Why global container freight charges are surging

The global container ocean freight charges are surging to levels not seen since the pandemic supply chain crunch.

In some key trade lanes, the freight rate is up 140 percent since mid-December and still increasing by the week.

For Africa, trade volume was projected to shrink in the first half of the year risk leading to accelerating inflation, according to a report compiled by Afrexim Bank.

Read also: Why freight forwarders must accept review of terminal charges – Aniebonam

Freight is one of the most inelastic markets in the entire global economy—brands rarely ship more stuff on the basis of cheap freight or less stuff because the price of freight is expensive, according to Ryan Petersen, founder/CEO of Flexport, Venture Partner at Founders Fund.

Petersen said when demand for shipping goods exceeds the supply of the world’s cargo-carrying capacity; the price will increase to the rate people are most willing to pay to get them moved.

Surging fright started last December when terrorist attacks in the Red Sea forced the world’s container ships to divert around Africa, reducing shipping capacity. This was because it takes 30-40 percent longer to complete the round trip from Asia to Europe, lowering the network’s effective throughput.

The Shanghai Containerised Freight Index (SCFI), which measures the container freight price in the spot market showed that Shanghai to Europe rates hit $3,050 per TEU – a 155 percent increase from April 15, and nearly three times increase from December 15, 2023.

Also, Asia to US trade lanes has been heavily impacted, with rates from Shanghai to the US West Coast hitting $4,393 – a 37 percent increase from April 15, and a 142 percent increase from Dec 15, 2023.

The high cost of freight was to compensate for capacity gaps caused by the Suez re-routings as carriers were forced to rotate many ships from the Pacific to Asia-Europe lanes.

Also, in mid-April, port congestion surged with poor weather—heavy fog in two of China’s biggest ports Shanghai and Ningbo, along with heavy rain in Malaysia and Singapore.

“Global shipping is a chaotic system in the literal sense as it depends on the weather and even the earth’s geology,” Petersen said.

In addition, the North American market is grappling with its issues as a potential Canadian rail strike scares importers from the fastest route to the Midwest from the Pacific, pushing them to move goods through US gateways.

The problem is even worse on the US East Coast with a near-perfect storm of disruption. First, the fastest route to the East Coast from South Asia and the Middle East is through the Suez. Ships on those lanes now go around Africa or cross the Pacific and go through the Panama Canal.

On the other hand, the Panama Canal has been suffering from a lack of water, which limits it to 2/3 capacity during a drought, and recovery has been slow.

Adding to problems for East Coast ports is the Baltimore disaster where the Maersk MV Dali collapsed the Key Bridge and cut the U.S. ninth busiest port’s access to the global ocean for over a month.

The worst development for shippers moving cargo to the East Coast is that the International Longshoreman Association (ILA), the union operating all ports on the East and Gulf Coasts, has a contract expiring on Sept 30.

As a result, shippers are nervous about delays and companies fear they may miss Christmas if cargo doesn’t get into East Coast ports before Sept 30.

This is making demands to come at the same time as capacity is severely constrained, leading to a surge in US East Coast rate high: Shanghai to the US East Coast on the index hitting $5,562 – a 33 percent increase from April 15, and a 98 percent increase from Dec 15, 2023.

With spot market rates soaring over rates on annual fixed contracts, many contracts are now running into challenges in getting fulfilled. Almost all fixed-rate contracts are subject to a peak season surcharge (PSS) implemented at the carrier’s discretion.

“In this market, the shipper won’t pay, they won’t get loaded. As of this month, all ocean carriers and forwarders have applied a PSS to almost all fixed-rate contracts, even ones signed weeks ago. The PSS has elevated the fixed-rate prices, sometimes bringing them close to the spot market rates, which may be two to three times higher,” said Petersen.

According to him, shippers, especially those with fixed-rate contracts, are naturally unhappy about the price surge.

“If they believe prices will go up in the future, they’ll push hard for inventory to move on earlier departures, leading to still more capacity issues in a compounding feedback loop and even panic bookings.

“Ocean carriers are pushing premium options as a method to get cargo prioritised on the first available departure date with higher equipment priority, though at a higher cost. This approach is one of the only options right now to avoid delays and ensure timely deliveries,” he said.

Why nobody saw this coming

Shipping is full of black swans, including terrorism, bridge collapses, labour union unrest, intense weather, and more. Forecasting them accurately is nearly impossible. Even after they occur, their second and third-order effects are hard to predict.

Many experts thought new ships built since COVID would be enough to overcome the supply shock from longer routing around Africa. Such calculations are generally aggregated, ignoring the granularity of available capacity on a given day, sailing, and port pair customers require.

What’s next?

In the short term, firms have to accept the market reality. Many will complain but the reality is ocean carriers are capital-intensive businesses.

The life cycle of these ships is 20-30 years, so at the time they’re bought, carriers have no idea what demand will look like, much less the black swans.

Also, experts see high prices as a signal for carriers to invest in more container ships, which they’ve done in spades since COVID-19. Thanks to those reinvestments, ocean container shipping capacity is expected to increase significantly since the 2022 supply chain crisis began to unwind.

There are millions of TEUs with more capacity for container shipping coming online in the next few years. The current capacity crunch is supply-driven.

“I don’t know when the Red Sea will be deemed safe again, but we can say with reasonable confidence that carriers hope that new ships being delivered into 2026 should service the capacity eliminated by the rerouting and other disruptions,” Petersen said.

He predicted there would be plenty of capacity to overcome the Red Sea re-routing but the world didn’t envisage that in global shipping there’s always another disruption around the corner.

“Rather than focusing on predicting the future, the best advice for global logistics professionals is to stay agile and ready for whatever the world throws at them. Observe, orient, decide, act, and repeat. Agility is the name of the game to stay ahead in the ever-changing world of shipping and logistics.

“Uncertain, volatile situations like this create competitive advantage for those who are best at responding to the chaos,” he added.