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May 21, 2024

Why Ocean Freight Rates are Surging: A Look at the Supply Shock after the Red Sea Disruptions

Why Ocean Freight Rates are Surging: A Look at the Supply Shock after the Red Sea Disruptions

In our previous post, we discussed the lasting impact of the Red Sea diversions on shipping costs and the broader market transformations that have ensued. As we move deeper into May 2024, it's clear that the disruptions are far from over, and the shipping landscape continues to be marked by significant challenges. Let's delve into the current state of the Far East Westbound Ocean routes and the factors driving the persistently high rates.

The situation in the Red Sea remains chaotic. Vessels are rerouting via the Cape of Good Hope, significantly impacting on-time performance and schedule reliability. The delays caused by this rerouting are exacerbating the already strained supply chains, leading to extended transit times and further complicating logistics planning for shippers.

Strong Bookings and Rate Increases Post-Chinese Labor Holiday

During the Chinese Labor Holiday, bookings have remained robust and are currently looking strong for the coming period. While YoY growth looks strong on paper, it needs to be kept in mind that this is in comparison to a Q1 2023, where demand was unusually low, and as a result of many companies reducing stock levels.

However over the past weeks - it has become apparent that lead times are even longer than anticipated and with the outlook of freight rates increasing rapidly (The second half of May sees a confirmed General Rate Increase (GRI) of $1,000 per 40-foot container and June 1H will see a similar increase), a surge in demand has been observed. Shippers are pushing cargo for earlier departures to avoid increasing freight costs. Many companies are also changing their strategy to accept higher stock levels fearing the even more costly stockouts that many companies faced during COVID. The situation is right now, that unless space has already been secured, all vessels are reported full, highlighting the intense demand for shipping slots. To cope with this situation, more carriers are pushing Premium options. These options allow shippers to load their cargo on the first available departure date with higher equipment priority, though at a higher cost. This approach helps avoid delays and ensures timely deliveries.

Overall, there is no massive uptick in consumer demand and while it is tempting to compare the current situation to the COVID time, this is the biggest difference. What has changed is buying behaviour in companies: there is a panic mode due to longer than anticipated transit times. Many companies are now looking at increasing stock levels to avoid stockouts, creating an unnatural spike in demand. This combined with normal May holiday seasonality is putting pressure on the supply/demand situation and hence drives rates up at a rapid speed.

Announced Blank Sailings and Further GRIs

The market is bracing for more blank sailings in June. The Ocean Alliance has announced three voided sailings, and MSC has confirmed one slide-down. In addition, carriers are pushing for another GRI in the first half of June, driven by the current over-demand. This continuous push for rate increases reflects the challenging market conditions and the carriers' efforts to manage capacity.

Equipment Shortages and Strategic Recommendations

Equipment shortages continue to plague the market, with major carriers like CMA, Evergreen, Hapag Lloyd, Yang Ming, and HMM reporting issues. The situation will remain tough through May until empty containers are fully recovered. Shippers are advised to pick up containers as soon as the container yard opens or as soon as the Equipment Interchange Receipt (EIR) is available to print, following carrier local practices. This proactive approach can help mitigate delays and ensure that cargo is moved efficiently.

The Path Forward: Strategic Planning in a Volatile Market

The persistent high shipping rates on Asia to Europe routes are more than just a temporary fluctuation—they signal deeper, structural challenges within the shipping industry. As these trade lanes adjust to the new realities of post-Red Sea diversions, all market participants must recalibrate their expectations and strategies. For shippers, this means bracing for continued delays, longer lead times, and higher costs, particularly during peak periods.

This raises critical questions: Will the Ripple effect continue, even during summer months, or will it ease again a bit after the first (panic) moves are over? And how will peak season look like in H2 considering the potentially advanced peak that we are seeing right now? We might see the Ripple effect during summer transitioning into a moderate peak. This would mean quite some pressure on the rates and the end-to-end supply chains.

And maybe the even bigger question is: will the diversions continue or will there soon be a resolution allowing normal trade - this could once again turn the market situation upside down. For now the message continues to be “until further notice”.

It is crucial to stay informed about market developments to navigate the complexities of this challenging landscape. Flexport will continue to monitor the situation and provide updates to help shippers make informed decisions.

Sign up for the Freight Market Update Live and hear from Guillaume Caill, Arno Hausch, and myself about the latest developments during the FMU live on Tuesday, 21 May 2024, at 15:00 BST / 16:00 CEST. You can sign up here.

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