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Growing Concerns as Ocean Freight Rates Could Exceed $20,000 with No Relief for Global Trade Until 2025

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Benjamin Hughes

June 25, 2024 - 13:15 pm

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Far East to U.S. Ocean Freight Rates Skyrocket

Far East to U.S. ocean freight rates have surged between 36%-41% month over month, while air freight prices have jumped 9% this year. DHL indicates that ocean freight rate inflation might not ease up before the Chinese New Year in early 2025, with some forecasts predicting rates reaching between $20,000 and a Covid-era peak of $30,000. The longer Red Sea transits are causing a shipping container capacity shortage and canceled sailings from Asia, which are driving spot ocean freight rates higher.

Rising Freight Rates Amid Low Demand

Demand alone cannot explain the recent price hikes, as ocean freight orders have dropped by 48% month over month. Despite the Federal Reserve and U.S. economy receiving good news on inflation with softening consumer and wholesale prices, a major global trade inflation indicator is heading in the wrong direction. Rising freight rates are a new source of concern in the global supply chain, with forecasts warning that ocean cargo prices could reach $20,000 — potentially even touching the Covid-era peak of $30,000 — and stay there into 2025.

Impact of Surging Spot Ocean Freight Rates

Spot ocean freight rates from the Far East to the U.S. have increased by 36%-41% month over month, with ocean carriers increasing additional charges, known as general rate increases, by roughly 140%. These costs have taken the price of a 40-foot cargo container to about $12,000. "This index data confirms what we are seeing from our data and hearing from shippers," said Paul Brashier, vice president of global supply chain for ITS Logistics. A lack of containers and limited vessel capacity overseas has forced shippers to move to the spot market to find equipment to load out at origin. "That is significantly driving rates to levels not seen since the post-Covid crisis two years ago," he added. Freight is also bottlenecked at port terminals due to extended dwell times, and empty containers to load with goods are very scarce, Brashier noted.

DHL's Outlook on Freight Rates

Goetz Alebrand, head of ocean freight at DHL Global Forwarding Americas, expressed pessimism about freight rates declining anytime soon. "It is unlikely that the situation will resolve itself soon and ocean freight rate levels might not ease up before Chinese New Year," Alebrand said.

Potential to Reach Peak Covid Era Rates

On Thursday, Sea-Intelligence issued a note forecasting that Asia-Europe spot prices could exceed $20,000, considering the Red Sea crisis and the increase in nautical miles traveled. "The pandemic set a precedent, which is that during times of severe distress, freight rates per nautical mile can reach these very high levels," said Alan Murphy, Sea-Intelligence CEO. The Defense Intelligence Agency's report on the economic impact of the Houthis' Red Sea attacks indicated that container shipping through the Red Sea had declined by approximately 90% between December 2023 and mid-February. Alternate shipping routes around Africa not only add about 11,000 nautical miles (one to two weeks of transit time) but also add approximately $1 million in fuel costs for each voyage.

Sea-Intelligence Data on Spot Rates

Sea-Intelligence data estimates that if the rate paid per nautical mile reaches the same level as during the pandemic, spot rates could reach $18,900 per forty-foot container from Shanghai to Rotterdam, $21,600 per forty-foot container from Shanghai to Genoa, and $21,200 per forty-foot container on the back-haul from Rotterdam to Shanghai. "Spot rates will continue to rise as long as there are enough shippers willing to pay the price," said Murphy. "Although it is unlikely that the spot rates will increase beyond the levels of the pandemic period, it is by no means a guarantee." On the Transpacific route (Asia to the U.S. West Coast/East Coast), the extrapolation of the maximum spot rate would be identical to the pandemic period, when some rates reached $30,000 per container.

Inflation Volatility and Global Supply Chain Concerns

Peter Boockvar, chief investment officer at Bleakley Financial Group, noted that the global economy is in a new world of inflation volatility, even as the Fed's latest comments and Consumer Price Index data in the U.S. showed progress on disinflation. "The spike in ocean shipping rates, along with air, is a reminder of this," Boockvar said. "We've seen in the past goods prices can easily be reversed upward. Higher for longer rates are real."

Shippers' Frustration with Supply Chain Pricing

Shippers are frustrated by the sharp turn in supply chain pricing. Nate Herman, senior vice president of policy at the American Apparel and Footwear Association, wrote in an email that in May, the market saw low demand, with container bookings down 48% and ample supply with vessel capacity up 2.6%, "but yet carrier general rates exploded with up to a 140 percent increase! Shippers are paying sky-high rates as a direct result of schemes that ignore existing contracts."

Air Freight Market Dynamics

According to freight intelligence firm Xeneta, China to North America air freight spot rates increased 43%, to $4.88 per kilogram, year-on-year in May. Global air cargo spot rates were up 9% year-on-year in May, to $2.58 per kg. Increased demand is a factor in the air freight market. Xeneta wrote that the global air cargo market is "on a pathway to double-digit growth in volumes in 2024, after a +12% year-on-year jump in demand in May." Companies from Apple to Chinese retailers Temu and Shein, as well as semiconductor companies, use air freight as the top choice for transporting products.

Impact on Consumer Goods

"If the costs keep up through the end of the summer, then this will put upward price pressure on Apple and chip products passed on to the end user and consumer," said Daniel Ives, managing director and senior equity analyst at Wedbush Securities. "This is heading into a key time as iPhone 16 ramps heading into the mid-September timeframe." Niall van de Wouw, Xeneta chief airfreight officer, told CNBC that air cargo spot rates from China to the U.S. have surged in 2024, primarily due to the extraordinary boom in e-commerce demand through companies such as Shein and Temu. "We may also be seeing some impact on air freight due to disruption in ocean container services," said van de Wouw. "Given that 98% of the world's cargo is moved by ocean, even a percentage shift of 0.2% would see a 10% increase in air freight volumes. This illustrates how sensitive air freight can be to disruption on the oceans."

Disconnect Between Ocean Freight Prices and Demand

The CNBC Supply Chain Heat Map highlights the disconnect between ocean freight prices and demand, which is unlike during the pandemic when ocean freight was fueled by insatiable consumer buying and a lack of containers and vessels to move the trade. According to ocean freight data from FreightWaves SONAR, container bookings and freight orders from shippers to the ocean carriers are down 48% month-over-month. Ocean carriers are canceling vessel sailings and around 37% of ocean bookings, which creates a tighter market for containers to be placed on vessels, increasing the price of the container. Adding to the constriction of container availability are the longer Red Sea transits. The route around the Cape of Good Hope ties up container availability and artificially shrinks the pool of available containers.

Smaller Carriers and Port Congestion

Xeneta data tracking ocean freight rates from the Far East to the U.S. East Coast, West Coast, and Gulf Coast ports shows the historic run. "There is evidence of smaller ocean carriers repositioning vessels and charters being booked to capture this higher revenue," Brashier said. He noted that this could create two significant challenges: a significant amount of containers entering North America across a greater number of ships and through ports that shippers are not accustomed to, and the higher total number of ships bringing in cargo through traditional gateways will overwhelm current supply chain operations. Port delays create a "bunching" effect similar to vessel arrivals that led to port congestion during the pandemic.

Recommendations and Precautions

DHL recommends clients pre-booking their freight four to six weeks before their scheduled departure to reduce the chances of having the freight rejected and ensure timely and efficient service.

East Coast, Gulf Coast Strike Concerns

West Coast prices could rise more with the suspension of contract talks between the International Longshoremen's Association (ILA), which represents union workers at East Coast and Gulf Coast ports, and the United States Maritime Alliance (USMX), which represents the ports. Fears of an ILA strike in the fall motivated logistics managers to move up the timeframe of importing holiday goods earlier this year to ensure the items are in warehouses before the September 30 contract deadline.

Potential Impact of a Strike

In a new statement on Wednesday, ILA President Harold J. Daggett warned, "The threat of a coast-wide strike on October 1, 2024, is becoming more likely as USMX and its member companies continue to drag their feet." According to Gene Seroka, executive director of the Port of Los Angeles, it has only seen a fractional amount of containers diverted to its port to mitigate multiple risks, from the Red Sea to the Panama Canal drought and ILA/USMX negotiations. The port's May container imports were down 3% year over year, while exports hit a new milestone of 12 consecutive months of gains. "We have heard nothing since this announcement," Seroka told CNBC. "During these negotiations, there are stops and starts, and I don't see this as terribly unusual."

Negotiation Disputes

Talks were suspended this week over union allegations that Maersk and its APM Term

inals were using automation in violation of the master contract. "Companies like Maersk are repeatedly trying to eliminate ILA jobs with the introduction of automation while realizing raking in billions of dollars," Daggett said. "They are in for a rude awakening. This is our time, and the ILA will demand our ILA longshore workers get big boosts in their wages." Maersk stated that it remains in full compliance with the ILA/USMX master contract and expressed disappointment that the ILA had chosen to make selected details of ongoing negotiations public in an effort to create additional leverage for their other demands. Maersk said it would continue to engage with all stakeholders, including the ILA, to address their concerns.

Government Involvement

Appearing at the Port of Los Angeles, Jared Bernstein, chair of the United States Council of Economic Advisers, said the Biden administration is carefully watching the port union negotiations because of the impact a strike can have on the economy and is encouraging both sides to negotiate in good faith. "It is the policy of our administration to encourage collective bargaining because we know it works," said Bernstein. "The president knows that it works. He is the first president to actually walk the picket line. He always supports collective bargaining, but he also supports giving the parties and the space they need when they’re at this stage and association."