Logistics Concerns, Not Economy Drove Shipping Surge Experts Believe

It’s not the economy that drove up shipping demand. Not consumer spending. It was logistical considerations. Importers were trying to get ahead of supply chain disruption risks. Risks like the potential International Longshoremen’s Association (ILA) strike the union has been threatening. At least that’s what international shipping industry analysts and large importers of goods believe.

Peter Tirschwell reported in the Journal of Commerce (JOC):

Some analysts, as well as some large US import beneficial cargo owners (BCOs) the Journal of Commerce spoke to over the past week, believe logistics considerations are the main drivers [of first half 2024 shipping volume growth]. That presumes the market will steadily cool off as the year progresses. The sources said their total 2024 volume expectations had not changed, only the timing. 

“We see the volume surge as being a logistics rather than economics issue,” said Chris Rogers, head of supply chain research for S&P Global Market Intelligence. “That means the volume surge seen thus far this year is more due to front-loading of shipments for restocking and risk avoidance versus underlying demand. 

“The Red Sea disruptions, transshipment congestion and volatile rates are all evidence of an artificial demand surge running up against limitations in capacity…,” Rogers added. “Weak manufacturing and retail data suggest demand-side pressures are minimal.” 

That shouldn’t be surprising. You’d be hard pressed to find anyone who’d say the economy is good right now who didn’t have a political reason for saying it. Inflation, in particular, has been brutal over the last few years. Thus, you would think the recent increase in shipping demand to be at least partially artificial. That’s probably why the JOC is already saying freight rates have peaked when it was just a week ago that we saw the first week in months when freight rates didn’t grow:

Spot rates from Asia to the West Coast last week edged lower for the first time since carriers on May 1 began implementing twice-monthly general rate increases.

Bill Mongelluzzo wrote that in a section titled “Spot rates in eastbound trans-Pac have peaked” in a JOC article two days ago. There still isn’t much time to have a great deal of data. However, freight rates came down just a little this week compared to the previous one as well. I guess you could call two weeks in a row a trend. Here’s the data Mongelluzzo shared:

The West Coast spot rate as of Monday was $7,600 per FEU, down 3% week over week, according to Platts, a sister company of the Journal of Commerce within S&P Global. 

The East Coast spot rate was $9,950 per FEU, down 1% week over week, according to Platts.

When, in last week’s blog post, we examined if freight rates had peaked and might even start dropping, it felt premature to definitively say shipping prices had peaked. It still feels premature. However, I did write about how retailer shipping demand is likely inflated by shippers getting ahead of the ILA strike threat.

Tirschwell’s article brought up the possibility of shipping demand increasing to beat the possible trade impact of a second term for President Trump. Through a trade war, President Trump increased tariffs a great deal on goods from China during his first term in office. And it seems clear that he plans to continue a tariff strategy on China.

However, tariffs on Chinese goods is the one bit of Trump Administration policy the Biden Administration did not set out to undue. In fact, on top of keeping the tariffs on Chinese goods, in May, President Biden announced plans for enormous tariff increases on $18 billion worth of imports from China. There have been news reports going back to last year of President Biden considering tariff hikes on China. It’s more likely shippers have been rushing to beat Biden Administration tariffs than potential Trump Administration tariffs. But it’s not inconceivable the idea of potentially higher tariffs in 2025 could have given a little boost to importing demand in 2024 too.

July Capacity Increase Could Reduce Freight Rates

The Mongelluzzo-written JOC article mentioned above was actually an injection of capacity into Asia to North America shipping routes in July. More capacity, upping the supply side of the supply/demand equation, means downward pressure on freight rates. Mongelluzzo credits July’s capacity increase with the end to the months-long streak of surging freight rates and replacement with slight decrease:

The launch or restart of 10 Asian services calling North America has put almost 16% more deployed vessel capacity on the eastbound trans-Pacific this month compared with June and the most tonnage on the water in at least three years.  

The capacity injection is already dulling the eight-week ascent in container spot rates that had been driven by the frontloading of Asia imports and global capacity stretched by Red Sea diversions and port congestion.  

Trans-Pacific carriers in July plan to deploy 2.6 million TEUs of combined capacity to the US West and East coasts, up 15.6% from 2.25 million TEUs in June, according to Sea-Intelligence Maritime Analysis. In July 2023, 2.1 million TEUs were deployed. 

The increased capacity is certainly good news for shippers, as diversions away from the Red Sea and Suez Canal have strained capacity and helped create the high freight rates we’ve been seeing. Additionally, Mongelluzzo reports a significant decrease in blank (cancelled) sailings, which can be frustrating and expensive for shippers:

And as the deployed capacity rises, blank sailings are falling. Just 7.2% of July’s total available capacity in the eastbound trans-Pacific is due to be blanked, down from 12% in June and 20% a year ago, the Sea-Intelligence data shows. 

As of mid-July, August figures show 2.56 million TEUs of capacity being deployed on the trade lane and just 4.4% of total available capacity being blanked next month. 

Conclusion

Positive signs are starting to appear for reduced freight rates in the second half of this year. However, freight rates are still very high at this moment, and there are still factors in place that will likely keep freight rates from tumbling hard. The biggest factor is the Iran-backed Houthi attacks in the Red Sea. Recently, it’s been reported deaths from those attacks quintupled from 4 to 20 seafarers. There’s no sign carriers will be returning container ships to sailing through the Suez Canal anytime soon.

Additionally, the ILA strike threat is only increasing at the moment. If a strike does shut down U.S. East and Gulf Coast ports, that would be incredibly costly for shippers and put enormous upward pressure on freight rates.

I still expect to see high freight rates in August, but more and more I’m seeing a greater chance for decreasing freight rates. If the BCOs and analysts the JOC talked to are correct, and I would tend to agree with them on shipping demand being inflated by logistical factors rather than natural economic ones of consumer buying increase, then there’s a very good chance of significantly lower freight rates by the end of the year. If an ILA strike doesn’t undo that, of course. Other unexpected disruptors can always pop up and put upward pressure on freight rates too.

Retailers worried about lower demand should feel optimistic as they look to 2025. A likely change from the Biden Administration to a Trump Administration should markedly improve the economic outlook. The booming economy during the pre-pandemic term of President Trump, marked by energy independence and consumer economic confidence, is a night-and-day contrast to the poor economy of the Biden Administration, marked by inflation and high interest rates.

There’s a good chance shippers will like the way freight rates trend for the rest of the year more than carriers will. If an economic boost starts in 2025, that would increase demand, and likely freight rates, while also being good for retailers’ sales. That could potentially make both the shipper and carrier side of the freight rate equation happy.