Ocean Shipping Prices Are Pushing Toward Pandemic-Era Highs as Congestion Swells

Date: Monday, June 24, 2024
Source: The Wall Street Journal

Ship backups that plagued seaports during the Covid pandemic are making a comeback, as vessel diversions because of attacks in the Red Sea trigger gridlock and soaring costs at the start of the peak shipping season.

Flotillas of containerships and bulk carriers are growing off the coasts of Singapore, Malaysia, South Korea and China while ports in Spain and other parts of Europe look to dig out from container piles.

Houthi rebel attacks on commercial shipping in the Red Sea, which have effectively closed the Suez Canal since the end of last year, are being felt at faraway ports as the disruptions extend voyage times, throw ships off schedule and strand sea containers.

The snags are complicating logistics for retail and manufactured goods, but importers and exporters say they are most concerned that the backups could expand as demand picks up in the coming months heading into the busy peak shipping season. That could drive already-resurgent freight rates close to levels seen during the pandemic, when companies vied for scarce space on ships and spot-market prices for shipping a 40-foot container surged past $20,000.

The average worldwide cost of shipping a 40-foot container hit $4,119 the week ending June 14, according to Freightos, more than triple the cost in June last year and the highest rate since September 2022.

“We have not seen those $20,000 rates for a container as it was in the pandemic, but we are looking at $7,000 per box from Asia to the U.S. East Coast rates versus the normal rate of about $3,500,” said Michael Murray, who runs DeSales Trading, a threads and yarns wholesaler in Burlington, N.C.

“As an importer there is nothing worse than getting stuck with inventory having inflated freight costs like what happened in 2022,” he said

The disruptions come as a range of other events are adding to supply-chain challenges.

Some U.S. importers are pulling orders forward ahead of new tariffs on Chinese goods. The Panama Canal has been limiting ship movements because of a drought that only recently showed signs of abating. In the U.S., retailers and manufacturers are worried about recent dockworker warnings that they might strike at U.S. East Coast and Gulf Coast ports in October.

Freight specialists say the congestion could get worse if more importers bring in goods early to avoid higher costs and further delays later in the year.

“What we are seeing is a surge in cargo, as shippers book earlier and perhaps more containers than normal,” said Jonathan Roach, a container shipping analyst at London-based Braemer. “This is an attempt to front-load inventory and mitigate longer transit times and potential delays.”

“If the congestion worsens, we may see even more front-loaded cargo bookings, which could make the situation even worse,” he said.

The impact already shows signs of reaching the earnings of importing companies.

Mark Webb, chief financial officer of Quincy, Mass.-based J. Jill, said on a recent earnings call that the apparel retailer used “very costly” airfreight to rush in items ahead of Mother’s Day in May.

British retailer DFS Furniture this month slashed its profit outlook by half, largely because “Red Sea routing issues have persisted, resulting in delays to customer deliveries and higher freight costs.” The company said nearly $18 million of its goods were delayed because of the Red Sea-related disruptions.

Houthi rebels effectively closed the canal to most commercial shipping last fall when they started hijacking and attacking vessels in support of Palestinians in Gaza. They have captured, damaged and sunk vessels, killing several sailors.

Ocean carriers were initially able to cope with the re-routings around the Cape of Good Hope in southern Africa, which added 10 days or more to sailings. But global shipping networks started to buckle in May as retailers and manufacturers ramped up orders in an apparently early start to the peak shipping season.

The diversions around Africa knocked ships off schedule, causing ocean carriers to cancel some sailings and to divert vessels from other parts of the world to fill gaps in service. The disruptions also stranded containers in ports around the world and led to a shortage in export hubs like China.

The Port of Singapore, a global hub for container lines, has been swamped, leading to long wait times for a berth and increased shipping costs.

Average time in port at Singapore increased 15% between mid-April and mid-June to almost 40 days, according to S&P Global Market Intelligence’s Port Performance data.

Meanwhile, brokers, port operators and ship owners said ports like Barcelona in Spain and Antwerp in Belgium have been heavily congested in recent weeks as ships skip Mediterranean distribution hubs like Piraeus in Greece and Marseille in France and sail across Europe’s Atlantic coastline.

The cost of leasing sea containers has also skyrocketed at some gateways because so many boxes are tied up on the longer voyages around Africa’s Cape of Good Hope and stuck in the cargo snarls in Asia and Europe.

Container xChange, an online marketplace for sea containers, says the average price for a shipping container in Singapore in May was up 26% from October, before the Houthi attacks on commercial vessels began. Leasing prices for boxes from Shanghai to Los Angeles and Long Beach in May were about double the rate of last November.

The fast-rising shipping prices have been a boon to container lines. Danish shipping major A.P. Moller-Maersk this month raised its full-year guidance for the second time in roughly a month, projecting a $3 billion improvement in free cash flow for the year over its previous forecast.

“Trade flows will eventually return to normal when the Gaza conflict is resolved and ships return to the Red Sea,” said Nils Haupt, the chief spokesman for German boxship operator Hapag-Lloyd. “Freight rates will fall, because there is no escaping that there is a lot of extra capacity at sea.”