Global trade may face unprecedented challenges as ocean freight rates continue to rise, potentially exceeding $20,000 per shipment with no immediate relief in sight until 2025.

• Between 36%-41%, month over month, Far East to U.S. ocean freight rates have increased, while air freight prices have risen by 9% this year.
• According to DHL, ocean freight rates may not decrease before the Chinese New Year in 2025, with some predictions suggesting rates could reach between $20,000 and a Covid-era high of $30,000.
• The increase in long Red Sea transits is causing a shipping container capacity shortage and canceled sailings from Asia, which is driving up spot ocean freight rates.
• Despite a 48% decline in ocean freight orders month over month, the demand for goods is not the sole factor behind the price increases.

While the Federal Reserve and U.S. economy receive positive news on inflation with consumer and wholesale prices decreasing, a major global trade inflation indicator is moving in the opposite direction. The rise in freight rates is a new concern in the global supply chain, with forecasts predicting that ocean cargo prices could reach $20,000 or even surpass the Covid era peak of $30,000 and remain at that level until 2025.

The cost of a 40-foot cargo container has increased to about $12,000 due to a 36%-41% month over month increase in spot ocean freight rates from the Far East to the U.S., and an approximately 140% increase in additional charges known as general rate increases, according to the CNBC Supply Chain Heat Map.

According to Paul Brashier, vice president of global supply chain for ITS Logistics, the index data confirms what is being observed from their data and heard from shippers. A shortage of containers and limited vessel capacity overseas has forced shippers to turn to the spot market to find equipment to load out at origin. This has resulted in rates increasing to levels not seen since the post-Covid crisis two years ago. Additionally, freight is being bottlenecked at port terminals due to extended dwell times and empty containers to load with goods are in short supply, Brashier stated.

DHL Global Forwarding Americas' head of ocean freight, Goetz Alebrand, stated that he is pessimistic about a decline in freight rates in the near future.

According to Alebrand, it is unlikely that the situation will improve quickly, and ocean freight rate levels may not decrease before Chinese New Year.

Testing the peak Covid era $30,000 container rate

On Thursday, Sea-Intelligence predicted that Asia-Europe spot prices could surpass $20,000 due to the Red Sea crisis and the rise in nautical miles traveled.

"During times of severe distress, freight rates per nautical mile can reach very high levels, as set by the pandemic," said Alan Murphy, Sea-Intelligence CEO.

The Defense Intelligence Agency's report on the economic impact of the Houthis' Red Sea attacks revealed that container shipping through the Red Sea had decreased by approximately 90% between December 2023 and mid-February. Using alternate shipping routes around Africa, which add about 11,000 nautical miles (one to two weeks of transit time), can result in an approximate $1 million in fuel costs for each voyage.

If the rate paid per nautical mile is the same as during the pandemic, spot rates from Shanghai to Rotterdam will be $18,900 per forty-foot container, from Shanghai to Genoa will be $21,600 per forty-foot container, and from Rotterdam to Shanghai will be $21,200 per forty-foot container. However, it is unlikely that the spot rates will increase beyond the levels of the pandemic period, but it is not a guarantee. On the Transpacific route, the maximum spot rate will be identical to the pandemic period, when some rates reached $30,000 per container.

According to Peter Boockvar, the chief investment officer at Bleakley Financial Group, the global economy is experiencing a new era of inflation volatility, despite recent comments from the Fed and declining Consumer Price Index data in the U.S. Boockvar emphasized that the increase in ocean shipping rates and airfare is a clear indication of this. He warned that in the past, goods prices have been known to reverse upward suddenly, and that higher for longer rates are a reality.

Carrier general rates have increased by up to 140% despite low demand in May, with container bookings down 48% and ample supply with vessel capacity up 2.6%. Nate Herman, senior vice president of policy at the American Apparel and Footwear Association, wrote in an email that shippers are paying sky-high rates as a direct result of schemes that ignore existing contracts.

Air freight prices and demand are going higher

In May, the freight intelligence firm Xeneta reported that China to North America air freight spot rates rose by 43%, to $4.88 per kilogram, while global air cargo spot rates increased by 9%, to $2.58 per kg.

The global air cargo market is expected to experience a significant increase in demand, leading to double-digit growth in volumes by 2024.

Air freight is the preferred mode of transportation for companies such as Temu and Shein, as well as semiconductor companies.

"If the costs continue to increase until the end of summer, it will put upward pressure on the prices of Apple and chip products, which will be passed on to the end user and consumer, according to Daniel Ives, managing director and senior equity analyst at Wedbush Securities. This is particularly relevant as the iPhone 16 is set to launch in the mid-September timeframe."

Air cargo spot rates from China to the U.S. have increased in 2024, mainly because of the significant increase in e-commerce demand through companies such as Shein and Temu, as stated by Niall van de Wouw, Xeneta's chief airfreight officer.

"According to van de Wouw, a disruption in ocean container services may have an impact on air freight. Since 98% of the world's cargo is moved by ocean, a 0.2% shift in ocean traffic could result in a 10% increase in air freight volumes, highlighting the sensitivity of air freight to ocean disruptions."

Although global spot rates rose by 9% in May compared to the previous year, not all major trade routes worldwide experienced such significant increases. In fact, trade from Europe to North America saw a decline of 21% in spot rates.

The CNBC Supply Chain Heat Map reveals a disconnect between ocean freight prices and demand, which is different from the pandemic period when ocean freight was driven by high consumer demand and a shortage of containers and vessels to transport trade.

Ocean carriers are canceling vessel sailings and around 37% of ocean bookings, which creates a tighter market for containers to be placed on vessels, increasing the price of the container. The longer Red Sea transits, which tie up container availability and artificially shrink the pool of available containers, add to the constriction of container availability.

Tracking ocean freight rates from the Far East to the U.S. East Coast, West Coast, and Gulf Coast ports using Xeneta data reveals a historic run.

Brashier stated that evidence suggests smaller ocean carriers are repositioning vessels and charters are being booked to take advantage of higher revenue. This could pose two significant challenges for his company, including an increase in the number of containers entering North America through various ships and ports, which may overwhelm current supply chain operations.

Port delays are causing a "bunching" effect similar to vessel arrivals that led to port congestion during the pandemic. DHL has warned of continued port congestion at key China and Southeast Asia ports, with Singapore experiencing congestion for weeks and vessels waiting on average seven days to get into port. Waiting times have also risen across all main Chinese port regions, with Shanghai and Qingdao experiencing the longest delays.

Nearly 7% of the container shipping fleet has been immobilized due to worsening port congestion, according to Linerlytica, a container shipping market intelligence company.

The large number of peak season containers entering North America earlier on a greater number of ships could create significant challenges for shippers, including port congestion. The entrance of smaller vessels also adds to congestion at the ports.

Jon Monroe of Jon Monroe Consulting wrote in a recent advisory that smaller carriers are entering the market offering expedited services, which makes it seem like we are operating in a Covid-like environment without the actual presence of Covid.

To guarantee timely and efficient service, DHL advises clients to pre-book their freight four to six weeks prior to their scheduled departure, thereby minimizing the likelihood of freight rejection.

East Coast, Gulf Coast strike concerns

The suspension of contract talks between the International Longshoremen's Association and the United States Maritime Alliance could lead to a rise in West Coast prices. Logistics managers moved up the timeframe of importing holiday goods earlier this year to ensure the items were in warehouses before the September 30 contract deadline, motivated by fears of an ILA strike in the fall.

On Wednesday, ILA President Harold J. Daggett cautioned that the likelihood of a coast-wide strike on October 1, 2024, is increasing as USMX and its member companies remain slow to act.

According to Gene Seroka, executive director of the Port of Los Angeles, the port has only seen a small portion of containers diverted to its port to mitigate various risks, including the Red Sea, Panama Canal drought, and ILA/USMX negotiations. Despite this, the port's May container imports were down 3% year over year, while exports hit a new milestone of 12 consecutive months of gains. Seroka tells CNBC that they have not received any updates since the announcement and that the negotiations have been ongoing, with stops and starts being common.

The ILA is demanding higher wages for its longshore workers after talks were suspended over allegations that Maersk and its APM Terminals were using automation in violation of the master contract.

Maersk stated that it is adhering to the ILA/USMX master contract and expressed disappointment over the ILA's decision to disclose certain negotiation details in an attempt to gain leverage for other demands. Despite this, Maersk pledged to maintain open communication with all stakeholders, including the ILA, to address their concerns.

The Port of Los Angeles has been closely monitored by Jared Bernstein, the chair of the United States Council of Economic Advisers, who stated that the Biden administration is closely watching the port union negotiations due to their potential impact on the economy. He further encouraged both sides to engage in good faith negotiations.

"Our administration encourages collective bargaining because it has been proven effective, as stated by Bernstein. The president supports this practice, having walked the picket line himself and always advocating for the parties to have space during negotiations."