The ocean freight market’s ‘perfect storm’ has worsened in the continuing aftermath of the Suez Canal blockage, driving up rates on the Asia-Europe trade lane to unsustainable levels and threatening the very survival of many shippers and importers while also impacting end-consumers who are set to pay far more for goods, according to one UK-based forwarder.
“At the end of last year, we highlighted a vicious cycle of port congestion, vessel cancellations, box shortages and escalating prices in the segment - which was damaging the supply chains and businesses of ‘UK plc and called for high-level interventions to address these issues,” Peter Wilson, group managing director of logistics and maritime service provider Cory Brothers, told Lloyd’s Loading List in an interview.
“Almost six months on, the situation shows no sign of ending and has even deteriorated further. The support we had hoped for from government and industry bodies, together with possible solutions, have not materialised. In fact, nothing has happened in the way of relief and we feel it is the right time to bring this ocean freight 'conundrum' and the challenges it poses, back into the spotlight again, not least of all, so that our customers can see that we're are extremely mindful of their plight.”
Wilson noted that the blockage of the Suez Canal had aggravated the already sombre market conditions. “Having softened slightly in March, rates took an absolute kicking when the Ever Given got stuck on the sands, going up and up. The incident also led to delays in vessels arriving in Europe, the emergence of blank sailings out of China and heightened difficulties with regard to congestion and the positioning of containers.
“But in reality, the Ever Given was just one part of an already ongoing situation that we've been facing since the beginning of the COVID-19 outbreak in Europe. When China re-opened, Europe went into the first of a series of lockdowns and the market has never really got back on its feet since and is like a punch-drunk boxer.”
'Online buying frenzy'
One of the key factors in keeping capacity tight and driving rates inexorably upwards is strong demand for cross-border e-commerce consumer goods which has its origin in the lockdowns triggered by the pandemic, Wilson underlined.
“In the UK, as elsewhere, COVID has spawned a sustained, online buying frenzy and part of this is manifested in a ‘staycation mentality’ which sees consumers putting a cross on their holidays and staying at home - doing up the house or making the garden look nice because they’re going to be stuck there for the summer. So there’s this huge peak in e-commerce purchasing, particularly from China/Asia-origin goods for home and garden, DIY products and leisure equipment which appears to show no sign of waning.
“And one interesting and revealing development from my own experience in this regard is that just over a year ago I bought some new garden furniture. When, out of curiosity, I went online to ascertain the current price for the same item, from the same seller and website, I found it had almost doubled over the period.
“Doubtless part of this can be explained by the strength of demand, pushing up prices but surely not to the extent of them doubling? Nor is it an isolated example as my own research has shown and I would argue that a principal factor in these retail price hikes is that ocean freight rates are extremely high. The 'perfect storm' in ocean freight is now impacting end-consumers.
Wilson went on to note that shippers will have to pay $12,000 to get a 40-foot box away while accepting the risk that it could be sat on the quayside and rolled because someone's offered $14,000-15,000.
He said as recently as 12-15 months ago the going rate on the Asia-Europe route was $2,000/FEU.
“Now we're at $8,000+ before surcharges. So that's at least $12,000 all-in and you still don’t have the guarantee that it will move it at that price. We've got offers for ‘super special’ services where you pay a further inflated premium price but the carrier reserves the right to roll your cargo for up to three weeks. And on top of that, the rates are only good for seven days. If the rate changes after seven days, the one you agreed goes. And if you cancel, there's a $2,500 surcharge. And that is what we call a premium service in this market!”
Cory Brothers' group marketing and procurement manager, Mike Bowden, revealed that the company has a number of SME customers that have got stock sold, ready to be distributed in the UK but that it can’t leave China because of a shortage of boxes.
” They’ve given us the freedom to go up to as much $20,000 which is a ridiculously high level and we're not talking particularly upmarket expensive goods here. But this is the situation we're in. And so what we're finding is that our importers, our customer base, are either being hit massively in passing that (the box rate) on to consumers or pulling back and waiting for rates to cool down but running the risk of losing business. In January and February, we saw a real retraction in bookings because customers were expecting rates to soften but they never really did.”
“We are on a very sticky wicket, because these rates are not going anywhere. Basically, the lines are saying, 'take it or leave it.' However, I would say a fair and reasonable rate in the current market for a 40-foot high cube would be $4,500 plus surcharges and on that basis, we’re still talking $7,000 to $8,000 to ship. $12-15,000 plus is outrageous frankly and we're stuck with it. And there isn't a system or a regulatory body that is able to extend or cut capacity or negotiate these rates for us.”
Wilson also highlighted that at the same time as posting these elevated rates, lines are pulling capacity with a number of blank sailings.
“I'm sure they've got a good rationale for doing so, such as not having enough containers in the market, or whatever it may be. But another way of looking at it is that they're controlling the freight market rate and as long as they’re doing that, we will not see these rates of $10,000 plus soften to any significant degree before early-2022 with the Chinese New Year which is simply not sustainable. So, in no way are we out of the woods.
“Unless you've got a BCO rate, like the big guys, the supermarket chains, who’ve negotiated through sheer volume, you are really struggling. SMEs on named accounts and FAK rates are hard-pressed to get stuff shipped that's already ordered to market. And it’s not just low-end merchandise such as white goods or so-called household apparel that are being held up. For example, you can’t get Microsoft's latest Xbox for love nor money and they were launched in the UK eight or nine months ago. It’s the same for pizza ovens, I've ordered one and it's still in China. It's four to six weeks away. Importers are selling stock they don't have and they honestly don't know when it's going to arrive, unless they're paying these premium rates and even then......”
Nothing to do with Brexit
Wilson played down any suggestion that Brexit was playing any role in the ocean freight conundrum.
“People wrongly blame Brexit but the relation to Brexit and sea freight and import and export markets is all around the Channel Tunnel, Dover, Calais, the Netherlands and Belgium into the UK and focuses on European road freight and traders. All of what we're talking about on the sea freight market is Asia inbound. And those prices going through the roof have got zero to do with Brexit because everything we had to do before Brexit we still have to do now exactly the same.
“Obviously, it (Brexit) has benefited the freight forwarding community in that it's put additional customs clearance work our way. But there's no margin for us in these high ocean rates. It's not like we are a traditional broker that would take a percentage on a ship charter for the freight. We are vocal about this issue because it is hurting not only our shippers but the market in general.”
A 'long perfect storm'
Bowden observed that the outlook appears grim, to say the least, with the the prospect of change slim.
“If we take an analogy with the pandemic, we had COVID and now we have long COVID. In Q4 last year the perfect storm appeared and it's hung around and become a long perfect storm and there's nothing on the horizon that points to it dissipating or blowing itself out.
“We've spoken to MPs, industry associations and trade bodies about what can be done. Ministerial people have quite rightly told us that the shipping lines are private enterprises, commercial entities and that they (the government) can't intervene. There’s no sort of regulatory or legislative body that can say to them (the lines): 'Look, you know, you're extending the level of your profitability too much.' In short, they are powerless to act.”
“But the effects of these “outrageous” ocean rates risks becoming dramatic, he warned.
“The prime example that comes to mind is the SME shipper ready to put up $20,000 for a container. They find themselves in a horribly desperate situation where they have sold the goods and are having to pay an exorbitant amount to get them to market through no fault of their own and may end up going to the wall because their business model has been shattered. That's the predicament a good many SME shippers are in today and short of any real action to resolve this ocean freight conundrum the situation is only going to get worse.”
Bowden concluded: “So here we are again, putting our head above the parapet and calling this out and if other freight forwarding companies do the same then we might at least get some traction in getting the message across that these rates are untenable and will wreak havoc on businesses, penalise the end-consumer and indeed compromise economic recovery after COVID if they remain in place.”