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Why sea container freight rates could soar even higher. And nobody will do anything.

Why sea container freight rates could soar even higher. And nobody will do anything.
24 December 2021 jjserrano_

Returning to the subject of the unstoppable escalation in maritime freight rates, I transcribe below an interesting article published yesterday in the magazine "Ports and Shipping Companies".

In this article, the current level of freight rates is posited as the new normal, at least for the coming months....

"Spot market ocean container freight rates are going up year after year, so they must be close to their peak. They are so high that they do not have much room for manoeuvre. This is a common belief in the container market, even though this premise has already been proven wrong, and container freight rates could, in theory, have much more room to rise if the upper limit is defined in the same way as in non-containerised shipping.

"In terms of our current law, a high price in itself is not a violation".

A leading freight forwarder executive told American Shipper in August 2020: "I don't think there is room for growth beyond $4,000 [per forty-foot equivalent unit or TEU]". Nine months later, many all-inclusive transpacific rates, including premium charges, are more than double that - and rising sustainably. Importers typically pay $10,000 per TEU or more, including premium charges, sometimes much more, as reported by Freight Waves.

But why stop there?

The ratio of inventories to retail sales remains at historic lows, stimulus checks, PPPs, continue to support spending and the traditional peak season is just around the corner. Meanwhile, US households accumulated huge excess savings during the pandemic (equivalent to 12% of GDP, according to Moody's) that could now be unleashed.

What if the demand for high-end US imports develops over the rest of this year and outstrips the supply of ships and equipment even more than it does today?

A common response from shippers at forums is that regulators will intervene if rates rise too high. During a presentation last week, Federal Maritime Commission (FMC) chairman Daniel Maffei made it clear that if high freight rates are caused by market forces, there is nothing the FMC can do about it. "In terms of our current law, a high price in itself is not a violation," he said.

The rate for a spot cargo in bulk shipping is elastic to the point of erasing the shipper's profit margin. Rates for very large crude carriers (VLCCs, tankers carrying 2 million barrels of oil) exceeded $200,000 per day in October 2019 and March-April 2020. A liquefied natural gas carrier was booked at $350,000 per day in January.

"It turns out that, at current commodity prices ... the dry bulk market is nowhere near its theoretical ceiling," he wrote. "If demand exceeds supply, the main upward constraint on the cost of freight for ships is the point at which it absorbs the profit of the producer or shipper."

Container transport is much more opaque. "This is much harder [to calculate] for containerised goods because you don't know exactly what's in those boxes," he said. "Are they large stuffed animals or are they iPhones and iPads of much higher value and lower weight?

The key is how the total costs of containerised transport, including sea and land transport, relate to the margin of the goods. "Let's say a pair of shoes costs $10 to produce and sells for $100 to $200. A container holds a lot of shoes. If the transport cost is $5 to $10 per pair and the transport goes up to $20, who cares? There is still a big margin," he says.

The spot price equation also changes when importers pass on transport costs to consumers. "The cost of everything is going up. There is an inflation of the cost of goods. Even the price of low-margin materials is going up and part of that is the increased cost of transportation being passed on to customers," Giveans said. ""