Supply Chain Matters highlights for readers indications that ocean container shipping spot rates involving routings from China and Asian ports to the U.S. are exploding. We further call attention to a published report indicating that container freight rates might surpass $20,000 per 40 foot container by 2025.

 

Ongoing Situation

Readers who have been following the U.S. based Logistics Managers Index likely noticed that this index reading for the month of May increased 2.7 percentage points from that of April. The May report indicated that the Transportation Price index increased 13.7 percentage points, the highest level since June 2022.

The latest monthly global Container Market Forecaster issued by the Container Xchange indicated that in May, container prices surged 45 percent across China. The average price for a 40-foot container reportedly skyrocketed from $2,240 in April to $3,250 in May. The key drivers are noted as ship and empty container shortages. Additionally, global shippers are scheduling import shipments to support holiday quarter sales needs for the final quarter of this year to arriving earlier than prior years, likely before the end of September.

Bloomberg has pointed out that the Shanghai Containerized Freight Index for China shipments to U.S. West Coast ports reportedly jumped 82 percent from early April through the first week of June.

Outlook for the Remainder of Year

We especially call our readers’ attention to today’s published report by the global business broadcasting network CNBC.

Specifically, this report observes: “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 touch the Covid era peak of $30,000 — and stay there into 2025.”

The reasons are many and have similarities to what occurred during the pandemic period.

This report cites multiple industry observers in indicating that the ongoing Red Sea disruption has added fuel costs and upwards of a two week extension of transit times as ships that usually traversed the Suez Canal are now forced to sail around the Cape of Good Hope. Sea Intelligence CEO Alan Murphy indicated to CNBC: “Spot rates will continue to rise as long as there are enough shippers willing to pay the price. This means that although it is unlikely that the spot rates will increase beyond the levels of the pandemic period, it is by no means a guarantee.”

Noted is that the CNBC Supply Chain Heat Map highlights a disconnect between ocean container spot rates and actual freight demand. While bookings and freight orders are reportedly down 48 percent month-over-month according to FreightWaves SONAR data, container carriers are reportedly canceling sailings at upwards of a 37 percent clip that distorts the supply vs. demand effect in the favor of carriers.

Air Freight Rates Rising

Further, this report indicates that air freight rates are reportedly also on the rise primarily for three reasons. The first is the volumes being generated from China based online platform provider Temu and Shein. The second is existing shippers turning to air as an alternative mode of transport. The third factor is the usual air freight demands that Apple will place on the air freight market after the company makes its new iPhone model announcements geared toward holiday fulfillment.

U.S. East and Gulf Coast Labor Talks

A more than likely other component to potentially Covid level spot rates by the end of the year is the ongoing labor contract talks involving U.S. East and Gulf Coast dockworkers and the U.S. Maritime Alliance which have been suspended this week.

Fears of a potential walkout, or likely periodic work stoppages over the coming three months adds to the disruption based possibilities and hence, added port congestion and spot rate market price hikes.

What is Up and What to Expect

All of these recent reports indicate that shippers are again both increasingly concerned and frustrated by these industry dynamics and developments. Well they should be.

Our Supply Chain Matters commentaries have expressed frustrations as to why global wide maritime regulators fail to crack down on these new and more sophisticated business shipping capacity network alliance practices under the guise of being exempted from market monopoly exemptions.

Need a further evidence point, consider that global carriers such as A.P. Moeller Maersk that had forecasted 2024 to be one of little volume growth and substantially reduced operating profits has raised full-year guidance upwards for the second time in over a month.

Cost Saving Opportunities Diminishing

As we have provided in our market advisories and annual predictions, entering 2024 many businesses mandated that added cost savings were required and one of the primary target areas was going to be high global transportation and related logistics costs. With global demand and production levels contracting over most of 2023, there were multiple opportunities to negotiate lower contract prices.

For larger global wide enterprises that can leverage annual volumes with carriers, cost gains were achieved in new contracts. But contracts can be mute when shipping schedules are constantly blanked forcing businesses to go to the spot market in order to meet just-in-time inventory or customer order shipment requirements.

Small and medium businesses and supply network providers remain a victim of these industry dynamics since they remain dependent on third party logistics services providers or dominant online retail platform providers to leverage their scale and volume with ocean container lines in contracted services. That is an eventual impact to business margin in cost-to-serve.

Thus, the answer of what’s up with transportation cost is likely to be a frustrating conversation, one that will not please either the CSCO or CFO.

Global geo-political dimensions compounded by multiple presidential and legislative elections add to the belief that persistent high inflation levels are a result of end-item price increases especially for food and grocery staples and from supply chain related cost inflation, especially transportation.

We would submit that all of this leads to the fundamental question of what was learned from the pandemic, and what has been done to mitigate such dimensions.

That is likely the subject of a lot of business, industry, governmental and supply chain focused conversations that are occurring as we pen this commentary.

What remains above all is that global supply chain volatility and resiliency remains a constant challenge and businesses need to be prepared to deal with this.

 

Bob Ferrari

© Copyright 2024, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.