Freight Rates Up, But for How Long?

Barely more than a week ago, Universal Cargo’s blog post was about falling freight rates. Freight rates had seen 16 consecutive weeks of decline and were at their lowest since January of last year according to the Drewry World Container Index (WCI). In particular, this was a trend seen in eastbound transpacific shipping from Asia to the U.S.

There were conflicting projections on where freight rates would go from there. Among those I shared in the post was this:

There is some data showing flat rates moving into next week. Some believe that means freight rates have bottomed out and will start rising from here.

Those projections over the ones that believed freight rates would stay in place ended up being correct. Freight rates have surged.

Successful Start to Latest GRIs

Bill Mongelluzzo reported in the Journal of Commerce (JOC) yesterday:

Spot rates on the eastbound trans-Pacific have jumped by about $700 to the US West Coast this week with retailers stepping up their purchase orders for the fourth quarter now that factories in Asia have reopened following the Golden Week and Autumn festivals, market sources say. But forwarders say the effort to end a four-month decline in container spot rates may stumble, and carriers have few other options.

The gains came via a general rate increase (GRI) carriers implemented Wednesday, with prices rising to about $2,000 per FEU for West Coast business from $1,300 per FEU last week. Multiple forwarders and a carrier source told the Journal of Commerce that carriers are getting the higher rates from customers.

That last sentence is important. Part of the fall in freight rates has had to do with soft demand. Lower demand put downward pressure on freight rates. We knew carriers were going to bring October GRIs, but if demand is low enough, shippers might hold out for the GRI to falter or even go to another carrier who’d undercut the GRI freight rates in order to grab marketshare with the market low.

It’s not uncommon for carriers to implement GRIs but be unable to maintain them.

However, demand is showing signs of strengthening, which is good news for carriers and their efforts to increase freight rates. Even so, expectations are not high for the current GRI to be very long-lasting.

Expectations for Short-Lived GRIs

Mongelluzzo reports:

“Bookings are stronger than anticipated after the Autumn Festival,” one forwarder said. “In general, the market is showing some resilience.”

…

Still, carriers and forwarders expect this week’s GRIs, such as the price hike made on Sept. 1, to deteriorate after a week to 10 days, likely to be followed by additional GRI attempts on Nov. 1 and Nov. 15.

Indeed, carriers have filed November GRIs. The question is whether there will simply be a short-lived October surge followed by a short-lived November surge, like the carriers and forwarders Mongelluzzo refers to in his article expect, or if carriers can maintain the higher rate level.

Recent GRIs have failed to stick for long, as the JOC article notes about the September GRIs. Forwarders, carriers, and shippers couldn’t be blamed for thinking October and November GRIs will do likewise.

Demand Influx Could Support New GRIs

Ultimately, the biggest factor in whether the latest GRIs and higher freight rates hold up should be demand.

As one forwarder was quoted in the JOC article as saying, demand is higher right now than expected. Demand could remain higher than anticipated through the rest of the year.

Consider that many shippers imported goods early in order to beat tariff hikes. For some, that could mean a need to restock earlier. Plus, there’s still plenty of uncertainty with what will happen moving forward with tariffs, especially concerning China. Many shippers may increase importing through October, November, and December to avoid the unknown tariff increases that may come in the new year.

Recent trade war escalation makes tariff expectations even shakier right now. China announced export controls expansion to take effect on December 1st. President Trump responded by announcing a 100% tariff added on goods imported from China to take effect November 1st. Of course, China signaled it would retaliate with more tariff hikes. That would be a familiar and frustrating pattern for shippers.

However, there was a softening of the rhetoric between the countries, with U.S. Trade Representative Greer even pointing out that neither the U.S. tariff hike nor the export controls expansion have gone into place, indicating neither may happen.

If the U.S. holds off on the tariff hike but China goes through with the export controls expansion in December, back and forth tariff hikes could quickly follow. If it looks like the Trump Administration is not going to impose the November 100% tariff on goods from China, there’s a strong chance of a demand surge as shippers try to get their goods in before potential tariff escalation.

Such a demand surge would help carriers maintain GRIs, keeping freight rates from quickly falling back down. Meanwhile, carriers are also reducing supply by utilizing blank (cancelled) sailings in order to add some upward pressure on rates.