Market Update – January 2021

Market Update – January 2021

Demand has continued to build in the weeks before the Chinese New Year holiday, which is February 11 – February 26 this year, and the shipping industry is bracing for the surge to continue through the lunar holiday as China tries to maintain momentum in its recovering economy.  Continued efforts to restock depleted inventories, the booming eCommerce industry (which soared 34% in 2020 and is expected to climb 16% in 2021), and growing manufacturing activity are fueling the demand.  And with consumers, replete with stimulus money, still stuck at home for the foreseeable future as the pandemic rages on, experts anticipate that Q1 will be one of the strongest first quarters in history – in both terms of consumer spending and freight volume.

Bottlenecks at shipping ports have been reported all across Asia, as demand for Chinese goods have created a shortage of containers.  Repercussions are expected to impede the regions’ exports in the coming months, especially as exporters look to front-load shipments ahead of the Chinese New Year shutdown.  HMM Co, South Korea’s biggest shipping line announced last week the at shortage of containers and space on ships will likely continue throughout the first half of 2021.

Shippers should brace for further increased freight costs due to strong demand and tight capacity across all modes of transport.

Ocean Freight

It is getting increasingly more difficult to book space and equipment out of Asia in the lead up to the Chinese New Year holiday, with ports in South East Asia struggling the most.  Vessels are at capacity and all Asian ports are experiencing equipment shortages. OCEANAIR recommends booking containers several weeks in advance so we can begin the process of securing space. Carriers are limiting blank sailings through the Lunar New Year to increase capacity but the delays are expected to continue beyond the holiday.

Due to the overwhelming demand, carriers will not accept cargo without the additional Priority Booking Fee.  Even with the priority booking premium, space limitations are causing many containers to be rolled to future sailings.

With demand for space and equipment at an all-time high, shippers are paying as much as 50% more than the already record-high spot rates just to guarantee their shipments arrive in the U.S. in the next few weeks.  The Special Premium Guarantee (SPG) features on regularly scheduled weekly Transpacific services, which guarantee equipment and “protect” space onboard vessels, vary from carrier to carrier and range from $1,500 to $3,000 per FEU on top of the base freight rate.

While base spot rates have remained stable in early January, carriers continue to increase Premium Space Guarantee surcharges on a weekly basis and are scaling back the amount of space allocated to premium bookings.  Multiple shipping lines have confirmed that cargo under premium space guarantee may be subject to rollover or delay, which leads us to believe that carriers have oversold the premium space guarantee.

Acute Shipping Container Shortage Drives Spike in Shipping Costs

Exporters across Asia have been scrambling to find empty shipping containers to load their goods.  The acute shortage, especially for the popular 40’ and 40’ high cubes, is wreaking havoc on the market’s efforts to improve the backlog, particularly at smaller Asian ports as carriers focus on repositioning empty containers to larger-volume ports, such as Shanghai and Yantian.  While some carriers have taken delivery of newly-built containers in January, taking only some of the heat off the situation, smaller secondary ports are being starved of empty container stocks and can’t keep up with booking demand, resulting in longer delays than were experienced in December.

Efforts to Alleviate the Container Shortage Fall Short

In an effort to reposition empty boxes back to Asian ports, carriers have imposed booking stops, refused agricultural and other exports that delay the return of boxes into the system by up to two to three weeks, and tightened the time allowed to pick up equipment prior to vessel departure.

While China’s container manufacturers delivered 2.6 million 20-foot containers last year, with more than 70% produced in the second half of 2020, manufacturers have little intention of increasing production further due to the supposed short-term nature of the demand caused by the global pandemic.

The overwhelming demand for new shipping containers has contributed to strong price increases for the boxes.  In early July, a 20’ dry box started at approximately $2,100 but soared to $2,650 by October.

Industry Cries for Help

Growing allegations by American and European exporters that ocean carriers have abandoned them in favor Chinese exporters has led to heightened scrutiny by the Federal Maritime Commission for potential Shipping Act violations.  The European Freight Forwarders Association (CLECAT) and the European Shippers’ Council (ESC) are also calling on the European Commission to act.  Allegations include violations of existing contracts, unreasonable rates, unfair surcharges, refused bookings at contracted rates which forcing shippers to pay higher spot rates, unreasonable conditions for the acceptance of bookings, lack of reliability, and abandoning service to shippers altogether.

They are also citing the equipment imbalance surcharges that carriers have imposed due to the container shortage, which the associations blame on the carriers for creating in the first place by canceling sailings earlier in the year.  A recently published report by maritime research and analysis firm Drewry backs up that claim.  According to the report, the container problem is not a shortage of supply, but rather a logistics problem exacerbated in part by the many blanked sailings, which reached as high as 30% of sailings on some trade routes, imposed by the carriers the first half of 2020.  The report goes on to say that container recovery efforts by carriers in the second half of the year created uneven levels of activity and severely impacted ports around the world.

No End in Sight

While the container lines expect the situation to remain extremely tight over the next few weeks, industry experts anticipate it will take months for a full recovery.

Chinese New Year Blank Sailings

Transpacific carriers appear to be infusing as much capacity as possible through the new year holiday, with only 5 blank sailings announced – 2 to the East Coast and 3 to the West Coast – as they continue to try to cope with the unprecedented demand and disruption caused by the container shortage.  For comparison, carriers historically have blanked 48-56 sailings over the 3-week period.

While carriers have voided fewer sailing than a year ago, the lack of additional capacity prior to the holiday means that current conditions will persist throughout the month of February, if not longer.

Demand for LCL Rising

The global container shortage and sky-high air freight rates are driving up demand for less-than-container load (LCL) services.  According to the LOADSTAR, “People are getting desperate.  Normal shippers are definitely trying to switch from FCL to LCL to secure space.”  As such, we anticipate this market will be flooded soon.

U.S. Port Congestion

California

A pileup of containerships off Southern California’s coast has reached epic proportions at the country’s main gateways, which together handle more than a third of all containers coming into the U.S.  Docking delays at the ports of Los Angeles and Long Beach have been stretched for more than 5 days, from the normal maximum of 2 days, causing a queue of over 30 containerships waiting to berth.

Delays are further exacerbated by labor shortages due to rising COVID cases at the waterfront, hour breaks between shifts to disinfect equipment, and strenuous COVID testing efforts.  The labor shortage is affecting turnaround time for truckers, inter-terminal transfers, gate transactions, and vessel delays.  Gene Seroka, executive director at the Port of Los Angeles said, “We are all stretched very thin, whether It’s warehouse workers, truck drivers, or longshore workers.  Storage facilities are full and have staffing issues, because of social distancing, and this extends to the trucking community and the docks.”

The unyielding bottlenecks at the ports have left many retailers waiting for weeks for their goods, hitting companies with lean operations particularly hard.  Shippers are also being hard hit with additional storage and demurrage/detention charges due to the delays.

New York / New Jersey

Berth congestion has also been reported at Maher Terminal and APM Terminals.  Vessels have reported delays of several days upon arrival and all terminal services have been impacted by the congestion.

Extra Loaders Coming to Help with the Backlog

Carriers deployed 31 extra loaders in Southern California and 7 to the East Coast in December to cope with the exceptionally strong market conditions, on top of the 49 extra loaders already deployed in November.  Long Beach and Los Angeles are expecting 13 extra loaders in January, on top of the 27 regularly scheduled loaders.  While East Coast ports are also expected to receive extra loaders, the figures are not currently available.

No Sign of Relief Coming

Conditions at expected to worsen in mid-January as terminals report record numbers of anticipated arrivals.  And with liners drastically cut back on the typical CNY blank sailings to clear the backlog in China, terminal operators in the U.S. will continue to struggle to clear some of the inbound congestion.

Interior Point Intermodal Cargo Restrictions

Some carriers have put restrictions on accepting Interior Point Intermodal and Mini Land Bridge cargo due to serious port congestion at Los Angeles and Long Beach, railroad congestion, and long lead times for empty container repositioning from IPI points.

OOCL will not accept any requests for destination changes on IPI/MLB services.

YML will only accept IPI cargo for the following destinations if the shipper pays for Premium Bullet Rates, which are exceeding $9,500 above FAK rates:

  • Chicago, IL
  • Paul, MN
  • Kansas City, MO
  • Dallas, TX

Air Freight

While many airlines have added more flights, it hasn’t been enough to offset the thousands of passenger planes grounded by the pandemic.  Global airfreight volumes rose 2.5% in December and an 8% increase in the last two weeks, driven largely in part by restocking efforts and manufacturing and eCommerce growth as well as the release of the COVID-19 vaccines.  Available capacity is still 21% less than it was a year ago.  The capacity situation, higher rates, and the acute container shortage in the ocean freight sector is also driving up incremental demand for air freight services, further placing pressure on air freight capacity.

Air freight rates from China to key American and European cities are currently 35% higher than before the start of the peak season in October and more than 150% higher than they were over the same period last year.  While spot rates dropped slightly after New Year’s and rates are expected to drop again in a couple of weeks, rates are not expected to drop significantly for at least six months.  As air freight rates are expected to remain elevated and volatile for quite some time, accurate forecasting by shippers will be crucial for managing shipping requirements and costs.

Last month, the International Air Transport Association (IATA) forecast that air cargo industry would return to pre-pandemic levels early this year, a sharp contrast to the air passenger industry, which is not expected to bounce back for another three years.

Domestic Trucking

Industry analysts expect to see pricing driven up my high demand and tight capacity, with moderate rate increases in FTL and mid-to-high single-digit increases in the LTL segment.  One consolation for shippers is the prosect of a modest rise in demand for oil this year, according to the U.S Energy Information Agency, which should relieve the cost pressure from fuel prices.

Contracted tenders are up 15% over the same period a year ago, and it is expected that this year will not see the typical slow season.  And, with the passing of the second stimulus package, the slow rollout of the vaccine program, and the potential for a third stimulus, 2021 shouldn’t lose any steam soon.

Although capacity has been loosening since the year began, continued high demand is making it difficult to secure space, with carriers rejecting nearly one in four tenders.  Dry van outbound tender rejection rates are currently at 23.39%, its lowest level since mid-August, while reefer capacity remains the hardest to secure, with a tender rejection rate of 42%.  The Midwest and Plains continue to experience the tightest capacity for dry vans and reefers, followed by the West Coast, with tender rejection rates hovering at 18.5%.  Tender rejection rates are expected to remain stable or fall just slightly over the next few weeks.

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Sources:

  • OCEANAIR’s Partners – COHESION Freight Worldwide and M+R Spedag
  • American Shipper, 1) Airfreight volumes, pricing strengthen into 2021, 2) Regulators warn container lines to stop refusing US exports, and 3) Inside California’s colossal container-ship traffic jam
  • The LOADSTAR, 1) With air cargo rates set to remain sky high, shippers need to plan carefully, 2) Covid, costly airfreight and box shortages pushing forwarders to LCL options, 3) Space on box ships out of Asia now going, going, gone – to the highest bidder, 4) Strong US surface transport market augurs more cost pain for shippers, 5) More misery for shippers with return of bunker surcharges on the radar, and 6) More misery for European exporters as carriers tighten Asia bookings,
  • FreightWaves, Freight bull market rages on in the new year
  • Seatrade Maritime News, Container lines cancelling hardly any services over Chinese New Year period
  • South China Morning Post, Shipping containers becomes new buzz word as coronavirus leaves industry struggling to meet demand
  • The Maritime Executive, I1) Drewry: Blanked Sailings Contributed to Container Shortage and 2) EC Needs to Act on Carriers’ Practices, Say European Shippers
  • Bloomberg, Demand for Chinese Goods Is So Strong There’s a Container Shortage
  • The Wall Street Journal, Port Delays Leave Cargo Ships Stranded off U.S. Pacific Gateways