Rising global ocean and air freight volumes despite congestion at major ports has kept container and therefore shipping costs high.

Date: 23 August 2021 (Updated 25 April 2022)
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Across the major indices used to measure fluctuations in containers freight rates, increases have been observed in a higher degree than what was originally experienced in the early stages of the pandemic.

China, the world’s largest exporter, has recorded an over 200% increase in container freight rates. Two indices are used to observe how these prices have changed in this major exporting market over the past few months.

  • The China Containerized Freight Index is based on the freight rate and volume of 12 major routes around global supply chains and reflects the changes in freight rates on these major routes. This index tracks data from major departing ports in China such as Shanghai, Guangzhou, and Qingdao.
  • The Shanghai Containerized Freight Index is the weighted average from Shanghai, China’s busiest port, to the main ports around the world.

Both the indices have reached record highs this year, with current trends indicating further escalation of prices in the second half of this year.

The Baltic Exchange Dry Index (BDI) is an index of average prices paid for the transport of dry bulk materials across more than 20 routes. It is a composite of 4 sub-indices that measure different sizes of dry bulk carriers or merchant ships: Capesize, Panamax, Supramax, and Handysize.

Year-on-year (y-o-y) growth for the China Containerized Freight Index was 156% in April 2022 compared to a growth of 229% in April 2021. The Shanghai Containerized Freight Index moderated to a growth of 135% y-o-y in April 2022 following a growth of 379% y-o-y in April 2021. While the Baltic Exchange Dry Index was also growing at 492% y-o-y in April 2021, it has moderated to the lowest growth amongst these indices at a rate of 75% y-o-y in April 2022.

Trade growth, supported by consumer spending and capital expenditure by corporates meant continued strong demand for logistics services into the peak season of the fourth quarter of 2021. According to Maersk, this growth was being driven by strong demand in the US, especially for technology and retail goods. European container imports from Asia have been uneven between markets, and delays are continuing. Further port delays in Q4 reduced available capacity on the networks. While container demand growth eased in H2 of 2021 compared to H1, the true drivers of high freight rates were congestions in ports and other bottlenecks in the supply chain.

Container rates, as assessed by the Drewry’s world container index, have skyrocketed for major shipping routes. Drewry’s composite world container rates for a 40ft container have increased by 58% y-o-y from USD 4,984 in April 2021 to USD 7,874 in April 2022. Rates for a 40ft container from Shanghai to Los Angeles have increased by 99% y-o-y from USD 4,403 in April 2021 to USD 8,758 in April 2022 whilst other routes such as Shanghai to Rotterdam have also increased by 37% y-o-y in the same period from USD 7,583 to USD 10,364. Numerous factors are contributing to these increased prices; however, some key factors stand out, as discussed below, that will continue to influence over the short to medium term.

5 key factors are influencing further increase in container rates

  1. Lingering pandemic backlog
    • At the onset of the global pandemic, production was halted in major export markets such as China, Vietnam to curb the spread of the virus within domestic borders. Many procurement managers were initially unable to fulfill orders as China’s production only resumed to pre-pandemic levels in the latter half of the year. With the world easing from lockdowns there has been a surge in global demand which in turn has led to continued growth of demand in containers. Global container demand growth has grown by 7% in 2021. The high 2021 growth reflects the strong and ongoing demand strength in the US and partly in Europe. Container demand growth ran ahead of supply growth in most of 2020 and 2021 and as per Maersk data, it is expected to stabilise to 2-4% growth in 2022.
  1. Port congestion and ongoing delays
    • Port congestions at all major ports around the world have resulted in delays in expected arrivals times for importers, as well as increase in costs involved. Fewer shipping vessels can keep to schedules due to rapidly changing regulations across ports as each market attempts to curb the spread of the pandemic within their borders. Moreover, global shipping experienced numerous impactful events in 2021, with the Suez Canal blockage in March, followed by two major ports of South China’s Shenzhen and East China’s Ningbo partially closed due to localized COVID-19 outbreaks in May and August, later exacerbated by US port congestion which began to escalate since July. The crisis has even more widened due to higher fuel costs and disrupted capacities. Therefore, as per Sea-Intelligence, vessel schedule reliability dropped from 78.0% in 2019 to 63.9% in 2020, and then to 35.8% in 2021 and was at 34.4% in February 2022.
    • China’s stringent Covid-19 rules in recent months has led to shipping congestion at Chinese ports creating a ripple effect to supply chain disruptions in Asia, the U.S. and Europe. Shipping congestion particularly rose after Shanghai, the world’s largest container port, initiated a city-wide lockdown in March 2022 to combat Covid-19 cases. This also idled factories and warehouses’ inventory due to slower truck deliveries and increased container backlogs.
  1. Rebuilding inventories
    • As global shippers continue to fight for space on ships, and port capacity not increasing at a fast enough rate, procurement managers are forced to think further into the future with their inventory needs. Where before one can safely order goods only a few weeks before key shopping seasons such as Christmas, larger orders are now being placed months in advance to hold inventory in the event of delays occurring in market arrivals. These increased orders mean that shipping logs are continually being filled, giving shipping companies little time to address this increased demand.
  1. Uneven recovery amongst Global Markets leading to slow turnaround of empty containers
    • While some markets, particularly those in emerging markets such as China and Vietnam, have been able to recover their global exports to exceed levels achieved before the pandemic, overall recovery has not been achieved globally. Major economies such as the US and countries in the EU still lag in terms of exports reaching pre pandemic levels, however, their continued recovery will likely increase pressure on the already high container prices as they seek to resume their trade in goods, this increasing the existing pressure on container availability
  1. Lack of alternatives and high price of air freight
    • Few alternatives exist that can match the efficiency that ocean freight offers. With border restrictions placed between countries, alternatives such as rail or trucks have also seen increased costs associated with their transport. In the last quarter of 2021, air cargo demand substantially surpassed 2019 levels as congested ocean ports were still adding to air volumes. Therefore, ocean freight rates, already at all-time highs, are set to remain this way and most of the major shipping trade lanes such as the transpacific, Asia-Europe and the transatlantic will be impacted. Pressure on ocean freight rates should ease only by late 2022 or early 2023.

Looking to the future

Over the short term, further increases are expected as shipping companies continue to address the multiple factors that influence port capacity, container availability, and excess demand. Prices are expected to stabilize in the medium term as orders for more containers and container ships are completed and fewer cases of Covid occurring at ports as more workers are vaccinated. Efforts by global shipping companies to provide sustainable solutions to the numerous factors influencing decreased availability and spiking prices will aid the price stabilization in the long term. However, these issues have forced a need for new thinking in how procurement managers should approach global sourcing.

Imperatives for Procurement Managers

  • Reassess contracts with global shipping providers. Longer term contracts and volume visibility and commitments to ensure sustainable supply
  • Utilize service providers that offer solutions to your specific needs. The global shipping industry is more consolidated with select top companies providing better solutions
  • Reevaluate your global procurement spend. Increased costs in global logistics will drive down margins, calling for a revaluation of whether one’s procurement is optimized in best cost countries and clusters

For more on Axis Group International’s Global Procurement & Supply solutions email us at solve@axisgroup-international.com

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