Special thanks to Lars Jensen, CEO of Sea Intelligence Consulting and Zvi Schreiber, CEO of Freightos Group for their contributions and insights into this report.
Shipping containers such as Scotch.
It’s hard to predict what the demand for products like this will be like ahead of time. Just look at the price fluctuations for Yamazaki in Suntory is 12 years old.
But decisions about how many barrels to produce or how many ships to sail must be made in advance. The lack of demand visibility is also a major contributing factor in China and the United States sea freight rates Doubled to the West Coast since June, Passing $4,000/FEU to the East Coast – which came as a surprise as most analysts thought rates and earnings would free fall.
But the high rates of rise led many ocean vector to me Huge profits While the decline in the volume of trade led to bankruptcies, bailouts and financial pain for most other parts of the logistics industry. And “excessive performance” soon sparked accusations of profit Or price gouging, even a couple Government Queries.
Was it profitable? And if not, why are prices so high when demand is not? Is ocean freight pricing broken?
The most likely explanation is that a combination of wise ability management and Poor visibility of demand led to these prices and the resulting profits.
It can be repaired. But first, how did we get here?
Alliances fill the void (sailing)
It started in 2008.
While ocean carriers were just signing checks to build huge ships, global financial crises hit and the volume of shipments Drowned like Led Zeppelin.
It took months for carriers to adjust capacity to the new reality of lower demand. At this scale, ocean prices plummeted resulting in $15 billion in industrial losses that year, and eventually to a position high. bankruptcy from Hanjin Cargo.
In the years that followed, NSConsolidation and formation of three major ocean alliances It allowed carriers to quickly and widely manage ship supplies by canceling or “blurring” sailing in times of low demand.
When the pandemic hit, carriers were able to respond within weeks to deteriorating demand.
From February to May, ocean carriers covered a record number of cruises on China-US lanes — first as manufacturing in China shut down, then the coronavirus impacted the US economy.
Graph: Courtesy eeSea.com
From March to May, rates have remained stable enough – and generally on par with the previous year despite the significant decline in volumes. Capacity management prevented the expected rate collapse and halted carrier losses. In conversation with Lars Jensen sea intelligenceHe rightly noted, “The prices in these months were not really flat, because oil prices were going down. So the actual rates were going up, and the carriers were making profits even earlier.
June, she changed her tune
Then, in June, US demand for Southeast Asian imports began to recover unexpectedly.
There is a possibility multiple factors To rise: More personal protective equipment is starting to move through the ocean as supply chains stabilize. Companies whose stocks have slowly fallen since March are beginning to restock. more home Purchases And home offices mean new home furnishings. Unused vacation money turned into spending more on goods, and the transition from bricks and mortar to e-commerce required inventory.
But whatever the reasons, the carriers couldn’t see it coming – certainly not long in advance – and weren’t sure how long it would take.
With 16% of planned production capacity in Asia and the United States Demand quickly outnumbered supply. This resulted in cargo rolls and a buildup that sent ocean rates up nearly 60% from the end of May to the end of June from China to the West Coast of the United States.
And all the macroeconomic indicators continued to cause sudden economic downturns, so, as Lars once again pointed out, carriers were reluctant to regain capacity too quickly. But demand continued to climb until September. With capacity eventually restored and then some, the laws of supply and demand continued to push up ocean rates: West Coast rates between China and the United States doubled by the end of August and were increased by approximately 160% on an annual basis. Interest rates to the East Coast rose 50% and exceeded the $4,000/unit acquisition level in Europe in early September.
the most extreme altitude On shipments from China to the West Coast of the United States compared to the East Coast also showed how much the natural patterns are changing. Importers are eager to absorb the explosive e-commerce market, along with suspicion About how long it would take for demand to push BCOs onto the fastest route to the West Coast.
Zvi Schreiber, CEO of Fritos Group, added that prices could continue to rise in this way because “sea freight service has proven to be an inflexible commodity. Door-to-door shipping costs often represent only a small percentage, perhaps five to eight percent, of The cost of merchandise. And because there is also no real alternative to moving large orders around the world, when demand is there, prices must increase very dramatically (10x?) before any interested shippers are deterred from booking.
Carriers have the power, and vision is the key
So where does this leave us?
First, the crisis has proven that carriers can now prevent a price crash through capacity management. Newfound pricing power means container rates have a floor regardless of market conditions and shippers will likely need to get used to this fact. And unlike shipbuilding, which can mean huge supply chains, containers are too relatively graceful.
But, secondly: The June spike, the ensuing backlog of business backlogs and extensions, and the decision to restore capacity was relatively slow. A sign of poor data visibility (plus some endemic delays that cannot be removed from the banking industry when 24,000 TEUs are repositioned). That’s straight Contributed to the speed and possibly the magnitude of the interest rate surge.
The better carriers become at reducing lag in matching supply and demand, the happier all players will be. Fixed prices, fewer wraps, and less heartburn. But real improvement can only be achieved through better forecasting of demand, and this is where digitization is key.
In recent conversations with industry experts about the trend of logistics technology, it was not just a matter vector, but a pioneer Shipping agentsAnd BCOs to Ali Baba, which emphasized the importance of innovation to improve supply chain visibility.
Each link in the series spoke about the importance of unlocking data to unlock true transparency.
Johnson & Johnson The head of advanced supply chain technology, specifically, called the power of technology in improving their demand forecasting — based on data from supply chain and retail outlets all the way to social media — as a key goal.
Each link also spoke about how data silos and a lack of standards within and between companies in the supply chain hindered their visibility.
But the industry is already looking at the potential of what happens when you remove those silos and share data across the chain. This gold standard is sometimes referred to as preventive logisticsIt is built on the premise that all the incremental automated improvements and visibility improvements that occur today, can be combined and integrated with AI in a few years to power orders and shipments before actual consumer behavior.
This end goal will inform supply decisions to shipping companies as well.
In the (near?) future, the potential of data will be realized in the form of an improved supply chain. The massive rises in ocean rates should, however, be mitigated by poor visibility, providing stability and profitability for carriers and reliability and stability for shippers.
Which means when we’re ready for this year, Nadura, he’ll be there.