight rates may hit new highs as a result of increased demand and the restrictions of a congested system. Even if capacity restrictions are alleviated, freight prices may remain higher than before the pandemic. With ports already operating at more than 100% capacity before this wave of price surge hit it is clear that there is a huge gap between Container shipping capacity and worldwide demand, and the industry is unable to meet all of it, which is driving up freight prices.
Other factors such as congestion in Los Angeles, the Suez Canal being closed for a week, and major ports closed in China for more than a week have only increased the problem. Wildfires are responsible for the disruption in the inland intermodal operations on two major rail lines, floods ravaged industry and river barge service across Europe, and backlogs at industries and ports in Vietnam and Malaysia have resulted from COVID lockdowns. The shutdown of Durban's marine ports was triggered by civil unrest in South Africa. China is also facing shipping delays because of Typhoon In-fa.
In conclusion, it is safe to say this price increase can be seen mostly as an infrastructure capacity issue rather than an ocean capacity issue.