Various factors continue to drive ongoing surge in ocean container rates

Much attention in recent weeks has been given to the ongoing rate increases being seen in the ocean container shipping market, for various reasons, some relatively new and some ongoing.

Some of those reasons were made clear in data and analysis from the recently-issued Freightos Baltic Index.

Freightos highlighted what it called “an unexpected start to Peak Season,” coupled with Red Sea-driven congestion, tight capacity, and low empty container levels at Asian hubs to roll containers and push ocean rates up sharply.

As an example, the company explained that Asia-North America rates increased 70% in May, back in line with the February $5,000/FEU (Forty-Foot Equivalent Unit) peak, and rates to the East Coast and Northern Europe up roughly 50%, adding that going forward rates are expected to move past their first quarter highs on additional June GRIs and surcharges.

“Shippers could face several months of very elevated rates and increased delays,” said Freightos. “But demand should subside when this year’s peak season ends (possibly earlier than usual) and monthly volumes are projected to be much lower than those seen for 18 months straight during the pandemic and that caused unprecedented port congestion. These differences should mean that the market will avoid the scale and duration of disruptions and rate spikes experienced in 2021 and 2022.”

Similar sentiment was echoed by San Marcos, Calif.-based lobal supply chain insights and risk analytics company Everstream Analytics.

In a research note, Mirko Woitzik, Global Director of Intelligence for the firm, observed that shippers are facing worsening container shortages in China, due to the Red Sea crisis and also earlier-than-usual Peak Season shipping.

“The container shortage has resulted in a surge of ocean freight rates with spot prices jumping to the highest level in more than 20 months [in late May],” wrote Woitzik. “In addition to the skyrocketing shipping costs and container imbalances at different ports, some ports are also experiencing severe congestion in the last few weeks, especially in China due to vessel bouncing.”

It noted that the surge in container demand is attributed to various factors, including: shippers securing space for back-to-school and holiday goods sooner than usual; more blank sailings out of Asia; little excess idle capacity of container vessels; longer transit times around the Cape of Good Hope; bad weather in Asia; and a potential strike at U.S. Gulf and East Coast ports in the fall.

What’s more, Everstream said that while Peak Season typically occurs between June and September, the increase in rates and decrease in available capacity is causing shippers to attempt to lock down space earlier than usual.

Nathan Strang, Director of Ocean Trade Lane Management, for San Francisco-based freight forwarding and customs brokerage services provider Flexport, said that the increase in ocean rates can, in a sense, serve as a proxy for ongoing economic momentum, in that American consumers are spending and GDP growth remains intact, in addition to what he termed an inventory issue coming out of pandemic in 2022 and 2023, with retailers dealing with an inventory overhang, which has since significantly subsided.  

“There is real demand in the market,” said Strang. “The other thing is just when you look at capacity now—and this is kind of where Houthi pirates situation impacts things—is that capacity coming online from the carriers is kind of getting artificially absorbed into these crisis areas, like the Panama Canal not having enough water to be able to service the Neo Panamax ships really well and the longer routing because of the Red Sea…you're pushing a lot more freight, you're having to use more ships and more containers to carry the same amount of weekly cargo. That creates a real kind of capacity issue, in that normally by this time in the market, I would see what we call extra loaders, where carriers add another ship because why pass up a why pass up an opportunity if you have an extra vessel and freight rates are at $6,000 or $7,000 to the West Coast, you add another vessel, for sure. I've only ever seen one of those announced so far. And that's fairly unusual in that we haven't seen that that opportunistic ability to inject capacity quickly into the market and that holds supply, so ships sailing 98% full and high demand for cargo helps to explain your pricing.”

Should an East and Gulf Coast ports strike come to fruition, Strang said that with capacity being tight, it creates a situation where rates explode, turning things into an auction for shippers to get cargo onto ships.

In that situation, he said a carrier has the capability to raise rates, with the caveat that it becomes harder to do further down the chain. As an example, he noted that it creates a difficult situation for a coffee cup importer to elastically price its product, as it is buying a commodity, in the form of ocean rates, but not selling a commodity.

“You don't really want people to come in every day and seeing the price of coffee cup keep going up because your import costs keep going up,” said Strang. “So, it's more of a stepladder approach for these companies. And a company has to then look at itself and look at its balance sheet and look at the market and say can ‘what can I afford to do here? What can I do?’ Some things are just going to have to obviously increase in price but other companies just aren't going be able to compete in that market. We saw that during the pandemic, a lot of businesses just couldn't compete. They couldn't continue to raise prices, and it caused a contraction which gives less opportunity for a consumer. We're going on buying things, and we want choice, we want the ability to go to different places and shop and whenever one of these situations happens, that choice starts to contract, with a really big impact to the consumer.”

In many cases, ocean rate scenarios can tend to be of a longer-term nature, according to Matt Muenster, Chief Economist for Green Bay, Wis.-based Breakthrough, an innovator in transportation management, dedicated to creating transparent and fair strategies for the world’s leading shippers.

Muenster said that going back to late 2023 and early into 2024, there is a point in time in which longer-term rates have been held up from the disruptions in the Middle East and also the Red Sea and Suez Canal.

“I am not certain how that affects the share of rates that otherwise could have been on a longer-term contract,” he said. “I do think longer-term contracts matter here, though, in terms of ultimately the rate environment and how quickly it can both shift and how quickly stakeholders would take action to move up their goods based on things like tariffs, too.”