Navigating International Ocean Freight
International Ocean Freight Market Analysis
The international ocean freight market is a mess right now, and that’s putting it mildly. As carriers continue to add more and more capacity to try and manage the recent flood of increased cargo demand, many ports are running into major infrastructure issues, especially in the U.S. In January, for example, an average of more than 30 container ships headed to the ports of Los Angeles and Long Beach were forced to anchor offshore in San Pedro Bay.
According to a report from Freightwaves.com as recently as the week of March 15th, there are currently 28 container ships anchored outside of the port complex. Terminal congestion is at critical levels with a few terminals at or above their capacity 73% - 114% in LA/LB and estimated at 85% in OAK terminals. Those ships unable to secure an anchor are being diverted even further offshore to idly wait in drift boxes until the traffic jam clears up enough to make room. While maxing out California’s offshore space is not a concern, these are unprecedented circumstances for the carriers and the shippers with freight onboard.
To put this situation into perspective, the port’s previous record for container ships held at anchor reached a total of 28 vessels and was the direct result of a labor union dispute that happened over six years ago in 2015. Prior to that, the all-time high record for the area was set during a shortage of rail staff back in 2004. On an average day though, it’d be common to only see around 12 anchored ships, and most of them wouldn’t even be container vessels. All of this goes to show just how out of control port congestion really is at this point.
With import volumes ramping up and no sign of relief on the horizon, these cargo delays are only going to continue. So, what’s causing this logistical nightmare?
Port Congestion Explained
Surprise, COVID-19 strikes again. The pandemic has not only played a large part in driving consumer demand, but it’s also taken a huge toll on port employees. When you add a labor shortage to an already constrained port terminal, you get a devastating combo of severe equipment imbalances, major freight delays, and unreliable shipment scheduling.
Containers aren’t returning empties to Asian origins fast enough to keep pace with growing demand, and because of these lengthier turnaround times due to port congestion and extended transit times, container ships are now being delayed by more than five days on average worldwide. Out of all of the major trade lanes, shipments are leaving Asian ports later than scheduled due to container equipment shortages and are then sometimes experiencing weather-related delays before reaching U.S. ports. As a result, ocean carrier on-time performance from Asia to USWC was 22.1% in December 2020, down from 70.9% in December 2019, while ocean reliability to the USEC fell to 26.3% from 70.5% (JOC.com). Taken altogether, this situation has created unheard of market conditions that are directly impacting freight rates.
Fixed Rates vs. Spot Quotes
Since container carriers control what scarce capacity is left, there’s no doubt that they’ve got the pricing power right now, and they are not hesitating to use it. According to Drewry, service contract negotiations are expected to shift into high gear in March and April, with carriers, NVOs, and shippers saying per FEU rates will increase noticeably from this year’s levels of about $1,350 to the West Coast and $2,350 to the East Coast. Except for the largest retailers, carriers are reportedly pushing for rates of about $2,600 to $2,800 per FEU to the West Coast and $3,600 to $3,800 per FEU to the East Coast. This means contract freight rates in eastbound trans-Pacific trade could increase by up to 65 percent more than the current 2020-21 contract rates over the next year, starting May 1.
As for spot quotes, rates from China/East Asia to the North American West Coast have almost tripled YoY — up 181 percent as of Thursday — to reach $4,261 per FEU based on Freightos Baltic Index data. Meanwhile, rates from China/East Asia to the East Coast are listed at $5,892 per FEU, which marks a 2 percent decrease from the previous week.
Benefits of a Fixed Rate Schedule
Considering the pricing dynamics in the spot rate market right now, medium to large BCO’s will be better off negotiating a fixed rate rather than playing the spot market. Here are some reasons why.
A fixed rate schedule:
Provides access to weekly freight capacity based on weekly MQC (min quantity commitment)
Eliminates unnecessary safety and financial risks by providing consistent less volative ocean pricing
Establishes long-term relationships that lead to more consistent, predictable & quality service
Provides more control over unknown market variables like additional fees and surcharges
Helps optimize freight scheduling
Increases freight budget accuracy
Provides KPIs for companies to measure carrier performance and drive improvements
Navigating the Insanity That Is the Asia To U.S. Import Market in 2021
Supply chain disruptions are at an all-time high, and while rate increases are inevitable, it’s important to make sure you’re strategizing the best approach to secure a level of service you can actually rely on for this next year. In order to navigate the current import market insanity, shippers need to focus on analyzing data (especially figures related to on-time performance and rolled cargo) they can leverage in upcoming carrier contract negotiations. If you want to avoid running into problems later, you should also start booking your loads for summer now.
Click here to learn more about how eShipping can help you better manage the chaos that is today’s international shipping marketplace.
