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Covid Rebound Has Ocean Freight Rates Cresting

Ocean container freight rates are rising, as trade activity has picked up following several months of depressed shipping during the peak of the pandemic.

Executives from Flexport, a global freight forwarder and customs broker, discussing the issue and other “Top Global Trends in Ocean Freight,” during a Wednesday webinar, noting that July shipping and overall global commerce spiked compared to the March through June period.

Broken records

Nerijus Poskus, global head of ocean freight at Flexport, said many records were broken during this time. He noted that more than 30 percent of vessels were late, according to data from Drewry, and some 83 percent of container cargo saw what is called “rollovers,” or shipments that were transferred to later-leaving ships. This was in part due to carriers consolidating shipments for greater efficiency and avoid blank sailings that occurred during these months.

In the area of pricing, Poskus said many trade lanes broke volume records in July. Drewry’s composite World Container index increased 4.2 percent to $2,176.90 per 40-foot container or equivalent unit (FEU) for the week ended Aug. 20 and was up 49.7 percent compared with same period of 2019.

Drewry’s composite World Container index (WCI) increased 3.4 percent to $2,250.63 per 40-foot container or equivalent (FEU) for the week ended Aug. 27 and was up 59.9 percent compared with same period of 2019. The average composite index of the WCI for the year-to-date was $1,741 per FEU, $325 higher than the five-year average of $1,417 per FEU.

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Freight rates from Shanghai to Genoa soared 9 percent to $2,123 per FEU, while spot rates from Shanghai to Rotterdam, Shanghai to Los Angeles and Shanghai to New York all increased 3 percent to $1,922, $3,508 and $4,041 per FEU, respectively. Rotterdam to Shanghai rates declined 3 percent to $1,187, but were 106 percent above the year-ago level.

Rates on Los Angeles to Shanghai, New York to Rotterdam and Rotterdam to New York kept hovering around the previous week’s rates. Drewry expects rates to increase in the coming week.

Poskus noted that several shipping lines recently reported strong financial results for the second quarter despite the Covid-19 slump in business activity.

A.P. Moller-Maersk said it saw improved profitability across all businesses in the second quarter through agile capacity deployment, cost mitigation initiatives and adaption to changed customer needs. The earnings improvement came despite the sharp drop in global volumes following the Covid-19 crisis.

“As expected, the second quarter was materially impacted by Covid-19 and our focus remained on protecting our employees from the virus, serving our customers by keeping our global network of ships sailing and our ports, warehouses and inland transportation networks operating, and helping the societies we are part of fight the virus,” Søren Skou, CEO of A.P. Moller–Maersk, said. “Our operating earnings improved by 25 percent, marking the eighth consecutive quarter with year-on-year improvements, driven by strong cost performance across all our businesses, lower fuel prices and higher freight rates in Ocean and increased profitability in Logistics & Services.”

Earnings before interest, tax, depreciation and amortization (EBITDA) improved to $1.7 billion, higher than the initial expectations in the trading update from June of an EBITDA slightly above $1.5 billion. Revenue decreased 6.5 percent to $9 billion, driven by a volume decrease of 16 percent in Ocean and 14 percent in gateway terminals. In ocean, Maersk said the lower volumes were partly offset by agile capacity deployment of the global network, leading to lower costs, together with lower fuel prices and higher freight rates.

“I think the ocean carriers have really perfected the art of managing capacity,” said Jan Hinz, head of North America ocean freight at Flexport.

Martin Holst-Mikkelsen, head of Europe ocean freight at Flexport, noted that the consolidation of the ocean carriers into a handful of alliances has helped them manage capacity.

“Its no longer 10, 15, 20 players out there, it has narrowed down to five to eight, maybe, and that does make it easier to control the capacity,” Holst-Mikkelsen said. “And I think the carriers are going to try their best to hold onto this for long as they can. At the same time, the capacity is available out there.”

Winners and losers

Poskus noted that despite sourcing shifts caused by the U.S.-China trade war and a definitive falloff in U.S. imports from China, container freight shipments to the United States from China increased 20 percent in July compared to June. However, U.S. ocean freight imports from Vietnam jumped 39 percent, the best monthly rise ever.

“I think the big winner of the trade war and the Covid crisis was Vietnam,” Hinz said. “When we look at some of the losers, I think consistency lost. Customers who wanted a budget on a fairly consistent spend for the year, cost certainty and the ability to plan a logistic budget really struggled. And a lot of volatility entered the market.”

On the plus side, “we see tremendous demand for e-commerce,” he said, which has resulted in shippers building more flexible options into their services such as premium value routings and new entrants into the market.

Jason Parker, head of North America trucking at Flexport, said a lot of companies are using transloading services on the West Coast region, such as Chicago fast-rail service.

“The market is facing a pretty big capacity crunch, larger than Q4 last year, which is generally retail season,” Parker said. “As a result, we’ve seen rates up about 80 percent. This is basically due to a huge imbalance in freight, with a lot of freight moving inland and a lot of freight moving back to the West Coast. All this leads to is contract rates also increasing.”