US $25000 container freight rate is the new normal of supply chain non performance of contract

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Those looking for exciting news about the state of global supply chains may have to wait. An investment bank focusing on the ground does not see the current supply chain dilemma, or the accompanying higher costs, which has eased them for quite a long time.

In a report released on Monday, UBS said increased supply restrictions affecting the global shipping system were driving bottlenecks that "may not be eased soon." More importantly, after at least 12 months, the increasing container costs may not be adjusted too much.

Analysts responsible for the investment bank's tough US retail business said the company recently held a conference call with two experts in the shipping industry, who identified three major causes of the bottleneck: Port disruption, labor shortage and lack of available warehouse space to store goods.

UBS said that even if these three problems are solved, the market tension may remain at a higher level than usual due to the long-term backlog of demand exceeding supply.

The situation has become so severe that the National Retail Federation (NRF) has asked to meet with President Joe Biden and other government leaders to discuss the continuing challenges of congestion and rising freight rates. The American clothing and Footwear Association (AAFA) and the port of Los Angeles have urged government intervention.

UBS said it expected the August and September transportation seasons to be in trouble again as retailers tried to restock ahead of the 2021 holiday, but did not respond to requests for comment. Even without major supply chain constraints, supply is usually low during peak seasons and container capacity becomes scarce, resulting in increased transportation costs. Now, with the complexity of these problems, at least in the short term, rising freight will undoubtedly become a bigger problem for retailers.

In the report, UBS said experts said container rates continued to rise due to limited supply. Specifically, an expert pointed out that since August 2020, the cost per unit of containers to the west coast is about $8000 to $9000, while the freight to the east coast is about $12000. In addition, one expert pointed out that in some cases, spot prices have reached as high as $20000 to $25000.

UBS said that was a big change from June 2019, two years ago, when the price of containers on the west coast was about $1000, while the average price of containers on the east coast was $2200.

Other markets also saw substantial growth. Freight for standard 40 foot containers from Shanghai to Rotterdam, the Netherlands, rose 534% year-on-year to $11196, according to Drury's world container index released on Thursday. This is the highest rate among the eight major East West trade routes studied by Drury (freight forwarder zencargo reported on June 9 that it costs $10522 to transport the same container on the same route). The Drury composite index, which measures all eight items of freight, rose 306% year-on-year to $6957.

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French and Japanese freighters impose surcharges on goods bound for China

To make matters worse, container carriers in Japan (Ocean network express, or one) and France (CMA CGM) have increased surcharges for shipping to China's Yantian port due to congestion and container shortages. To cover the cost of goods diverted to Yantian, CMA CGM charges a surcharge of $1250 per container, while one increases the cost by $1000.

CMA CGM implemented the surcharge on June 11, but some countries will not be charged until July 21, including the United States and its overseas territories, Brazil, Argentina, Colombia, Ecuador, Panama, Venezuela, Uruguay and Paraguay.

In the case of congestion and delay in Europe, the United States and Asia, one and Maersk have omitted the berthing of Yantian wharf to maintain the schedule. Maersk reported that the eastern area of Yantian terminal, which handles trunk ships, has an operating rate of 45% of normal productivity.

However, although Yantian Port continues to be restricted by covid-19, everstream analytics reported further normalization of operations, with yard density and vessel waiting time "significantly" reduced in recent days as of Tuesday. Port operators are expected to resume normal operations from the end of June.

Perhaps the biggest setback to high costs is how long it will take to get back to normal. Experts quoted by UBS also believe that there will not be a big adjustment in interest rates within 12-18 months from now. Even if the dynamic of supply and demand tends to be stable, there may be a "new normal" in container prices.

"Moreover, in many cases, contracts have not been fulfilled. This has led some importers to look for products at home, "the note said.

The main railway is hot with congestion

According to UBS's discussions, restrictions across the chain are having a negative impact on some of the country's largest rail systems, particularly BNSF rail and United Pacific.

"Both BNSF and unp seem to be facing the problem of slower container departure from Chicago area terminals (and BNSF's Memphis), and the increase / lack of space has resulted in both Western railways measuring the flow of intermodal trains and containers from Southern California to the Midwest," UBS said in the report" While transportation capacity may be a limiting factor, warehouse space constraints in Chicago and Memphis also seem to be a problem. "

However, the rise in ocean freight rates is likely to drive the growth of ocean freight related revenue of freight forwarders in the second quarter.

"The expert's comments on our call led us to believe that the relatively tight marine container transport market and port disruption may support freight forwarders' strong marine container volume, total revenue and net revenue performance in the second quarter, and this support is likely to last until 2022," the note said.

The United States still faces unnecessary land and ferry restrictions

Everstream analytics pointed out in its weekly summary of the impact of the covid-19 pandemic on the supply chain on June 22 that the United States will extend unnecessary travel restrictions at land and ferry crossings with Canada and Mexico to July 21 to reduce the spread of the epidemic. Coronavirus. Border posts have been closed since March 2020, and restrictions have been extended every month since.

Despite higher vaccination rates and faster recovery in the United States, congestion still exists in the global market. Flights to and from Bao'an International Airport in Shenzhen, China, have been cancelled after authorities imposed restrictions on the discovery of delta coronavirus variants. Everstream said the airport could be congested as a result.

Indonesia, with the world's fourth largest population, has tightened restrictions on movement in the "red zone" including Jakarta in two weeks since June 22 due to an increase in covid-19 cases. South African authorities have tightened measures nationwide since June 15, and raised the country's level 5 virus transmission risk level from "level 2" to "level 3".

On the positive side, Japan lifted the covid-19 emergency travel restrictions on June 20 in nine of 10 counties, including Tokyo. Okinawa remains the only region to impose restrictions, which will last until July 11.

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