Soaring ocean freight rates due to sudden container crunch trigger global trade concerns.

• The global shipping industry is facing a capacity crunch in ocean containers as peak shipping season begins, with freight spot rates increasing by approximately 30% in recent weeks and continuing to rise.
• Supply chain issues are being exacerbated by bad weather, longer ocean transits, and vessels skipping ports.
• Xeneta, a freight intelligence firm, is predicting that freight rates could increase significantly by June, surpassing the Red Sea spike and ultimately impacting consumer prices.

A shipping container capacity crunch is occurring due to a sudden and surprise spike in ocean freight rates caused by a perfect storm in global trade.

The combination of the start of peak shipping season, longer transit times to avoid the Red Sea, and bad weather in Asia has negatively impacted the flow of trade on critical routes. As a result, ocean carriers are taking measures such as skipping ports or reducing their time at port, and not picking up empty containers, to ensure timely delivery of goods.

The water transportation of consumer goods for back to school and the holidays is facing supply chain cost challenges.

Xeneta's senior shipping analyst, Emily Stausbøll, predicts that spot rates from the Far East to the U.S. West Coast are likely to exceed the levels seen during the Red Sea crisis earlier this year, indicating the magnitude of the recent increases.

"The wider the gap between short and long-term rates, the higher the risk of cargo being rolled, which we already know is happening," she stated.

Since the end of April, spot rates on routes to the U.S. coasts have increased by as much as $1,500 on average, resulting in some of the highest contract rates charged by shippers being over double the rates of just a month ago.

"As during the Covid-19 pandemic, some freight forwarders are currently being charged premium rates to secure space guarantees," Stausbøll stated.

Early Xeneta data suggests rates will increase further at the start of June.

Since January, DHL has been warning about a container crunch due to the longer routes required to avoid the Red Sea due to Houthi attacks. As a result, containers are spending more time on the water and are not being reloaded as quickly. The situation has been exacerbated by bad weather affecting port operations in China, Malaysia, and Singapore.

Shipping capacity forecasts were off

Despite predictions from many logistics experts that there would be enough container and vessel capacity to handle supply chain issues from the Red Sea to a drought-ridden Panama Canal, DHL Global Forwarding's head of Ocean Freight Americas, Goetz Alebrand, has stated that vessel space on many trade lanes is insufficient to meet market demand. Specifically, Alebrand noted that trade lanes from Asia to Latin America, Transpacific routes, and Asia to Europe are all experiencing space constraints. These shortages are affecting specific locations, some carriers, and certain types of equipment.

"As high demand and longer transit times continue, we are closely monitoring the situation to address any potential challenges," Alebrand said.

According to Judah Levine, Freightos' head of research, in March and April, ocean carriers utilized idle vessels and ships from other lanes to mitigate the longer voyages and maintain weekly departure schedules. However, this has resulted in a lack of excess capacity in the market.

The delays caused by bad weather in East Asia at the end of April led ocean carriers to skip some port calls or shorten their turnaround at destination ports, resulting in fewer empty containers being brought back to China.

An increase in ocean freight rejections shows the imbalance.

"The rise in demand for exports from China and the decrease in repatriated empty containers are causing a shortage of empty equipment at some export hubs, resulting in higher shipping rates," Levine stated. "Although demand levels are not excessively high, the already strained vessel capacity and the lack of containers are exacerbating the issue, driving rates even higher."

Fear of new post-pandemic supply-chain cost record

The current increase in ocean freight rates is due to a previous high in the year, where Levine set an "elevator floor" of $3,000-$5,000 per container. At that time, prices were double compared to the previous year.

The Federal Reserve has identified logistics price increases and high freight rates during the pandemic as factors contributing to inflation. Logistics providers are issuing customer alerts to inform shippers, including major retailers, about the global container shortage.

"Orient Star Group has warned clients that carriers are currently facing a serious equipment shortage due to various factors, including long-term congestion, blank sailings, and increased demand caused by the implementation of South America tariffs. This shortage is causing delays in shipments, leading to heavy backlogs and a tightening of space in the market. To address this issue, Orient Star Group is encouraging shippers to arrange empty container pickups as early as possible to ensure that resources are utilized efficiently."

The sudden increase in demand has led carriers to become "greedy" and charge an additional $1,000, as characterized by Orient Star Group.

The world's largest ocean freight company, MSC, announced new rates of $8,000 to $10,000 for 40-foot containers to the U.S. West Coast, effective from May 15 to May 31.

It has been stated by Wan Hai that they will impose a premium for "space protection."

The International Chamber of Shipping did not respond to a request for comment.

The "huge rate increases" could lead the market to a new post-pandemic high, according to an Honour Lane Shipping note to clients. While spot rates continue to rise, capacity out of Asia remains tight, allowing carriers to implement a "diamond rate" during the pandemic period, HLS wrote to clients.

The cancellation or blanking of ships will only increase the pressure of soaring freight rates, as the re-routing of ships around the Horn of Africa accounts for 17% of global container shipping capacity.

HLS observed that carriers have ample space to adjust capacity as blank sailings rose in May and June, according to the written statement.

Drewry reports that 17 sailings have been canceled on the Transpacific route between weeks 20 and 24, and the firm has noted a "serious" decline in space available contracting on the U.S. East Coast.

The U.S. consumer economy remains healthy, and HLS predicts that headwinds will not improve anytime soon. As a result, the current market trend and space situation are expected to continue through June, with 2024 retail sales in the U.S. forecast to increase between 2.5% and 3.5%.

Despite what headlines about the economy may suggest, consumers are still shopping and retailers are ensuring they have enough merchandise to meet demand, according to Jonathan Gold, vice president for supply chain and customs policy at NRF. He added that re-stocking may have only just begun.

Peak season push forward

Logistics managers will face additional challenges due to longer transits, container shortages, and weather as they prepare for the holiday and back-to-school seasons. The recent increase in shipping rates is a result of tense negotiations between shippers and clients, which were influenced by the Red Sea diversions and longer transits.

In March, logistics managers informed CNBC that they planned to shift peak season from July to June to avoid any delays caused by a potential labor slowdown or strike at East Coast or Gulf ports during the fall. U.S. companies want to ensure their seasonal items arrive early or on time to be available for consumers. If products arrive late, they will most likely be sold at a discount. The frontloading of holiday and back-to-school products was confirmed in CNBC's latest Supply Chain Survey.

The International Longshoremen's Association, which represents longshoremen at East Coast and Gulf ports, has a master contract with the United States Maritime Alliance, which represents terminal operators and ocean carriers, that expires on Sept. 30. However, the union has set a cutoff date of May 17 for local contracts to be agreed upon, allowing for an overall master contract to be negotiated.

No update has been provided on the conclusion of local negotiations, and there are no details of any tentative agreements. The ILA and USMX have announced that they will likely schedule face-to-face meetings after the conclusion of local talks. The six-year contract negotiations began in February.