Freight rates are soaring again

​​​Freight rates are soaring again

​Global shipping costs have escalated dramatically recently due to several factors. Trade route disruptions, a shortage of empty containers, and surging freight rates have all contributed to the increases. Alarmingly, these freight rate hikes are largely due to logistical and supply chain issues impacting global trade flows. Additionally, geopolitical tensions in critical shipping routes like the Red Sea have exacerbated the situation, leading to sharp spikes in shipping expenses. These disruptions have heightened risks, leading to higher freight insurance premiums, further inflating costs.

​This sequence of events has raised concerns about potential long-term instability in global supply chains and increased international trade costs. The plunge in global sea freight efficiency and subsequent increase in seaborne goods and commodity prices reflects this precarious situation.

​The container shortage is surprising because, until recently, ocean liners had excess boxes compared to demand. Shipping companies and lessors had spent heavily on new equipment during the pandemic to ease congestion. But in an ominous parallel to the industry’s past experiences, liners are again facing a container crunch – this time due to route diversions following recent geopolitical tensions that blocked critical waterways.

​An initial jump in freight rates – caused by longer alternate routes – stabilized in March. However, prices have spiked again due to signs of worsening Asian and Middle Eastern port congestion leading to equipment shortages. Maintaining empty container flows is always challenging as global trade is imbalanced – China exports more than it imports, while the reverse is true for the US. Roughly one-third of containers shuttle empty on average for repositioning.

​Shanghai (Export) Containerized Freight Index Chart

​Demand has exceeded expectations potentially due to restocking and early seasonal peaks. Also, ships are taking longer voyages, absorbing vessel and container capacity. Eastern Mediterranean ports are inaccessible via Suez, so goods unload at western ports like Barcelona first, causing delays. Containers are also stuck in structural surplus countries like Russia where imports have boomed since 2022.

​Consequently, equipment is not returning to China as quickly as expected, limiting liners’ capacity utilization and giving them pricing power. For example, most Shanghai carriers reportedly lack empty containers.

​When rates dropped earlier, carriers cut surplus boxes to match lower demand and avoid storage fees on unused equipment. Meanwhile, container production last year fell to its lowest since 2016 as per maritime consultancy Drewry.

​The good news is Chinese manufacturers who produce almost all the world’s containers are rapidly scaling up output again. Early 2023 figures match early 2021 highs. Although order lead times are typically just months, most factories are booked for large orders until late summer as per Drewry.

​According to Bloomberg, nonetheless prices for 40-foot “high cube” containers in China have recently spiked to as much as $3,350 as per online logistics platform Container xChange, still below 2021 peaks but almost double last September's average.