【Ocean freights】 Why are ocean freight rates so high?
Since last year, there has been chaos on the container logistics in the whole World. Even those of us who have been exporting used engines and used auto parts shipping containers during many years are baffled by the situation.
Let’s take a look at some of the reasons to understand this situation.
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Why are ocean freight rates so high?
Even experienced traders who have been in the industry for more than 30 years can’t hide their surprise at ocean freight rates rising sharply, which are said to be from two to four times higher than usual.
There seem to be several reasons behind the recent surge in ocean freight rates.
Lack of containers
Cargo traffic, which had slowed down due to the effects of COVID‑19, has recovered and surged since July 2020. Export demand has grown significantly in Asia, and container shipping companies have increased their shipping capacity to meet this demand.
As a result, there was a sharp increase in the number of containers from the Asian side to demand areas such as Europe and the United States, leading to a shortage of empty container on the Asian side.
In addition, from the second half of 2020, as transportation demand grows around the World, the shortage of containers has become more noticeable.
In 2020, container cargo movements dropped sharply in the first half of the year, but suddenly surged in the second half, especially after October. This extremely rapid change in the supply and demand environment put pressure on container shortages.
In addition, the China–United States trade war in 2019 and the spread of COVID‑19 in 2020 worsened the outlook for cargo movement demand, resulting in a decrease in new container production.
According to NYK’s survey data, the annual production of containers was 3.25 million TEU in 2017 and 3.84 million TEU in 2018, but it dropped sharply to 2.31 million TEU in 2019 and 2.23 million TEU in 2020. This is also the cause of the container shortage.
Delayed shipping schedule
The combination of port congestion and the increased global demand for cargo traffic are the main reasons for the delays in transportation schedules in many parts of the World.
The most congested port is Los Angeles Long/Beach in North America. In addition, many other major ports and hubs, such as Busan, Singapore, Felixstowe and Southampton in the UK, are unable to handle the surge in supply and demand.
In North America, the spread of COVID‑19 has resulted in fewer dockworkers than usual, which in turn has reduced cargo handling capacity.
In the past, even if the schedule was delayed, it was possible to make up for it by temporarily transferring the ship from other routes or chartering the ship.
However, due to the increasing global demand for cargo traffic, virtually all operational container ships are in operation and there is no way to add more container ships.
Demand far exceeds supply
There is no doubt that the rise in ocean freight rates this time is extremely high, even by historical standards.
The reason for this is that the demand for cargo is far exceeding the supply of shipping capacity. The supply-demand situation is extremely tight, and since there are still shippers willing to pay high freight rates, freight rates have no choice but to rise.
In the past, there were times when cargo demand was much lower than the supply of shipping capacity, and ocean freight rates fell accordingly.
This shows that the standard for ocean freight rates is affected by extreme fluctuations in supply and demand.
What will happen next?
Unfortunately, given the current container shortage, schedule delays, and the balance between supply and demand, there is no way to resolve this problem in the short term.
It is expected that turn back to normal around April to June 2021, or later. However, it is unclear whether it will really happen as expected.
If you are thinking of buying used engines or used auto parts from Japan, you need to follow to the latest information.
If you are interested in the latest information or have any questions, please feel free to contact us.
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How this situation affected us?, What do we do?
From late October 2020, in Kaiho Industry, suddenly became very difficult to book containers due to the under strain space on ships carrying containers and the lack of empty containers in stock at the ports.
Our overseas customers still want to book, but due to the rapid rise in ocean freight rates, they have decided to forgo imports and postpone the loading of containers that we had planned to do.
The cost of transport shall be borne by the customers.
There were 137 containers planned to be shipped between October 2020 and February 2021, of which 78 were successfully exported. Some of our customers postponed their exports for up to six months while waiting for ocean freight rates to settle down. Some customers are still waiting for ocean freight rates to drop as much as possible.
In such a situation, some customers thought that it would be difficult for the soaring freight rates to return to the previous price range, and want to purchase the products even if they have to pay those soaring rates.
If you are going to buy used engines & auto used parts from us, we want to make sure that you will be satisfied.
So we interviewed our customers to find out what they really wanted to buy, and whether there was anything they were failing to tell us because of language barriers, in order to make sure that we could fit their needs and increase their profits as much as possible.
We also organized the project to propose to our customers parts that have not been produced before, because they require too much time and effort, to see how we can fill their containers for export.
Even now, the situation has not changed dramatically, ocean freight rates still remain high, ship connections are not working well, and transport times are longer than usual. Nevertheless, we keep in close contact with forwarders both in Japan and overseas, and work hard to export the containers that our customers are looking for.
If you have any questions or concerns, please feel free to contact us.
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