What is the expected pulse of freight industry in 2022?

February 10, 2022

Global trade has been subject to several price increases and few rate reductions over the past couple of years.

Recent freight prices have been engulfed in a vicious cycle, causing a continuous climb with little relief.

But the Russia-Ukraine conflict is now acting as the catalyst in exacerbating existing supply chain problems.

These inflated prices ultimately impact the everyday consumer, who will eventually pay to procure a product through the global trade channels. 

As we start the new year, the economic recovery and various world events that occurred during the course of 2021 will considerably impact the global freight rate map. 

This blog explains the highs and lows experienced with freight rates throughout last year. It also covers the factors that caused this extreme instability and deciphers the road map for 2022.

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What is the pulse of the freight rates as 2022 begins?

The 2022 campaign began with freight rates at a peak that was similar to the all time high seen during September 2021. However, these highly volatile rates have started to slowly descend by about 30% within a 3 week period. 

As of the second week of January 2022, rates to move a 40 high cube (HC) container from Chinese ports to the US West Coast in February 2022 were hovering around the $10,500 mark. 

Labor shortage at global terminals continues to be forecasted, along with restricted movements across borders.

While the world rushes to vaccinate its population, the logistics networks will continue to deal with unstable freight rates. 

Additionally, high vessel transit time remains a problem area in 2022.

The current transit time for a vessel from China to the West Coast has dropped to 44 days from 52 days. However, this range is considered a massive increase compared to the pre-pandemic timelines of 16 days. 

The freight industry is approaching the annual “low season,” a post-holiday lull where shippers see a decided drop in sales numbers. As a result, even though containers are waiting to be berthed and offloaded, the spot rates have had a decline.

Gate out times are improving on both coasts of the US, and it will not be long before the pile-up on vessels anchored at sea outside the ports are cleared. 

What were the spot rates recorded during 2021? 

The third quarter of 2021 ended with freight prices that broke records with a seven-fold increase in rates from 2020.

However, the last quarter of the year brought some respite. A possible explanation for this would be the end of the holiday shopping season.

The goods ordered for the holidays would have been sitting in containers on the way to Europe and the US in November 2021, thus resulting in a sudden price drop. 

Spot freight rates dropped steeply in October 2021, with the price of shipping a 40-foot container from China to the Port of Los Angeles reducing from a high of $17,500 to $8,500, or down 51.4% compared to September 2021. 

Similarly, for a container to move from China to the Eastern Coast of the US, the spot rate stood at around $13,800 per container in November 2021, representing a 29% decrease from September when freight rates were $19,500. 

The dire need for shipping and the unavailability of containers have created this financial disparity.

The ocean freight rates will stabilize only when a utopian equilibrium is reached in terms of demand and supply.

Why were the freight rates volatile in 2021? 

Through the first three quarters, freight prices rose drastically.

Isolated incidents in the pandemic-led market added to the mayhem. Labor shortages at ports worldwide resulted in a container build-up at sea.

In March 2021, a 20,000 TEU vessel was stuck in the Suez Canal for over six days, which added to the delays.

Recurring lock-downs and constant restrictions around the world strained the logistics network. 

While the physical environment has had many changes, the virtual marketplace has also evolved. The pandemic has changed the way consumers shop.

Netizens currently have the most considerable purchasing power, and their requirements have led to an e-commerce boom. 

Initially, there was a significant demand for personal protective gear, furniture and electronic accessories for home offices, and necessities like sanitizers and toilet paper. Towards the second year of the pandemic, hobby items like puzzles, bakeware, and loungewear picked up prominence. As most of these products are shipped across continents, it adds additional strain to the container shortage. 

Traditional factors like the cost of fuel, more stringent environmental regulations, geo-political events, and seasonality of shopping continue to keep prices volatile.

Coupled with the uncertainties that come with the pandemic, the rising prices from 2021 have been a bonanza for carriers. 

Who benefited the most from the 2021 volatile rates? 

With the massive 500% global freight rate jumps, vessel operators and carriers are making the most of this situation.

In fact, in an intelligent move to reap further benefits, these shipping companies repurposed vessels at sea in hopes of consuming additional demand. 

A Sea-Intelligence study on the first-quarter profits from 2021 of the 11 largest global shipping companies shows a record EBIT (earnings before interest and tax) of $16.2 billion.

Arguably, Q1 is generally considered to be a slow cycle; however, the 2021 economic recovery allowed carriers to surpass their original budgetary goals. 

How did specific mega-liners perform during 2021?

The world’s largest shipping company, Maersk, has begun declaring its large profits.

In September 2021, the estimated earnings for the year were revised with a staggering 278% increase to almost $17 billion. Originally, budgeted profits were projected at only $4.5 billion. Maersk also announced that Q3 of 2021 was the most profitable quarter in its 117-year history. Interestingly, only 15% of its fleet is dedicated to the lucrative trans-Pacific trade lanes.

Similarly, Hapag-Lloyd AG has also declared more earnings over the past six months than they ever did in the last ten years combined. 

Shipping companies are pausing to think of the future.

They are attempting to set the prices right on their own terms with the solitary aim of preserving and fostering long-term relationships with their regular clients.

Hence, large companies like CMA CGM have begun freezing their spot rate.

How did this impact the cost of imports? 

UNCTAD’s review of maritime transport for 2021 states that the current freight rates could increase global import price levels by 11%.

This domino effect of the increased costs would affect the availability of raw materials, increase the cost of production, and ultimately result in an increased consumer spending by around 1.5%. 

Statista also explains that the increasing freight prices would impact the import prices in the developing small island countries (like Fiji, Maldives and Barbados) by more than 24%.

What was the impact on the logistics stakeholders? 

As a result, the concept of procuring locally or substituting with geographically closer import markets has become a strong trend in 2021. Another parallel impact is on the future scalability of business during an uncertain freight rate environment.

Many buyers are not ready to make long-term commitments to import when prices remain volatile. 

Long wait times for containers forced the producers of perishable goods to reevaluate their strategy and sell their produce locally.

Typically speaking, the market was centered on either cheaper imports, or else producers could make more from exporting their perishables.

During the lockdowns however, much of the supply chain was shut down which led to a decline in demand for produce and other perishables. Fortunately, producers were able to restructure their operations.

In essence the pandemic was actually beneficial as it helped them network within their own community and create new business avenues, in order to cope during the economic recovery.

However, not every industry has been able to pivot as easily. As a result, many industries have had to rely on third party service providers, especially freight forwarding services. 

While the figure for the freight forwarding industry for 2021 is not published currently, a growth of 11.6% in 2021 was on the cards. 

What does 2022 have in store for the logistics industry? 

Global freight rates could be impacted in the first quarter of the year due to the Winter Olympics. Chinese production firms are concentrating on supplying locally, and hence global trade may take a while to pick up again. 

Further, the order books for new containers and reefers continue to rise.

This is made possible due to the large sums of profit that the carriers have made, along with the dire shortage of these containers.

It usually takes about three years for a container to be manufactured and delivered – and these could finally hit the sea towards the end of this year.

When the available supply increases, a proportionate decrease in freight rates could be expected.  

Many economists are comparing the 2022 price rise and increase in container demand to the 2008-2009 economic bubble.

There was a similar rush to order container ships in 2008 as well. However, when the fleet was delivered within a year of the crisis, it led to overcapacity and a drastic dip in freight costs. 

The impact of environmental reforms is also of major concern during the next decade. With governments attempting to moderate their carbon emissions, the requirement for more specialized containers arise. As a result, we could witness a prolonged container vessel capacity issue irrespective of the future supply of containers. 

Despite freezing and relaxing the trans-pacific rates across all forms of contracts during the last few months, the rate continues to remain higher than the pre-pandemic period. 

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