“It may get worse before it gets better, but it will get better.“
It has been one year since Ocean Carriers used proactive capacity management to avoid rate deterioration. It is almost one year since ocean transportation experts predicted a lost of $23 billion due to the pandemic will impact in the industry in 2020. No expert predicted that the Shanghai Containerized Freight Index (SCFI) will reach $2,885 and that rates from Asia to Brazil will be $18,000 per 40’ in December 2020/January 2021.
Shipping lines announced revisions for their unexpected hefty profits at the end of 2020 and service levels are now at 50% (one every two vessels is not arriving on schedule). Consequences of the proactive capacity management are the impact on equipment flow and the current port congestion. In less words, rates are high, service levels are low, and it seems this will not change in Q2 2022.
Rates will go down after Chinese New Year (they said…)
CNY came and went with little to no impact in the current Ocean Freight rates. Ocean carriers planned for a demand reduction to keep services running, move equipment, reduce port congestion, and increase service levels. As a result, demand of ocean transport in February was high, equipment it is still an issue everywhere and Southern California has an average of 30 vessels in anchorage going for 7 weeks. The pressure is expanding to north Pacific ports. The SCFI is now at $2638, reduced from the December/January levels, but still over 2 times higher than a year ago.
There is no sign of rates going drastically down in 2021, the basic principles are supporting this new rates levels, there is no availability of vessels, there is lack of equipment everywhere and demand seems to keep going and all of this has global impact. The installed capacity to produce containers is maxed out. For example, services from Asia to Latin America are not sailing at 100% utilization to keep rates levels high, it is the lack of equipment that pushes the rate levels.
What about the demand in Q2 2021?
What happens in the Transpacific (the US market) has global impact in the industry. The US consumers are expecting cash in their pockets in the coming weeks either because there is a tax refund, or because the COVID19 relief payments (up to $1,400 per person) are on their way, or just because they cannot spend it in services (at least not massively and not yet). We learn from last year that Americans with excess of cash tend to put pressure in the demand for hard goods (mostly imported from Asia). This expected surge in demand will not ease the port congestion and will not ease the need for equipment.
The 2021-2022 contract season shows the increase in rate levels, the current spot freights show the shippers willingness to pay to secure equipment and space. Who absorbs the cost? Sometimes the retailers, sometimes the consumer.
What about beyond Q2?
Increase in the cost of goods makes retailers change sourcing, it makes near sourcing attractive and it is what will make a possibility to consider local production. It has only been a year since importers have evaluated sourcing from other locations besides China. Change of sourcing patterns does not happen that quick, but most of importers are considering how to improve costs in their supply chain and therefore new origins and container transport will be evaluated for that.
The covid19 vaccine roll out in the USA and the promise that by July family and friends’ gatherings will be possible will impact the demand of goods. Consumers potentially switch spending to services. This change in spending patterns will be mitigated by the natural Q3 increase in demand but will equalize the demand surge caused by covid19 for the months after that.
Container logistics in 2021 and heading towards 2022.
Rates will remain high, there will be adjustments, but will remain high. The services levels will remain low. Equipment availability and secured space will take precedent over low rates. Contracts have been demanded earlier than normal. Spot rates are high, and the risk of poor service remains. Supply Chain costs will be evaluated, and new sourcing patterns will shape 2022 and beyond. The use of freight forwarders will be increased thanks to the flexibility and the ability to ‘solve problems’ on behalf shippers and importers therefore filling the service gap left by most of ocean carriers and the inland coordination required to navigate current environment.