Freight Rates Bubble About to Burst?

  

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Despite this year’s huge volumes and ridiculous increases in rates for container shipping lines, a better indication of the “recovery” will begin to be apparent by late August early September when most of the backlog that has plagued the China to U.S. market is out of the way.  One good indicator of this is the recent dramatic drop in freight volume from the U.S. back to China in raw materials like Lumber and Scrap Metal.  This is due to the fact many Manufacturing Companies in China are not getting new orders past Aug-Sep, so they don’t need any more raw materials from the U.S.

Meanwhile all of the Carriers are “Getting it while the getting’s good.”  Can you believe another $400-$600/40 increase set for August 1 for the Pacific Rim eastbound trade ?  My advice to anyone listening is to hold off your shipping till maybe Sept –Oct when rates will probably drop and space problems be alleviated, and I am a Shipping Company !

I personally do not see a dramatic slowdown, because we are in PEAK SEASON after all, which traditionally lasts until around Oct-Nov when Christmas orders are all in.  This year witnessed an intense backlog in China that was due to many factors such as China’s continuing problem of a shortage of skilled labor coupled with rising labor costs, factories no longer getting government subsidies which have resulted in mass shutdowns and relocations to central China, shortages of equipment and of course the manipulated vessel space shortage created last year by all of the Carriers.  We can sit back and marvel at how well this strategy worked for the Carriers as all are again profitable by now rising back from the precipice of near disaster and bankruptcy last year.  Economists and Economy majors in Universities will be studying this for years to come.

However this was not a true indicator of a real recovery in the U.S. Economy nor was it for the Shipping Industry (Although most Freight Companies are relieved to see their profits up this year from last year’s dismal dance with an actual economical depression )  If the U.S. Economy doesn’t have a true recovery that is sustainable we are in for a slide in the 2nd half of the year. But have no fear, the freight rates will probably be propped up to no more than a 20% drop by you guessed it…more vessel’s parked in Singapore as well as the newest method of Carrier cost saving….”Slow Steaming.”  Most Carriers have learned from their mistakes and have figured out how to stay profitable in a down market. But hey, isn’t what is supposed to happen?  What doesn’t kill you makes you stronger.

The old days of the big volume Importer “ VIP account “ appear to be over, as everybody including Walmart had to “pay the piper” this year and will continue to do so.  I have no problem with that personally as it was getting embarrassing to see the “Big Dogs” make every carrier their female canine for so long.

But that doesn’t mean there won’t be repercussions.  I am sure in the coming months as Carriers start to come begging for more freight, they will find they have lost some loyal customers….either that or with high freight rates and the inevitable re evaluation of the Chinese RMB, some importers may end up becoming exporters one day…WHICH IS A GOOD THING.

Devin T. Burke
CEO, Universal Cargo Management