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Trans-Pacific spot rates build ahead of peak season after lull

While they do not account for the premium rates that shippers must pay for preferential loadings, two key trans-Pacific container shipping indices rose to new highs this month after plateauing since December. That signals carriers feel more confident in pushing general rate increases as imports from Asia are expected to build in June.

Since early May, spot rates from Asia to the US West Coast as measured by maritime analyst Drewry have risen about 4.3 percent, to $6,358 per FEU. And since late April, the short-term rates on same trade rose nearly 13 percent, to $4,607 per FEU, on the Xeneta index. While the indices differ on the level of spot rates, they both reflect a significant increase in base rates over the last month.

Another spike in freight rates in the eastbound trans-Pacific is likely next month, but rates could stabilize in the third quarter if ports in North America and Asia address the underlying cause of the upward rate pressures - port congestion, according to industry analyst Lars Jensen.

Jensen, CEO and partner at Vespucci Maritime, said congestion at ports in Northern China and Southeast Asia, as well as in Los Angeles-Long Beach and Oakland, is idling containerships for weeks on end. Vessel on-time performance to the West Coast in March edged 3.3 percentage points higher, but was still just 14 percent. On-time performance to the East Coast in March declined 1.1 percentage points from February to 12 percent, among the worst times ever recorded<>, according to Sea-Intelligence Maritime Analysis.

Since vessels are slow in leaving Asian ports and are delayed when they reach US ports, vessel and equipment capacity are being artificially constrained and shippers are competing with each other to secure space and equipment, Jensen said.

"Prices are being forced higher by a fight among shippers themselves because there is not enough capacity," Jensen told a webinar Tuesday sponsored by freight forwarder Flexport.He expects robust consumer demand, which is driving record US imports from Asia, to continue through the summer-fall peak season.

The spot rate for shipping a 40-foot container from Shanghai to Los Angeles was consistently in the range of $5,600 to $5,700 this spring, according to the Drewry freight rate index. The spot rate surged past $6,000 in mid-April and stood at $6,358 per FEU on Wednesday.

"On June 1 we will see another increase," said Anders Schulze, vice president and global head of ocean freight at Flexport, indicating carriers will likely realize at least some of the proposed general rate increases (GRIs) they have filed with the Federal Maritime Commission. Most of the carriers have filed GRIs of $1,000 per FEU effective June 1. Hapag-Lloyd filed a GRI of $1,200 effective June 1, and an eye-popping $3,000 GRI effective June 15, according to the Sea-Intelligence Maritime Consulting's Sunday Spotlight. The spot rate for shipping a 40-foot container from Shanghai to Los Angeles was consistently in the range of $5,600 to $5,700 this spring, according to the Drewry freight rate index. The spot rate surged past $6,000 in mid-April and stood at $6,358 per FEU on Wednesday.

Carriers rarely achieve full GRIs, but if demand exceeds supply, which is currently the case in the eastbound trans-Pacific, even increases of $100 to $200 per FEU would indicate that advance bookings for June are quite strong and will continue to aggravate the space shortages at Asian load ports.

"Carriers are all backed up. We're so backed up. There is no room," an executive at a trans-Pacific carrier who did not want to be identified, told Tuesday.

A repeat of the 2020 GRIs?

A flurry of GRIs next month would harken back to the summer of 2020 when carriers, having completed their service contract negotiations, pushed up spot rates with several GRIs and a peak-season surcharge, citing surging demand as the US economy reopened from initial COVID-19 lockdowns. The West Coast spot rate, which was less than $2,000 per FEU in June, doubled by September to more than $4,000 per FEU, according to Drewry.

China's Ministry of Transportation and Communication became so concerned about the impact soaring freight rates<> would have on that country's exporters that it warned trans-Pacific carriers it would closely watch further rate actions. The FMC soon followed with a similar message, and GRIs effectively ceased until December.

Even though the West Coast spot rate now exceeds $6,000 per FEU, according to Drewry, Schulze said shippers are actually paying much more than that to secure equipment and vessel space in the largest US trade lane. When premium charges to secure equipment and vessel space are included, the effective West Coast rate ends up being about $8,000 to $11,000 per FEU, he said. Although freight indexes such as Drewry lists the East Coast at about $8,000 per FEU, a range of $11,000 to $20,000 per FEU is what it takes to move cargo, Schulze said, adding he has seen East Coast rates as high as $23,000 per FEU.

Although some shippers feel that paying these rates will guarantee them equipment and slots on vessels at Asian load ports, that is not the case, said Hayden Swofford, independent administrator of the Pacific Northwest Asia Shippers Association.

"The premium gives you favorable treatment, rather than guaranteeing you anything," Swofford told Tuesday.

Non-vessel-operating (NVO) common carriers say 10 consecutive months of record and near-record US imports from Asia<> is one factor driving freight rates higher. Another factor is blank sailings, which today are actually "structural" blank sailings. A sailing that is canceled because vessels are delayed for a week or longer at US and Asian ports and therefore misses its scheduled rotation is a structural blank sailing, unlike the past practice of carriers canceling sailings during slack periods of demand in order to keep freight rates from collapsing. A total of 121 sailings to the West Coast and 21 to the East Coast have been canceled since Jan. 1, according to Sea-Intelligence Maritime Analysis.

Retailers and NVOs are booking space well into June, so space availability next month is expected to be even tighter than it has been in May.

"There is such a buildup of demand, and space is incredibly tight. I expect June to be even worse," said Kurt McElroy, executive vice president of APEX Marine, an NVO. Vessel space is especially tight in Southeast Asia, including Vietnam and Cambodia, with no relief in sight, McElroy said.

"I don't know where the space is going to come from. We are literally frozen out of some markets," he said.

End-to-end supply chains are choked

Jensen emphasized that space and equipment shortages are at unprecedented levels in the eastbound trans-Pacific because the transit time in the end-to-end supply chain from the factory in Asia to the US port to the destination in the US interior has doubled. What should be a 35-day transit time from Shanghai to Chicago is now 73 days, he said.

Nevertheless, Jensen is convinced there would be enough vessel capacity and containers to meet current demand if supply chains were fluid, but the Asia-North America supply chains are so tight that prolonged congestion at a port or rail ramp, or even temporary disruptions such as the blockage of the Suez Canal<> for six days in March freezes the supply chain.

The key to restoring capacity and equipment to adequate levels is to remove the bottlenecks in the supply chain, starting with the port congestion, Jensen said. "Solving the port congestion issue will shorten the supply chain and free up equipment," he said.

Jensen said he is somewhat optimistic about the steady decline in port congestion in Los Angeles-Long Beach that has been taking place in recent weeks. According to the Marine Exchange of Southern California, there were 20 containerships at anchor and awaiting berthing space on Tuesday, down from 22 on Monday. Vessels at anchor in Los Angeles-Long Beach peaked at 40 in February.

According to the Port of Los Angeles platform Signal, the average length of time vessels are spending at anchor was down to 4.6 days on Wednesday, from more than 7 days last month.

If the port and rail bottlenecks are resolved by late June to early July, the steady increase in freight rates will level off, and rates could come down somewhat in the fourth quarter, Jensen said. Even then, rate stabilization will probably mean somewhere at the level they were at in late 2020, "which is still pretty high," he said. Spot rates last November-December were around $4,000 per FEU to the West Coast, according to Drewry.

However, if US and Asian ports do not get a handle on their congestion, or if rising COVID-19 cases in India and Southeast Asia affect port operations in those regions, "all bets are off," Jensen said.

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