Have High-Soaring Freight Rates Peaked?

According to S&P Global data shared in the Journal of Commerce (JOC), July 5th freight rates from Asia to the U.S. West Coast (USWC) were up 350% compared to the same time last year. Asia to U.S. East Coast (USEC) rates were up 551%. Asia to U.S. freight rates had been doing nothing but rise and rise and rise since April 19th. By this month, we were looking at freight rates soaring to “supply chain crisis” types of heights.

However, the freight rate numbers on July 10th finally broke the week-on-week growth streak. Asia to USWC freight rates suddenly decreased by 2% this week, and Asia to USEC freight rates dropped by 3%, according to S&P Global data reported in the JOC.

Does this mean freight rates have finally peaked? Will they actually start falling?

Let’s get into it….

Industry Pros Say Freight Rates Appear to Have Peaked

Bill Mongelluzzo reported, in a JOC article, that ocean shipping companies say soaring freight rates have indeed appeared to peak:

Spot ocean rates for Asia to the US West Coast appear to have peaked after edging lower over the past week, forwarders and carriers say, reflecting the capacity recently injected on the trade to handle what US retailers are calling their strongest volumes in two years.

…

“It was almost a change overnight in the market dynamics,” a carrier executive told the Journal of Commerce. “The turning point was the first week in July.”  

The Journal of Commerce spoke to six non-vessel-operating common carriers (NVOs), two carriers, two importers and an industry consultant for this story. 

…

“We’re getting notifications of [rate] reductions from some carriers,” said Kurt McElroy, executive vice president of the NVO Kerry Apex. 

This is certainly a welcome development for shippers; however, freight rates are still incredibly high and it’s too soon to say with certainty freight rates have peaked and will begin falling…

Factors Pushing Freight Rates Up Still in Place

There are a number of factors that put upward pressure on freight rates. Right now, congestion at Asian ports, along with shipping container availability issues to which that congestion contributes, and container ship diversions away from the Suez Canal because of Iran-backed Houthi attacks in the Red Sea are major factors for upward freight rate pressure.

However, demand can never be overlooked, as the supply/demand balance is always the most basic economic factor that affects the prices of anything. But that’s up right now too, adding more upward pressure! While ship diversions and port congestion are negatively affecting available capacity (supply), shipping demand is strong.

Peak season has a bit more urgency because of the threat of an International Longshoremen’s Association (ILA) strike that would shut down East and Gulf Coast ports after the current dockworker contract expires on September 30th. That’s had shippers pushing to move goods before that contract expires. Additionally, and despite inflation, consumer spending is still high enough to keep retailers’ demand for shipping strong, even with the skyrocketed freight rates they’re having to pay to import goods.

Only two days ago, Mongelluzzo reported in another JOC article that the National Retail Federation (NRF) just upgraded its forecast for containerized imports for the 6th month in a row. It’s reportedly because consumer spending remains strong despite the large increases of merchandise prices inflation has brought. Mongelluzzo shared:

“Despite all of that, we’re experiencing the strongest surge in volume we’ve seen in two years, and that’s a good sign for what retailers expect in sales,” Jonathan Gold, NRF’s vice president for supply chain and customs policy, said in the group’s Global Port Tracker (GPT). “Consumers can rest assured that retailers will be well-stocked and ready to meet demand as we head into the back-to-school and holiday seasons.”

With all of these upward pressures still in place, it’s hard to see a big decrease in freight rates hitting right now. However…

Freight Rates Will Come Down, But…

If consumer spending for the back to school and holiday shopping seasons don’t live up to retailer expectations, overstock could keep shipping demand low for an extended period after the peak season ends. We saw an extended period of overstock putting downward pressure on freight rates last year, which even gave us a weaker-than-normal peak season. Of course, that adds to the percentage increase in freight rates we’re seeing this peak season over the last one. But that doesn’t mean freight rates aren’t incredibly high right now.

And what goes up must come down. The question is always when.

Retailer shipping demand is probably inflated a bit by the aforementioned ILA strike threat rather than being completely based on consumer spending expectations. Has the rush to beat the potential strike come close to an end? That’s hard to tell. There’s still over two and a half months until the deadline. However, with shipping taking longer with the various supply chain disruptions taking place and the possibility of new, unexpected ones, shippers aren’t likely waiting until the last moment.

One would think, if there’s more of that rush to beat the potential ILA strike left, it would be hard for there to be much more than a month of it.

When looking at Universal Cargo’s internal container count numbers, which I sometimes use as a barometer for the international shipping industry, volume count by shipping containers went down by about 30% from May to June. That would indicate a possible slowing of demand and maybe getting past much of the early shipping to beat the possible ILA strike. However, things look very different comparing June to July.

July’s numbers aren’t finalized yet. Some of the end-of-July scheduled shipments could end up getting slid into early August. However, the current numbers show July’s container volume rebounding with a 33.5% increase. That certainly doesn’t give an indication of the peak season fizzling out already. What does it mean?

Maybe nothing. But if there were similar patterns with shippers throughout the international shipping industry, it could mean the moment of freight rates coming down a little bit for will be followed by them going back up. In that case, we haven’t seen the peak of freight rates yet. Late July and August may hold higher freight rates yet.

For the sake of shippers, I hope that’s not the case. Thankfully, high freight rates like this are hard to maintain. Many carriers have been implementing general rate increases (GRIs) twice a month over the last few months. Traditionally, carriers often struggle to maintain GRIs. It’s hard to see two GRIs a month continuing with the same recent success in the upcoming months. But we’ll have to watch and see.

Even if freight rates continue to drop a bit, I expect August shipping prices to remain pretty high. There may also be a final surge in containers in September, trying to beat the potential ILA strike. Too much of a surge could create rate-boosting congestion even if the ILA doesn’t strike. If the ILA does strike, the supply chain disruption would be significant and likely very costly for shippers when it comes to freight rates during the strike and its immediate aftermath.