The cost of ocean freight has quadrupled in a matter of months, driving up cost of deliveries. Soaring demand, labor shortages, port congestions, and incidents such as last month’s Suez Canal blockage are fueling high surcharges and sealing steep rates into contracts.
With 9 billion tons of cargo expected to cross our oceans before year’s end, the skyrocketing shipping costs in major affected lanes will remain inflated throughout this year. Although the backlog of vessels in the harbor are expected to dissipate beginning in June, port congestion and equipment shortages will persist through 2021. Suppliers began imposing rate increases in several trade markets in April and carriers are seeking to lock in profits into 2022 via higher annual contract rates signed this year. As a result, don’t expect to see rate reductions starting until Q1, 2022, and anything approaching pre-COVID pricing until 2023.
So, what can businesses do in both the short and medium term to mitigate these escalating costs?
First, develop a strategic sourcing approach. If you can, postpone launching any new sourcing — locating new suppliers from new regions — activity until the end of this year, or first quarter next year. The cost of ocean freight will continue to increase, albeit in a much more controlled rate for the rest of 2021.
Second, increase the number of carriers you contract with, to reduce reliance on spot market rates and ensure availability of supply.
Third, introduce renegotiation clauses in your new agreements with suppliers, shippers, liners, and container providers for the first quarter next year when rates are expected to be lower. Establish new baselines to integrate the updated rate charts for global ocean freights. Use the following detailed forecasts, listed by major shipping lane, to inform your strategy and negotiations.
North America West Coast to Asia: Container repositioning and securing empty containers in the U.S. will become easier by the end of Q3 2021. Containers that are stuck on ships awaiting berths, on quays awaiting transport, or log-jammed at other intermodal pinch points are expected to be released in the coming months. Because of lockdowns, the last few quarters witnessed an unplanned stockpiling of numerous essential commodities with the sudden growth in demands from various Asian regions; however, this trend is expected to end during the second half of 2021. The decrease in cancellation of sailings by carriers, along with reduction of blank sails in the North America West Coast to Asia lanes, will drive the reduction of ocean freight rates by the first quarter of2022.
Southeast Asia to Oceania Region: Rates are not expected to decrease until the end of Q1 2022. With seasonal commodity demands, we will likely see continuing spot rate inflation until Q4 2021.
South Asia to China: Labor availability is expected to expand in China to address the volume of containers stuck at Chinese ports, which will add more volumes in the Southeast Asia market and lower the inflated rates by the end of Q4 2021. To contain ocean freight rates on Southeast Asia lanes, governments are planning to force shipping lines and agents to provide “all-inclusive” freight rates. The Global Shippers Forum is backing India’s push for “all-inclusive” ocean freight rates, claiming that carrier surcharges disproportionately impact cargo owners in developing countries.
Intra-Asia: Spot rates from Intra-Asia trades are expected to lower by the end of 2021 and in the first quarter next year because with the market mildly overcoming equipment shortages, port delays, and lack of capacity. Additionally, the decline of personal protective equipment (PPE) traffic out of China and Southeast Asia, coupled with new preventative measures and in-house developments in the U.S. and EU and vaccination programs, will support in controlling any growth in freight rates.
Northern Europe to Middle East Region: Blank sailings are expected to reduce in major European lanes. For lower freight volumes, companies have started considering niche Non-Vessel Operating Common Carrier to contain costs. Repositioning of empty containers back to China from Europe is also expected to increase, which will lead to the removal of repositioning surcharges and reduce freight rates by Q4 2021.
Northern Europe to the Far East: Ocean freight spot rates in the European region may come down by the end of Q4 of this year because of the market overcoming the capacity bottlenecks and an increase in the availability of empty containers and other equipment. However, this benefit will be offset because shipping activity is likely to grow between Q3 and Q4 of 2021 because of an increase in seasonal demands of agricultural and perishable products in the Far East regions, creating minor inflation in the second half of this year.
Northern Europe to Oceania: Controlled European imports of e-commerce merchandise, home improvement goods, PPE, and other medical supplies will help to contain ocean freight rates. Carriers are expecting a slowdown in the number of new contracts during the last quarter of 2021. Ongoing service enhancements with less cargo rolling, improved container availability at load ports, and much better schedule reliability are expected to bring down ocean freight rates.