In less than a week, container freight rates registered one record high after the other, with new data showing another massive spike on the key Asia to US routes. Several companies have been struggling with the relentless rise in freight rates, shipping delays, and low container availability, which are all contributing to shortages of a wide range of products and acute consumer price increases. Freightos recently released a report indicating that rates from Asia to the US east coast topped the previous record of $20,000 and hit $22,000 yesterday, marking a 210 percent increase from last year’s rates. Before the onset of the health crisis, rates on this route were below $3,000. Up until this point, the most cited reason why freight prices are trending so high was an unexpected rebound in consumer demand in the second half of 2020, especially for goods made in China and Asia for delivery in the US. The intensification of the online shopping trend has also fueled demand for overseas products. But manufacturers and retailers were caught by surprise, as they’ve predicted consumer spending would collapse due to the aggravation of the global economic recession.
With government stimulus checks on their hands, consumers spent money like never before. On the other hand, shipping companies have been unable to meet this inexorable uptick in demand, with the Texas storms and the blockage of the Suez Canal for almost a week adding to the chaos. However, according to supply chain liner giant Maersk, the latest increases in shipping rates cannot be justified by an uprise in consumer demand. In a detailed report, the company described that shippers and carriers are not unfamiliar with rising consumer demand, and before the health crisis struck, shipping companies were perfectly able to adapt to changing patterns, solve crises and find resilience. What is happening right now is totally unprecedented, but not mainly caused by the effects of the health crisis and shifting consumer trends. A labor shortage at ports is creating a huge backlog of containers in several key spots, and this congestion is worsening the container shortage. The demand boom was just one of the catalysts, but not the most important. Shippers and carriers just realized how essential is their service at a time global cargo demand is fast-growing, and now that they became aware that businesses are willing to pay premium rates, shipping costs may have changed forever.
Maersk showed on its quarterly performance report that overall container shipping demand was up only 2.7% in the second quarter as compared to the same period two years ago, prior to the global sanitary outbreak. And yet, Maersk’s average freight rate was $3,038 per forty-foot equivalent unit (FEU), and increase of 63% from $1,868 per FEU from the same period in 2019. Moreover, the Drewry World Container Index of spot rates hit $9,371 per FEU this week, 6.7 times what it was two years ago. In essence, port congestion is what is actually curtailing effective ocean freight capacity, with equipment stuck both on land and at sea. Last week, Maersk published a customer advisory titled, “Critical help needed — congestion increasing.” The advisory purged U.S. companies to return shipping containers more quickly, stating: “We do not anticipate the congestion decreasing any time soon. On the contrary, the industry overall is forecasting higher U.S. volumes into early 2022 and beyond”.
Port congestion is expected to start showing signs of improvement in 2022, but just if more effective capacity is added to meet demand growth. However, when that eventually occur, shipping rates might already have been consolidated at historically high prices. As for freight costs, companies will have to get used to them. They may pull back at some point, but not to levels they once were. Without no end in sight for port congestions, the bottlenecks are likely to continue for the foreseeable future. And any expectations that inflation would be “temporary” are going to be crushed by the persistent and acute price increases all over the economy. When the masses start to realize that the economic collapse is far from over, and when the slump starts showing its ravaging effects, it’s safe to safe that it will be too late to reverse this crisis.
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