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  • Writer's pictureStephen Fodor

Container rates are red hot, freight demand is higher than ever, it's a 180 degree turn from 2020

Monday Morning Wake Up Call

April 12, 2021

Could container shipping rates stay this red-hot until 2022?

(American Shipper) Container-shipping spot rates keep bouncing around at stratospheric heights — and show zero signs of sliding back to earth. On some trade lanes, they’re still ascending. Case in point: The formerly sleepy Europe-U.S. trans-Atlantic route just spiked.

With fallout from the Ever Given accident in the Suez Canal expected to cut container and vessel availability, the “when will this end?” chatter is starting to fixate less on the second half of 2021 and more on 2022.

This is the season — in a normal year — when rates moderate. While different freight indices offer different numbers, the trend lines are all the same: either up or steady at the peak. The weekly composite Drewry World Container Index, released Thursday, rose 1% this week, to $4,910 per forty-foot equivalent unit (FEU). It’s now up 221% year-on-year. The weekly Shanghai Containerized Freight Index, released Friday, rose another 2.6% week-on-week.

The Freightos Baltic Daily Index global composite (SONAR: FBXD.GLBL) stood at $4,260 per FEU on Thursday, hovering at or near the all-time high set in February. It is around quadruple normal levels for this time of year.

Trans-Atlantic surge

In the U.S. markets, the biggest rate move this month is in the westbound trans-Atlantic trade.

The Freightos assessment of this route (SONAR: FBXD.ENEA) shows rates surging by almost 50% between March 31 and Thursday, to $3,254 per FEU.

Judy Levine, head of research at Freightos, attributed the spike to “strong demand and scarce capacity.”

On April 1, Hapag-Lloyd announced a booking suspension on eight sailings leaving Northern Europe for the U.S. in the first half of this month due to “an overbooking situation.”

Levine also speculated that the recent disruption of services through the Suez Canal could be having ripple effects on the trans-Atlantic.

Asia-US rates peaking yet again

In the much larger Asia-U.S. trade, Freightos put the rate to the East Coast (SONAR: FBXD.CNAE) at $6,239 per day as of Thursday, a new all-time high topping the previous record set in early February.

The Asia-West Coast rate (SONAR: FBXD.CNAW) was at $5,052 per FEU, just below the new high hit on Wednesday.

In the Drewry weekly indices, the latest assessment from Shanghai to New York (SONAR: WCI.SHANYC) is even higher than Freightos’ — at $6,705 per FEU. Drewry assessed the Shanghai-to-Los Angeles spot rate (SONAR: WCI.SHALAX) at $4,202 per FEU.

Many U.S.-based cargo shippers also move considerable volumes on the Asia-Europe route. However painful Asia-U.S. rates are, the Drewry indices highlight how much more painful the situation is for Asia-Europe shipments.

The spot rate for Asia cargoes to North Europe is now up 396% year-on-year, with rates to the Mediterranean up 317%. In contrast, Drewry estimates that rates from Shanghai to New York and Los Angeles are up 133% and 153% year-on-year, respectively.

What’s next?

The current rate boom has defied the predictions. In mid-2020, multiple commentators thought demand would peak in August or September and fall off in the fourth quarter. It didn’t. Then came fears that winter COVID lockdowns would hamstring consumers. That didn’t happen either. Analysts also speculated last year that rates were due to a one-off restocking event after the initial lockdowns in Europe and the U.S. in spring 2020. But even now, stores are still restocking and inventories are still low.

U.K.-based consultancy Drewry said in a research note on Friday, “Using history as the only guide, the smart bet would be to think that the market will cool down quickly. But these are not normal times. We argue that carriers are set up nicely for at least another two very profitable years [2021 and 2022].”

According to Drewry, the two drivers of stratospheric rates — the COVID-propelled shift to goods consumption and supply chain disruptions — “are stubbornly refusing to go away. The timeline for a ‘return to normal’ keeps getting pushed back.” Drewry expects port congestion and equipment shortages to persist through 2021 and for carriers to lock in profits into 2022 via higher annual contract rates signed this year. “Things might not be so easy for carriers post-2022,” said the consultancy.

For shippers who’d once hoped for rate relief in Q4 2020, a forecast for market conditions getting tougher for carriers — and thus better for cargo owners — in 2023 is a frightening prospect. If there’s any solace for shippers, it’s that forecasts during the COVID era have been persistently wrong.

This could be the hottest summer ever — for freight

(Freightwaves) The Inbound Ocean TEU Volume Index (IOTI), which measures maritime bookings for twenty-foot equivalent units for U.S. imports, is set to hit an all-time high this week. The IOTI starts in January 2019 but covers one of the most active periods in maritime shipping thanks to the pandemic. With imports being tied more closely than ever to surface freight volumes and transportation demand, this could be a signal of an extremely active summer for domestic surface transportation providers.

Import booking activity measures freight that will hit the U.S. two to six weeks in advance and has been connected to surface transportation volumes over the past year. After a quicker-than-anticipated recovery in consumer spending on durable goods last spring, shippers found themselves low on inventory and began placing orders at a record pace last May.

Whereas the connection between truckload and import volumes has not always been this close, the urgency of the past year has closed the gap between the time the freight is on the ship to the time it moves on a truck.

With many shippers caught off guard by changing consumer behaviors, there was no budget or plan for what occurred in most of 2020. Companies have found themselves playing catch-up most of the year, and the recent surge in consumer spending thanks to a new stimulus bill and continued quarantine this winter has not helped them recover.

The IOTI shows bookings up to a week in advance, meaning it is measuring freight that is being requested to leave their ports of origin over the next seven days. The spike in bookings over the next week is on the heels of a longer-running increase that began in late January.

Bookings do not necessarily translate to freight being moved, as the maritime providers do not necessarily accept the request, similar to domestic truckload, but it is a sign that shippers are becoming increasingly active in trying to secure capacity on the water. Looking at the Van Outbound Tender Volume Index (VOTVI), there are similar moments when shippers appear to spam their providers just to increase the odds of success.

This type of activity keeps upward pressure on rates as little to no gains in total available capacity are occurring, essentially bidding up the price. The Freightos Baltic Daily Indices that measure the average spot price for shipping a forty-foot equivalent unit across the water from China to North America’s East and West coasts continue to hit all-time highs.

The East Coast rate broke $6,000 for the first time this week as shippers are booking more loads to the eastern half of the U.S., attempting to bypass the port congestion in Southern California. This is another sign that freight volumes will continue to flood the U.S. in the coming weeks. It is also a sign that shipping patterns are changing, which will potentially put more pressure on carrier networks as more freight enters in areas they are unaccustomed to servicing at volume.

The Houston and Savannah, Georgia, markets have both seen trucking volumes surge over the past month and capacity tighten to record levels — tender rejection rates hit all-time highs in both markets over the past two weeks.

Most carriers have focused on getting trucks to Southern California to take advantage of high mileage, high-paying loads that keep utilization numbers high and margins wide. Houston and Savannah tend to have lower-mileage and smaller-margin loads thanks to regional density of carriers and destinations.

There is already enough freight to keep carriers busy on the West Coast and it is very difficult to alter networks quickly. With more freight on the way, this summer may be the hottest (market) on record.

To Read More:

How America’s Great Economic Challenge Suddenly Turned 180 Degrees

(NYTimes) Container ships stretch far out into the Pacific, waiting days for their turn to unload goods at California ports. Automakers pause production because they can’t get enough of the computer chips that make a modern car work. Long-dormant restaurants finally see a surge of customer demand, but they can’t find enough cooks.

These are all headlines of recent days, and they have one thing in common: They show how America’s great economic challenge has turned 180 degrees in a breathtakingly short time.

Just a few months ago, the nation faced an enormous shortage of demand for goods and services, which threatened to prolong the pandemic-induced downturn long beyond the point at which the virus was contained. The central economic problem of 2021 is looking like the polar opposite. Businesses are beginning to face the challenge of producing adequate supplies of goods and services — whether of lumber or of cold beer — to satiate that resurgent demand.

Huge swaths of the economy shut down last spring and are now being turned back on. But as roughly three million Americans are vaccinated per day and nearly $3 trillion in federal money courses through the economy, it is an open question how long it will take businesses to get up to speed. Their collective success or failure will determine whether this is a year of Goldilocks economic conditions, or a frustrating mix of price spikes and persistent shortages.

“The global economy is vulnerable because it never really recovered,” said Nada Sanders, a professor of supply chain management at Northeastern University. “There is massive pent-up consumer demand, but it’s important to have supply and demand connected because when you have a supply shortage you don’t have the products consumers want.”

After huge disruptions over the last year, the intricate networks by which major industries keep shelves full and services available have become frayed. Many workers have left the labor force. Worldwide manufacturing and shipping went through temporary shutdowns followed by reopenings, creating disruptions that random recent events, like the Texas ice storms and the Suez Canal blockage, have made worse.

Semiconductor companies cut back on manufacture of the chips destined for cars and trucks when major automakers reduced production during the early days of the pandemic. The semiconductor firms shifted toward making the chips needed for in-demand computers and other home electronics.

The auto industry is now facing the lagged effects of that cutback. For two weeks, Ford idled the factory that makes its popular F-150 trucks, for example. Over all, analysts at IHS Markit forecast one million fewer vehicles will be made in the first quarter of 2021 because of the disruptions. That means American consumers who want to put their new stimulus checks toward a car may face fewer options and have little negotiating leverage on price.

The labor market, meanwhile, presents a paradox. The unemployment rate, at 6 percent, is far above its prepandemic level, and the job market is even worse if you include Americans who say they are no longer looking for work. Yet many employers, especially in restaurants and related service industries, describe a shortage of labor.

At Bibb Distributing Co., a distributor of Anheuser-Busch and other beers in Macon, Ga., delivery drivers are sufficiently hard to find — and demand for the product sufficiently strong — that drivers have been asked to put in overtime and managers deployed on trucks, said Win Stewart, the chief executive.

“When I talk to other people in the market, trying to figure out whether it’s something we’re doing or if others are experiencing the same thing, all of my conversations are the same,” Mr. Stewart said. “We can’t find people.”

That could make things challenging if the summer goes the way many expect, with a wider reopening of the economy as most people are vaccinated. The 85-person company already has 10 to 12 openings, and drivers routinely are offered signing bonuses to move elsewhere.

“I feel like there’s going to be a surge in demand, as they open up concert venues and resorts,” Mr. Stewart said. “You’re going to see strong demand, and I’m not sure you’ll have the labor pool to service it.”

There are varying theories for the disconnect between the data that point to a weak labor market and anecdotal reports of a strong one.

It may be that many would-be workers are unable or unwilling to take jobs so long as they see health risks from coronavirus, or they are spending their time caring for children or for older or disabled family members. Jed Kolko, chief economist of Indeed and an Upshot contributor, has calculated that the percentage of women 25 to 54 who are working has declined by 4.5 percentage points among mothers, compared with 3.4 percentage points among those without children.

That would imply that efforts to get schools, day care centers and nursing homes back to full capacity will have important positive effects on the economy’s supply potential — part of the Biden administration’s rationale for emphasizing spending on those areas in its pandemic rescue plan.

Another possible reason for the lack of workers is that the influx of federal money has made some people less motivated to work. Mr. Stewart said five or six employees quit in the days after the government sent out $1,400 stimulus checks, and business leaders have argued that expanded unemployment insurance benefits may be dissuading people from returning to the work force.

But that theory is not supported by research on earlier rounds of expanded benefits, which found that a shortage of job opportunities was a bigger factor in joblessness than people staying on unemployment benefits.

The combination of a surge in demand and disruptions in the economy’s supply has important global dimensions, too. Many businesses rely on imports, including from countries that are far behind the United States in vaccinating their people, and in some cases facing new outbreaks.

Moreover, the backup in container ships at the Port of Los Angeles and some other American ports, especially on the West Coast, shows the world trade system has continued to be stressed by the whipsaw effect of last year’s shutdowns followed by surging demand.

“There are companies that have changed the way they operate from before the pandemic and are more digitally enabled, and reopening is not as big a deal for them,” said James Manyika, a partner at McKinsey Global Institute, the in-house research arm of the giant consultancy. “The problem is those are not the majority of companies, and those other companies will find they are highly dependent on their ecosystems and their supply chains.”

You can’t turn the world economy off, then turn it back on, and expect everything to come back to normal instantly, in other words. The question for 2021 is just how slow that rebooting process turns out to be.

To Read More:

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