The global shipping industry is experiencing a sudden and severe container capacity crunch just as the peak shipping season begins. This has resulted in ocean freight spot rates surging by approximately 30% over the past few weeks, with predictions indicating further increases. The ramifications of this development are raising alarms across global trade networks.
Several factors converge to create what experts describe as a “perfect storm” in global trade. Bad weather conditions, prolonged ocean transits, and vessels skipping ports are compounding the already strained supply chains. Ocean carriers are being forced to either skip ports or reduce their time at ports, which affects the collection of empty containers needed for future shipments.
The timing of this capacity crunch is particularly concerning as it coincides with the period when consumer goods for back-to-school and holiday seasons are typically shipped. This surge in shipping demand is further exacerbating the situation.
The dramatic rise in rates could surpass those seen during the Red Sea spike earlier this year, which will inevitably affect consumer prices. The spot rates from the Far East to the U.S. West Coast are likely to exceed the levels observed at the height of the Red Sea crisis, highlighting the severity of the current increases. The rally in spot market rates has created a significant spread between spot and long-term rates. Since the end of April, spot rates have spiked by as much as $1,500 on average for routes to U.S. coasts. Some of the highest contract rates charged by shippers have more than doubled from a month ago.
The current crisis is reminiscent of the chaos caused by the lack of available capacity during the COVID-19 pandemic. Similar to the pandemic period, some freight forwarders are being pushed to premium rates to secure space guarantees.
There has been warnings about the container crunch since January, attributing it to the longer routes required to avoid the Red Sea due to ongoing conflicts. The availability of containers has further been hampered by adverse weather affecting port operations in China, Malaysia, and Singapore.
Experts had forecasted sufficient container and vessel capacity to handle the supply chain issues, but reality has proven otherwise. Vessel space on many trade lanes is insufficient to meet market demand, affecting specific locations, carriers, and equipment types. The bad weather in East Asia at the end of April added to the delays, leading ocean carriers to skip some port calls or shorten turnaround times at destination ports. This has resulted in fewer empty containers being returned to China, exacerbating the imbalance in supply and demand.
The recent surge in ocean freight rates is expected to have significant economic implications. The logistics price increases will ultimately be passed onto consumers, contributing to inflation. During the pandemic, the Federal Reserve cited dizzying freight rates as a factor in rising inflation.
Logistics providers are already warning shippers, including major retailers, about the container shortage. The availability of containers is a critical issue as severe equipment shortages have led to shipment delays and backlogs. As a result, carriers are implementing substantial rate increases to capitalize on the sudden demand surge.
As the market adjusts to these unprecedented conditions, logistics managers are pushing forward peak season preparations to mitigate potential delays. U.S. companies are moving up the shipping schedule for seasonal items to ensure timely arrival and avoid discounts on late-arriving products.
Negotiations between the International Longshoremen’s Association and the United States Maritime Alliance are ongoing, with a potential labor strike looming. This adds another layer of complexity to the already strained supply chain.
The imbalance in container availability and demand for exports from China has increased the rate. The stretched vessel capacity and shortage of containers are pushing rates up. The recent increase in demand for exports out of China, together with the dip in the number of repatriated empty containers, means shippers are starting to find empty equipment hard to come by at some export hubs. Logistics providers are responding to the crisis by adjusting their rates and implementing premium charges for “space protection.” The huge rate increases could push the market to a new post-pandemic high, with spot rates continuing to soar and capacity out of Asia tightening.
In response to the volatile market conditions, shippers are being urged to make strategic adjustments to their logistics plans. Some may need to build up inventories earlier than usual to avoid potential delays during the peak season. Others might opt for premium rates to secure guaranteed space on vessels. Shippers have been advised to understand their supply chains and assess the risks involved. There is no single ‘best solution’ in such a complex market – it is a case of each shipper understanding their supply chains, assessing the risks, and using data to gain insights and make evidence-based decisions.
The shadow of black swan events looms large over the industry. In addition to the Red Sea crisis, there are ongoing restrictions in the Panama Canal and signs of escalation in the U.S.-China trade war. The announcement of new U.S. tariffs on imports from China and fears of port congestion in the Mediterranean and Far East add to the uncertainties.
The dramatic increase in ocean freight rates underscores the vulnerability of global trade to various disruptions, from geopolitical tensions to adverse weather conditions. Shippers and logistics managers must navigate these challenges with strategic planning and adaptability to mitigate the impact on supply chains and consumer prices. As the situation evolves, close monitoring and proactive measures will be essential to manage the ongoing crisis in global shipping.
The current container crunch highlights the need for resilience and flexibility in global trade logistics. By understanding the complexities of their supply chains and preparing for potential disruptions, businesses can better navigate the turbulent waters of international shipping.
General Manager
Ocean Freight
“In ocean transport industry, having sufficient space on ships and containers is crucial. Most shipping companies use a mix of owned and leased containers, both short-term and long-term. They determine the number of containers needed based on the ship’s size and its carrying capacity. The availability of containers also depends on the voyage duration, as longer voyages mean containers are engaged for extended periods.
For containers to be available at a port, the process relies on how quickly import containers are emptied and repositioned by the carrier. When the situation in the Red Sea worsened around mid-December 2023, carriers had to take a longer route around the Cape of Good Hope. This affected all shipments from Asia, the Far East, Southeast Asia, the Indian subcontinent, and the Middle East going to Europe, the Mediterranean, and the Americas. The average transit time increased by about two weeks.
This means container transit times on these routes are now two weeks longer, causing delays in the supply of containers to be used for the next shipment. This delay has led to a shortage of containers, forcing carriers to reduce free services like extra free time for container detention or demurrage which helps to get empty containers back into circulation more quickly.
Such changes impact shipping and logistics businesses by way of longer transit times, container shortages, delays in supply chain systems, and increased costs.”