“Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff”: Jerome Powell
By Wolf Richter for WOLF STREET.
Amid continued reports of container shortages, shipping capacity constraints, port congestion, and blistering global-stimulus-fed demand for goods – in part the result of the Pandemic-related shift of consumer spending from services to goods – the cost of shipping those goods from Asia to Western countries has exploded to new highs.
Average port-to-port spot rates from Shanghai to Los Angeles soared from around $1,500 per 40-foot container in early 2020, and from a five-year average of $2,177, to $4,000 in September 2020, to $8,000 in June, and to $9,631 in the week ended July 8, according to Drewry Supply Chain Advisors. This would be an increase of over 500% from early 2020 (green line in the chart below).
But it’s even worse: “We have heard reports of $15,000 from China to the West Coast and are aware that carriers are charging additional premiums on top to prioritize the loading of a late booking ahead of normal FAK [Freight All Kinds] rate cargoes,” Drewry says.
That would be a ten-fold increase from early 2020!
Rates from Shanghai to Rotterdam have skyrocketed from below $2,000 in early 2020, and from a five-year average of $2,486, to over $12,000 in July (yellow line).
Drewry calls this phenomenon a “market shock” that started in June 2020 for the Asia-US trade, shortly after the stimulus money started flooding into commerce; and that started in December 2020 for the Asia-Europe trade. The two starting points are indicated by the flames. The five-year averages are indicated by the dotted lines (chart via Drewry Supply Chain Advisors):
With the approaching peak season on the Asian routes, Drewry said that it expects “spot rates and underlying capacity shortages to become even more acute,” and it expects rates “to get close to $20,000 on some lanes.”
“The difference between this year’s container shipping market and that of the last 5 years has become stark, as spot rates broke inflationary record after inflationary record,” says Drewry in its Logistics Executive Briefing.
Freight rates from Shanghai to New York reached $11,708 per 40-foot container.
Freight rates in the other direction, from Los Angeles to Shanghai have also risen, but only to $1,326 per 40-ft container in the week through July 8. And from Rotterdam to Shanghai, rates have risen to $1,740.
The amount in spot rates over the five-year average, the “premium” in the chart above, has reached $7,000 to $10,000 per 40-foot container from Asia to the US, Europe, and other major lanes.
“For low-value products, this unexpected premium cannot be absorbed by shippers, and we know from Drewry shipper customers that some export business is being lost due to these extreme transport costs,” Drewry said.
In terms of 2022, Drewry expects that rates will be “substantially higher than 2019” and that “there will be a softening of extreme spot rates, but no return to ‘normal’ freight rates overall.”
So the extreme peaks of the spot rates, some of which are still expected to come in 2021, will be transitory in terms of 2022, but the remaining portion of the higher rates will be persistent.
Part of the reason for the container shortage is that container ships are tangled up in port congestion which continues to dog the shipping industry. Marine Traffic shows this image of the Ports of Los Angeles and Long Beach. The round dots offshore are about two dozen ships that are waiting to unload, though that is down from peak congestion in early February of about 40 ships.
According to Port of Los Angeles data, the average number of days at anchor and at berth for today was 8.5 days and on many days is in the double-digits, including on June 29 (10.7 days), July 2 (12.2 days) and July 7 (13.7 days).
The Port of Los Angeles has been setting records in terms of the volume of imported loaded containers. The container volume is expressed in the standard measuring unit of TEU (Twenty-foot Equivalent Unit), where a 40-foot container counts as 2 TEU. For the five months from January through May, the port imported 2.37 million TEU in loaded containers, according to data from the Port of Los Angeles. This was up 26% from the prior record period of January-May 2017:
As Fed Chair Jerome Powell observed with brilliant insight, after $4 trillion in QE since March 2020, accompanied by an increase of $5 trillion in federal government debt, caused by deficit spending – $9 trillion in total fiscal and monetary stimulus – in addition to similar stimulus in other countries around the world: “Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff.”
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