Like a bad nightmare, some of the same dreaded supply-chain terminology heard during the pandemic is being bandied about again — congestion, delays, disruption, rerouting, rate spikes — resurrecting haunting memories of Covid-era logistics when goods got stuck at ports and soaring transportation costs became an early accelerant for inflation.
Even though some of the descriptions are the same, this recent bout of congestion and surge in container prices is much different from the snags during the pandemic. Starting in mid-2020, ground transportation was overwhelmed by the sudden surge of goods and the difficulty of finding enough workers to run the trains, drive the trucks and unload the boxes at warehouses.
This round of supply-chain difficulties obviously originates with the threat from Yemen’s Houthis, which is keeping container ships from using their normal route from Asia to Europe through the Suez Canal. The problems this time are on the sea, not on the ground. Once ships hit US or European ports, the goods are flowing fine.
Before the pandemic, most people had not really thought about the supply chain until they realized during lockdowns that this behind-the-scenes network was the reason they couldn’t get the goods ordered a month earlier and why prices kept climbing. By the end of the pandemic, logistics had become a C-Suite topic, and people were discussing chassis shortages and the bullwhip effect.
This latter, somewhat bizarre term — bullwhip effect — is raising its ugly head again as a potential contributor to the latest spike in maritime rates. As retailers and other shippers anticipate problems, they are ordering goods now instead of during the traditional peak season, choking the supply chain similar to a python that has swallowed something too big. As more companies see the congestion at some Asian and even Mediterranean ports, they also are inclined to order early, thus contributing to the surge of volume that’s choking the system. That’s the crack of the whip.
This has resulted in rates to move a 40-foot container from Shanghai to Rotterdam jumping to more than $7,300 in the last week in June from a low in October of $1,010, according to Drewry data on Bloomberg. That’s still below the average of almost $10,000 during the 2021-2022 pandemic surge but enough to spark inflation concerns. Even though the Shanghai-to-Los Angeles route isn’t directly impacted by the Suez Canal restrictions, rates have also soared, hitting $6,673 per container from a low of $1,581 in June last year. In January, the Shanghai-Rotterdam rates spiked to almost $5,000 per container but cooled as the ships began to reroute.
So what happened? The additional sailing time around the southern tip of Africa adds a couple of weeks to the Asia-Europe route and reduces container ship capacity by about 12%, according to Clarksons, which provides shipping services. This drag on capacity should have been offset by an unprecedented wave of new ships coming into service. In the first half of the year, the equivalent of 1.3 million 20-foot containers of new capacity came on line, and an additional 1.7 million will be added in the second half, said Niels Rasmussen, chief shipping analyst for Bimco, a maritime shipping trade group.
The rerouting, though, hasn’t gone smoothly. The longer voyage caused ships to miss their allotted times to berth at ports, such as Singapore and Shanghai, and instead came calling in bunches, overwhelming operations. To make up for lost time on schedules, ships are skipping ports where they would normally pick up freight. These so-called blank sailings force shippers to find another vessel to pick up their freight. It’s tempting to leave behind empty containers, but then equipment gets out of place and causes shortages. All these inefficiencies add up and drag on capacity.
On top of the scheduling snarls, there’s more demand from early retailer orders. Industry watchers were taken by surprise with volume that has jumped about 10%, said Stephen Gordon, managing director research for Clarksons. The thinking was that people were still spending more on services and entertainment instead of goods, which require shipping. Something changed.
“What’s happened in the last six or seven weeks is that we have started to see volumes increase. So it’s not just the distance, it’s the volumes,’’ Gordon said. “Shippers saw these extra distances, they saw some of the risks to the supply chain, so they started everything early.”
This increase in demand raises many questions. Is this surge of maritime shipping demand a sign that consumers are rebalancing their spending back toward goods? Did retailers overshoot the inventory correction and are now madly restocking? Why hasn’t this shown up as higher volume for US trucking companies, which are still suffering a prolonged freight recession? How long will this surge in demand last, given that consumers have been beaten down by inflation and the government’s pandemic stimulus is long gone?
And finally the big question for inflation hawks, when will the port congestion and the spike in container rates subside?
“The final solution to this is that carriers can get their ships back on regular schedules with weekly sailings offering the same capacity as it would if they were sailing through the Suez Canal,” said Bimco’s Rasmussen.
Freight managers are resorting to some old pandemic-era tricks to mitigate the congestion at Asian ports. These include sending back empty containers from North America instead of waiting for export cargo and using less-than-container loads to consolidate multiple, smaller freight shipments into one container, which improves on capacity utilization, said Mike Short, president of global forwarding at C.H. Robinson Worldwide Inc.
Shippers are concerned that the carriers will use the disruption and congestion as an excuse to continue increasing container prices and applying ever larger surcharges. AP Moller-Maersk A/S, CMA CGM SA and other providers of maritime shipping had record profits during the pandemic.
“You would hope that the carriers would be able to better manage that system and be better prepared for the forecast provided to them,’’ said Jonathan Gold, vice president of supply chain for the National Retail Federation. “We’re all struggling to figure out why the system continues to run into these challenges.”
Cargo demand most likely rose 8.5% in the second quarter after a blistering 18.5% increase in the first quarter, catching the carriers off guard after contract negotiations with shippers indicated volumes would decline by 2% or more, said Nick Fafoutis, chief commercial officer at CMA CGM (America). In reaction, carriers moved ships out of transpacific service to markets with higher demand, he said. That capacity now is coming back to the transpacific lanes.
“This is why you are seeing short-term charters at such high rates, because there are not enough ships to address the need,” Fafoutis said in an email response to questions. “Our market is purely a function of supply and demand.”
These symptoms of maritime freight congestion are much different from what happened during the pandemic, and the main problem this time— the disruption of the Suez Canal — is well known. Ships move slowly, so it takes more time for the network to work out the supply-chain knots than with trucks or airlines.
Still, there’s enough capacity to deal with the fallout, and everything points to this being a temporary spike in container rates as long as carriers tackle these snags quickly and resist the temptation to ride the disruption as long as they can.
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