The market outlook for global ocean freight

What’s pushing global ocean freight costs

Planning resilient responses to delays and rising rates

The global freight market has been impacted by complex, interlocking developments over the past 18 months. COVID-19’s unpredictable path has created obstacles to freight movement that continue to push rates up and put pressure on large and small shippers.

Rising US import demands, extreme port congestion, and geopolitical tensions in China make it unlikely that ocean freight prices will fall this year. Businesses moving cargo internationally must be ready to respond to a range of logistical and commercial contingencies.

A US demand boom

Compared to 2019, 3% annual average global growth is consistent with pre-pandemic data. However, while COVID-19 has reduced demand in many parts of the world, North American imports have surged by 10% annually since 2019.

Pre-pandemic, around 2% of global capacity was always unavailable because of waiting times causing delay internationally. The current delays and bottlenecks have increased this sharply, and now equate to 10% removal of global vessel capacity.

There is no shortage in the number of ships. The problem is that they are unavailable for moving freight when they sit idle in queues outside ports. According to Lars Jensen, CEO and Partner of Vespucci Maritime, in mid-August 2021, there were 32 freight vessels queuing outside Los Angeles. Those ships face extended delays in getting to the next ports to pick up cargo, which has a flow-on effect on ports around the world.

“Carriers aren’t profiteering. This is a normal development, we’re just not used to it in container shipping,” he says.

Complex capacity absorption

Port congestion is a critical factor - but only the start of the problem. Crowded terminals are further impacted by inland bottlenecks fuelled by pandemic-related disruptions to road freight, including a reduced availability of trucks and drivers.

Natural disasters like fires in Canada have also restricted rail freight across North America. 2021 has seen full or partial closures of ports in response to the pandemic, including in China and South Vietnam. In 2022, the contract with the port workers’ labour union on the US West Coast is set to expire. If negotiations are protracted, international movements could be crippled.

Under normal circumstances, there is sufficient capacity in the market to accommodate the impact of natural disasters, contract negotiations, and similar challenges. In the current environment, this capacity does not exist, and these otherwise normal events have a compounding effect.

No upper limit on spot and contract rates

Capacity absorption resulting from increased US demand and other pandemic impacts are key drivers pushing up freight rates, particularly spot rates. With rates at record levels, they will continue to rise while there is insufficient capacity to meet demand.

Relatively small freight vessels, which could have been chartered for $10-12,000 a day 18 months ago, are fetching as much as $150,000 per day. Securing a contract may also mean being locked in to a 3- to5-year agreement. Market economics dictates that while there is an imbalance between supply and demand, there is no upper ceiling on rate movements.

While all rates are rising, so is the gap between contract rate and spot rates. This reflects the difference between cargo that must move now versus later, and ongoing competitive pressure on small shippers. Large companies facing a doubling or tripling of contract rates are better able to absorb those costs than smaller businesses looking to stay competitive.

Toll’s Peter Simmonds, Senior Vice President of Global Ocean Freight, agrees the market is unlikely to turn around in the short to medium term.

“Based on where we’re seeing the market going today, those rates are likely to increase again on a year-on-year basis unless we see some form of crash,” he says. 

Building resilience

Shippers moving any kind of cargo in the next 6-12 months must decide what resilience looks like in their business and put plans in place to support decision-making. It’s critical to ask the right questions:

• What is resilience worth to you and your business?
• What will you do if your cargo is suddenly delayed a month?
• What if you pay a premium rate but your cargo is stalled by bottlenecks?
• At what point will freight rates be too high?

Market volatility is not expected to improve this financial year. Businesses must prepare for the unpredictable and make informed decisions about leaving cargo at the point of origin or paying record-breaking shipping rates.

The good news

Lars says while there are no guaranteed timeframes for resolving bottlenecks, managing them will start to right the freight ship.

“If we can solve the bottleneck, the market will normalise,” he says.

Peter offer some good news for customers concerned that contract rates may disappear as carriers seek to benefit from significantly higher spot fees.

“We will continue to deliver 12-month contract rates for customers who want them,” he says.

“Access to multiple shipping lines gives us more flexibility across the market.”

Find out how to build resilience and plan for contingencies for international shipping during the pandemic.