Since the beginning of the pandemic, Covid-related restrictions kept families closer to home causing more spending on goods and less spending on services. This major change in consumption patterns in the U.S. has been driving up demand for shipping ever since, causing more congestion in ports and the surrounding infrastructure. As we enter the 2021 holiday season, it is clear now that businesses are struggling more and more every day to fulfill orders from U.S. consumers and it looks like this year’s holiday season will be remembered as the year the supply chain took the number one spot in many companies’ concerns.
The shipping industry has been faced with countless Covid-related issues during the pandemic.
These issues include port lockdowns, container shortages, blank sailings, ships being taken out of service, an overall reduction in shipping capacity, shipping backlogs, truck-driver shortages, port bottlenecks, constant lockdowns in Asia, widespread factory closures, labor shortages and the list goes on. All these issues combined are the root cause of this holiday season supply chain challenge. As we approach the end of 2021, many of the current issues seem to have no easy solution in the immediate future. All-time high shipping rates and all-time low service reliability is the new norm. Containers are still very hard to come by, especially from Southeast Asia where there are less options.
Shipping containers, once an ordinary cog in the global supply chain, have become a coveted and expensive lifeline for the nation’s retailers and manufacturers. They are in such short supply that companies are having to rethink how they stock shelves, placing a premium on smaller, more compact merchandise. We see countless new orders to produce new containers. Container manufacturers are expected to make 6.4 million new containers this year, more than double their pre-pandemic output. But those efforts are being hampered by shortages in raw materials, such as steel and lumber, as well as welders.
We now see that world’s largest retailers, like Ikea, are acquiring their own containers. Many others like Walmart, Target, Home Depot and Costco are chartering ships to get high-priority goods delivered on time.
So, the remedy isn’t as simple as just injecting more containers into the market.
Because the container shortage is closely intertwined with many other aspects of shipping as unreliable vessel schedules, port closures, a labor shortage and many other serious fundamental shifts, all components need to be addressed along with container shortages to see a real change. We are seeing countless ships waiting off the California coast, unable to unload their cargo. Port productivity, along with port capacity must be improved. Although we’re seeing progress in places like the Ports of Los Angeles and Long Beach, we must be prepared for more volatility and uncertainty heading into 2022.
On the consumer side, this holiday season we see that inflation has spread from used cars and energy to items across all the economy, from rents to food to apparel. At the same time, wages are increasing, which is great for workers but also contributes to inflation, as companies must raise prices on their products to offset higher labor costs. The demand–supply imbalance was slow at first in late 2020 but it really picked up steam as the ball dropped on this holiday season. The consumer price index, which monitors the prices of a basket of consumer goods, grew 1.7% annually in February but by October had jumped to 6.2%.
Current Transpacific Market Updates
As we approach the end of the year, Chinese New Year concerns re-surface. We are now seeing China space increasingly being cut due to blank sailings and delays on voyage rotation. With persistently strong demand, carriers are pushing many new bookings to Premium/Diamond Tiers. We expect an increase in December Premium Rates. We foresee that this will continue until at least the end of January 2022. Forecasting and good planning is more important than ever as many carriers are asking bookings four weeks in advance to queue for space allocation.
The space situation in Southeast Asian countries is also getting worse due to the limited options in carrier selection, allocation, and blank sailings. Carriers have withdrawn all FAK allocations for a very long time and only consider Premium/Diamond Tier for all new bookings. Due to the backlogs in major transshipment ports like Port Klang and Singapore, it now takes even longer for space planning and feeder connections for shipments from Indonesia and the Philippines. Equipment imbalance remains and will likely continue well into 2022.
The space situation on vessels ongoing to the U.S. West Coast is extremely difficult due to the transshipments in Asia loading ports. There are very limited space openings for East Coast bookings from India. For equipment availability, South Indian ports and inland ICD are facing serious 40’ HQ equipment shortages. We expect this situation will continue until at least the end of December.
Fuel prices are also up 47% from the beginning of the year, also heavily impacting the finances and quarterly reports of steamship lines.
These costs are, of course, passed along to shippers through bunker adjustment factors (BAFs). But this is probably less impactful than they would normally be, as ocean freight rates are so high now, the high BAF expense is a small fraction of the overall cost.
Finally, many recent studies show how quickly freight rates may normalize using historical data. Based on the data, the normal rate level is at -69% from the current rate levels. Analysis shows that it would take 18-30 months to get back to “normal” rate levels. However, I am doubtful as carriers now learned how to control the supply with blank sailings, my bet is that we won’t be seeing the pre pandemic lower-level rates anymore. So, we may as well still be discussing the strong market, space, container, and congestion issues well into next year’s 2022 holiday season.