Import demand, weather strains already stretched shipping system

Another crack of the Red Sea disruption-driven bullwhip is keeping ships on the Asia-North America trade unusually full. So much so that spot rates on the trade in late April and early May were at levels approximately two and one-half times the ranges midsize importers are hashing out with container lines for annual service contracts.

Lower demand shielded the industry from some of the initial Red Sea disruption that started in late December when Houthi rebels operating in Yemen began scaring container lines away from Suez Canal transits. Asia outbound slots were first restrained as carriers shifted capacity to account for longer transits around southern Africa, but the industry had wiggle room with ample capacity to deploy to handle the modest demand.

Container lines sped up ships and coordinated with European ports to avoid the ship bunching, and resulting congestion, that some forwarders warned of but never materialized. Spot rates surged on trades connecting Asia to Europe and the East Coast of North America and those trades indirectly impacted by the dislocation of equipment. Spot rates on both main trades had peaked by late January and steadily declined before the current rally that began in mid- to late April.

Now, outbound Asia capacity is stretched by unexpected import demand, first from North America and now Europe. Fog in North Asia in late April slowed cargo flow and squeezed outbound container supply as demand and longer transits sucked up equipment supply. Indeed, the strains to the extended container shipping system due to the ongoing Red Sea disruption are showing again, Charles van der Steene, president of Maersk North America, told the Journal of Commerce in a May 6 interview.

US importers complain they've been unable to get equipment for cargo out of Asia. The average rate to lease a container from Asia to US ports has been surging since late last year, as tracked by Container xChange. The average rate to lease a 40-foot high-cube, for example, jumped 67% to $1,173 between the fourth quarter of 2023 and first quarter of 2024. Asian outbound container leasing rates softened in April, but on average remain significantly higher than last year.

Sailing full

The uptick in import demand — higher than last year but comparable with 2019 pre-pandemic levels — is keeping Asia-US ship utilization in the high 90% range, according to recent discussions with carrier executives. At least a dozen forwarders and shippers have told the Journal of Commerce that container equipment has been particularly tight in recent weeks, giving some the impetus to stop delaying and sign annual service contracts which generally, at least on paper, start May 1.

China outbound cargo frontloaded ahead of Labor Day celebrations in early May met delays in Shanghai and Ningbo as heavy fog slowed cargo flow at terminals and in the harbors. An index measuring congestion in both ports' harbors shows Ningbo saw the sharpest rise in waiting times, peaking in late April and now falling.

Maersk's van der Steene hasn't been the only carrier executive surprised by the Asia import health in the first half of the year, further driven by a simultaneous rally of inbound cargo from Europe, nor do he and his peers have any idea how long it will continue. In addition, there remains no sense of when Houthi rebels will stop making Suez Canal transits off limits for most container lines.

Carrier-shipper relationships in focus

Even as spot rates soar and space is unnaturally tight, several carriers say they've been underwhelmed by their ability to get some midsize importers to agree to what they consider sustainable contract rates. Waving away talk that pandemic-driven disruption showed shippers the value of relationships — i.e. not driving down rates — carriers said many logistics managers are delivering stark targets from the C-suite. And compared with recent contract cycles, executives say shippers have more often walked away from nearly finalized deals once a rival provides better rates. There's still lingering frustration and bitterness among some shippers with service levels and the jump in prices during the worst of the pandemic-driven port congestion in the US.

In other words, as several carrier executives privately noted in discussions with the Journal of Commerce: The industry is back on familiar ground, where carriers find themselves budging on pricing to lock in contracted volumes rather than lose out on that business for the next 12 months. In a higher inflationary environment, carriers don't just have shipper customers keen to cut costs, but now they're also bearing higher operating costs themselves.

If Asia-North American capacity gets particularly tight in the second half, importers that "saved" during their contract rates by signing deals at far below market levels may pay in other ways when their so-called carrier partners can't help them secure space.

*This article was published on May 8, 2024 by the Journal Of Commerce

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.