Oceanworks Logistics Insights: Q3
For the first time in over two years, spot rates for ocean freight have fallen below long-term contract rates.
Since April 2020, long-term contract rates have offered steadier pricing than the short-term spot market during a time of unprecedented freight cost volatility. However, as the logistical bottleneck caused by the pandemic has begun to subside and operations have become more manageable again with falling demand, carriers are now reducing their pricing.
The high prices for freight over the last two years were the result of tight carrier capacity, extremely high demand for imported goods to restock dwindling US inventories, and strained port operations due to labor shortages and COVID-19 shutdowns. As a result, large companies and freight forwarders entered into long-term contracts with carriers to benefit from lower rates, guaranteed service, and less volatility than the spot market. Today, however, the spot rates have fallen and these companies are beginning to book on the spot market. In many instances they’re even abandoning long-term minimum contracted volumes, incurring hundreds of thousands of dollars in penalties.
While rates are dropping, the cost of shipping still remains much higher than pre-pandemic levels. Long-term rates to ship goods from China to the U.S. West Coast nearly tripled between June 2021 and June 2022 to $7,981 per container, according to Xeneta, a Norway-based transportation data and procurement firm. Short-term rates began to fall in March of this year and in June is when we saw these rates drop below long-term rates.
This same drop in spot market rates has been observed in the trucking industry in the US as well. Trucking spot rates fell 22% during the first six months of this year, according to DAT, dipping below the contract rate in May for the first time in two years. By June, the average contract rate for dry van trucking was $2.93 per mile, 17 cents higher than the $2.76 per mile to move a load on the spot market. However, the decreased rates are being overtaken by rapidly increasing fuel surcharges.
While prices are dropping across most of the logistics industry, a lot of uncertainty and volatility remains in the market. US dockworkers have still not reached an agreement with The International Longshore and Warehouse Union and the Pacific Maritime Association, which represents more than 70 employers. And while both parties have advised that they won’t let negotiations affect operations, there will likely be consequences if an agreement is not met soon. Congestion is also still a cause for concern and is keeping shipping costs high on some routes, such as China to the US midwest, which has been plagued by severe delays on U.S. freight rail systems. As we continue to navigate through unpredictable rates and sometimes unreliable service, Oceanworks advises their customers to continue placing orders as far in advance as possible to avoid any unforeseen production delays.