Ocean Freight Rate Spike – Reasons
The exporters and importers are baffled by the abnormal rise in freight rate in container shipping business. The rise is so dramatic that shippers have very little time for readjustment. The freight rate from China to Europe or North America, for a 40 ft container has gone up from US$ 2,000 to US$ 12,000. This is severe for Exporters and Importers and especially for those items which are of low value like toys, household items, clothes etc.
The price of shipping goods from Asia to Europe has gone up dramatically in last one year and in the recent month it has been very pronounced.
The trend is not limited to China-Europe lane but across the market including Chine-North America route. In fact China-North America route is experiencing the rates which are 20% higher compared to Europe route.
While analyzing the situation, we find that there is no single factor which has been causing the spike in the Ocean freight rates. There are multiple factors at work which is making the situation so dire. These factors are :
Surge in demand
The expected job losses due to global pandemic did not have material impact on the purchasing power because of stimulus packages announced by various countries as well as easy adaptation of work from home concept by the employees. This has also led to substantial saving by the household who had very little to do during lock down. The resultant saving is leading to massive surge in demand for various items which is translating into record demand for shipping in the market. This has led to short term demand supply mismatch resulting in surge in shipping rates globally.
Change in Consumption Pattern
Lockdown has forced people to work from home. This has resulted in less demand for services like restaurant and travel & leisure. However demand for home improvement items, electronics & gadgets, fitness equipment and autos have gone up substantially. This is causing great surge in demand for shipping and causing congestion at port.
Global Imbalance in capacity
The lock down at the beginning of the pandemic resulted in massive slump in the demand. This led to Shipping Companies pulling out capacities from the market. As the lockdown was lifted in the major markets and countries started the vaccination drive aggressively, the market confidence returned and demand for goods & services returned with vengeance.
However, it is taking time to bring the shipping capacities back in the market and this is leading to competition for available ocean freight capacities leading to major spike in freight rates.
Bottlenecks at Port
The economic recovery has been uneven across the globe due to pandemic. Major ports faced lot of issues due to instances of Covid breakout resulting in shutting of operations. This is leading to delays in loading and unloading of containers at the port resulting into capacities being locked up. There are some signs that average performance will start to improve as the share of vessels reaching their destinations on time stopped sliding in April’21, and average delays improved. However overall performance remains the lowest it has been in ten years of records.
No alternative to Ocean Transportation
There is no viable option to Ocean freight as it’s the cheapest mode of transportation for large volume of goods. The market has no choice but to ride out the current surge in pricing.
The higher shipping costs have been sparked by a combination of factors, including soaring demand amid stimulus checks, saturated ports, and too few ships, dockworkers and truckers. The problems are too broad to be remedied by any short-term fix and are creating ripple effects across supply chains. Problems are surfacing across the corporate landscape. Nike Inc. said revenue declined 10% in its latest quarter due to supply chain challenges, including the container shortages and U.S. port bottlenecks.