Post-Pandemic Ocean Shipping: A Lull Between Storms

Ocean freight rates from Asia are on the rise once again as exporters are shipping goods early due to concerns about US tariff hikes and ongoing disruptions in the Red Sea.

The Shanghai Containerized Freight Index, which tracks container shipping rates, increased by 12.6% to 3,044.77 last week, surpassing the 3,000-point level for the first time since August 2022. Exporters are booking more slots on vessels heading to the US and Europe to fulfill orders, leading to a continued growth in rates. The cost of shipping a 20-foot container from Shanghai to Europe has risen to over US$7,000, up by about US$1,000 from a month ago. US retailers relying on imports to meet consumer demand have further driven up demand for container transport.

Shippers may face elevated rates and delays for months due to high demand and limited capacity. However, these disruptions are expected to be less severe than those experienced during the pandemic.

The Panama Canal has been facing bottlenecks due to drought conditions since the end of last year caused by El Niño Phenomenon. Early this year, vessel wait times to cross the canal doubled, increasing from 10 days to 20 days. However, the situation is expected to improve with the arrival of rains in May and June. The operator of the waterway anticipates ongoing climate variability to impact global trade beyond this recent crisis.

Last year, the authority implemented unprecedented restrictions on shipping transits through the canal, affecting various commodities like refined products, LNG, and containers. These restrictions led to increased freight rates as vessels sought alternative routes around Africa. With the anticipated rainfall in May and June, there is hope that the restrictions will be eased. The authority plans to increase daily transits from 24 to 32 starting from June 1, contingent on weather conditions. However, the administrator cautioned that these plans are subject to change based on future weather forecasts.

The Panama Canal Authority is considering permanent operational changes, including a shift from a first-come, first-served model to a booking system for transit slots. The crisis prompted the authority to auction off unused slots, aiming to enhance the canal's reliability. As the canal moves towards normalization, the authority intends to increase the percentage of pre-booked transits to improve efficiency.

Panama Canal Vessel Traffic 06/04/24

Ship attacks have prompted owners of vessels sailing between Asia and Europe to opt for a longer route via Africa. Consequently, ships are setting sail earlier to accommodate the additional travel time required for this detour. According to Dominique Nadelhofer of Kuehne + Nagel, a prominent sea logistics company, the impacts of these route changes initiated in December are just starting to show, with ships in the Asia-Europe trade route now requiring over 100 days for a full rotation by circumnavigating Africa.

There is currently a shortage of empty shipping containers in Shanghai as demand from exporters rises. Chinese exporters, including garment manufacturers and toy makers, typically start shipping goods for the holiday season in July. Concerns about US tariffs and Red Sea disruptions have prompted exporters to accelerate shipments.

Trade tensions between the US and China have pushed manufacturers to expedite shipments of goods. Red Sea disruptions caused by attacks on ships have added to the urgency for exporters.

European retailers are hurrying to place their Christmas orders early as high shipping costs and disruptions in trade routes pose a threat to holiday deliveries, experts report. One business, as cited by the BBC, mentioned that the increased costs are likely to impact the prices of larger items like white goods. Nick Glynn, the head of the Buy It Direct group which operates online retailers such as Appliances Direct and Laptops Direct, emphasized the need to plan and book shipments well in advance to ensure timely arrivals. Despite the need for advanced planning, he believes that Black Friday and Christmas stock will not be affected.

However, Mr. Glynn highlighted that the increased spot rate for immediate delivery has surged from $4,500 to $7,500 in recent weeks, significantly impacting bulky items with low profit margins like furniture, barbecues, and kitchen appliances. He expressed concerns that most online retailers would not be able to absorb these price hikes on larger items, indicating that consumers can expect significant price increases in the coming months.

Importers have learned from the pandemic and are now prioritizing early shipping to protect their supply chains. Some businesses are already shipping goods for Christmas in May to avoid potential disruptions. Retailers are adjusting their timelines for importing goods due to concerns that Red Sea disruptions caused by Houthi attacks could continue until autumn. To mitigate any potential delays, shipments are being expedited to ensure timely arrivals. The attacks on ships have necessitated longer routes around Africa for vessels traveling between Asia and Europe, prompting ships to depart earlier to accommodate the extended journey time. Container equipment rotation has also been disrupted, affecting the timely completion of global container shipping operations.

Emily Stausbøll, a Senior Shipping Analyst at Xeneta, expressed concerns about the rapid increase in shipping rates and the factors contributing to this trend. The surge in demand during the first quarter of 2024, up by 9.2% compared to the same period in 2023, has intensified pressure on shipping capacity, exacerbated by the ongoing Red Sea situation. Learnings from the pandemic have prompted shippers to anticipate potential capacity constraints during the peak season in Q3, leading to an earlier influx of goods to avoid supply chain disruptions. This increased volume moving on the spot market is expected to drive rates upward.

While long-term rates on major trade routes have remained relatively stable in Q2, carriers have negotiated new contracts for the next 12 months at lower rates, considering the elevated spot market rates. The anticipation of a potential return of container ships to the Red Sea has motivated carriers to secure long-term volumes despite the current market overcapacity. Shippers are cautious about the widening gap between short and long-term markets, as it increases the risk of cargo being rolled over, especially for contracts at the lower end of the market.

Shippers are proactively building inventories to mitigate potential disruptions caused by black swan events, tariff changes, port congestion, equipment shortages, and labor negotiations.