Ocean freight rate increase in 2021 likely to stay until 2023

For two more years, importers and exporters must prepare themselves for elevated shipping costs and short supply from the ocean freight rate increase of 2021. For the current twelve-month period, various shipping authorities have forecast a rise of approximately 23% in ocean freight charges. This increase is expected across spot, contract and backhaul routes.

For a number of headhaul routes, short supply and high demand is likely to cause a considerably higher rise in price for ocean freight. Headhaul routes are when the shippers are generally loaded to capacity with freight when travelling that route. Ocean freight rates are predicted to drop in 2022 but they are not expected to fall to what they were pre-pandemic.

Ocean freight rate increase in 2021 likely to stay till 2023

Ocean freight rate increase in 2021 likely to stay till 2023

Two more years of ocean freight rate increase pain ahead

While 2022 is expected to bring some lowering of ocean freight rates, they will nonetheless be considerably greater than pre-pandemic rates. It is expected that the average decrease in 2022 rates will be approximately 9% lower than the giddy heights of this year.

As the global logistics network picks up and recovers, it is believed shippers will likely hold charges at the higher levels. This is due to the forced revisions in capacity planning made during the pandemic that will take some time to re-adjust, as well as clawing back losses from operating over that period.

Growth in shipping tonnage is falling short of required capacity

Handovers of new cargo ships for the current and coming twelve-month period have greatly reduced compared to previous periods. This means that gross cargo ship tonnage will be well under what is needed as global demand ramps up. This capacity shortfall will be compounded by related issues, such as a lack of space at seaports and poor shipping container circulation.

As cargo ships operate at full capacity, shippers are definitely experiencing good times. With shippers ordering too few new cargo ships, these good times are set to continue. The shortfall in supply of new shipping tonnage capacity will only add to shipper’ ability to maintain high ocean freight rates until at least 2022.

The rush to construct more vessels is not practical

From January to March of this year contracts were signed for the construction of around 170 new cargo ships to provide around 1,900,000 TEU. These ships will be delivered from 2023 and beyond. By that time global supply and demand may have settled down and evened out. This surge in construction contracts could cause an oversupply in capacity by the time they are delivered.

The surge also makes global logistics vulnerable to oversupply if any further major economic disruption occurs. It seems illogical to rush into constructing new vessels that will not be ready for a couple of years when it seems the main reasons for the ocean freight rates stem from the global logistics system rebalancing.

There’s a booming trade in pre-owned second hand cargo ships

It is becoming clear that there are some shippers eager to take advantage of the short supply but using pre-owned secondhand cargo ships. Switzerland-based MSC has recently been busy buying secondhand cargo ships of any age.

Among the ships snapped up by the company are four S-class 9,640 TEU cargo ships that were sold by Maersk. The four vessels were constructed more than two decades ago at Maersk’s shipbuilding facility at Odense in Denmark. An S&P broker commented that MSC is not concerned by the age of the cargo ships it is targeting for acquisition.

MSC has purchased 15 more ships from Maersk – all of similar size. This aggressive buying campaign means MSC will surpass Maersk’s long-lived capacity standard of 4,100,000 TEU. Their orders are currently standing at 636,000 TE, far surpassing those of Maersk of 40,000 TEU.

Booming trade in pre-owned second hand merchant ships

Booming trade in pre-owned second hand merchant ships

Other pressures mount from the ocean freight rate increase

Financial experts say importers, exporters, manufacturers and retailers are being buffeted by more than just higher ocean freight rate costs caused by the pandemic. Research shows they are suffering opportunity costs from the slower distribution from suppliers and large increases in production costs of their imported goods.

This fiscal squeezing means importers and exporters will be less able to absorb the ocean freight rate increase and will need to pass these on to consumers.

Over what period will shipping charges remain at the current level?

The greater the period the greater the likelihood the increases will be moved through to consumers. The flow-on of the recent hike in shipping charges to consumers may not be as great as what happened in previous periods. This is because the recovery of the global logistics system from the disruption of the pandemic should be dissipated within a year or so. This is a timeframe that large traders and shippers might be able to carry.

Are manufacturers able to absorb still more squeeze?

With the fiscal squeezes and finite ability to hike charges up, it is probable that increases will flow on to the consumer, although not necessarily in the short term. The price increases that are not devolved down to the market will have to be underwritten at some point along the distribution line.

Looking at the abnormal size of the price hikes together with the potential for it to settle down in the near future, we must be wary of using previous inflationary periods to predict what could occur in this one. Looking at previous studies though, it is not unrealistic to foreshadow that hikes in freighting rates over the past year or so will result in elevated shipping costs for the next twelve months.

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