Massive GRI, The New Normal?
If I had been asked in January of this year what the cost of freight from Asia Base Port to US East Coast would be by summer, I might have guessed $3,000/40’HQ. After all, in January the average rate on this lane was $4,500 and with predictions of a weaker demand for shipping in 2024, that seemed like a reasonable bet. Taking into account over three decades of historical costs and rate trends, all signs pointed to a calm year. If someone had asked at that time “What’s the probablity of rates exceeding $10,000/40’HQ?” my immediate reply would have been “ZERO!”.
It’s a good thing no one asked, because I would have bet the farm against that. Yet here we sit, US East Coast rates have now surpassed the mark of $10,000 per Forty-Foot Equivalent Unit (FEU), and West Coast rates aren’t too far behind. How can this be? It’s a question I ask myself, not just today, but twice in June of 2024 after two major General Rate Increases (GRI) surpassing $1,000 each, and twice in May with yet the same… two massive GRI.
Average costs have moved from $4500 as of January 1 to nearly $7,500 by February 1 this year. Not so crazy, given a tumultuous Chinese New Year and issues from Panama and Suez starting to appear. But, those increases quickly dissipated and costs crashed as low as $3,500 per FEU by mid-April. Since then, shippers have been absolutely hammered by GRI from the steamship lines on the 1st and 15th of each month since.
May 1 GRI: $1,500
May 15 GRI: $1,000
June 1 GRI: $1,000
June 15 GRI: $1,000
July 1 GRI: $2,000
In all, at least $6,500 worth of added costs to services that still underperform more than 50% of the time. Increases that come without interference from countries worldwide. China, whose factories struggle to grow due to increased cost remains silent, even as a stakeholder in steamship lines. The US Federal Maritime Commission (FMC) who’s function for US businesses is to provide oversight, regulation and protection to our economy, also remains silent. So I ask myself, “Are huge GRI and major shifts in transportation costs the new normal?”
If one were to explain the case for so many increases it would not be very difficult. After all, the two historic routes for trade from Asia to North America have suffered severe setbacks. The Panama Canal has struggled to fill the lock systems and as a result, physically could not move vessels through the canal. So, ships had to move via the Suez Canal. Unexpectedly, Houthi rebels decided this year was a great time to start a literal war against shipping vessels in the Red Sea. What are carriers to do? Essentially no choice, they must sail south around Africa. Beyond that, the US Government enacts major penalties against an extensive list of products, importers must rush to bring cargo in, in order to maintain P&L structures. Canadian workers consider a strike…. US East Coast workers consider a strike… The explanations and reasons are endless.
But I still struggle with accepting that $5,000+ swings in shipping costs in nearly 75 days makes sense. After all, when United Arab Shipping Company (UASC) went belly up, the market was only marginally impacted…. at most, $2,000 in total increases. When Hanjin completely collapsed, leaving vessels floating which were being held captive by debtors, still only marginal changes reached the costs of global transport.
So why are we seeing such savage changes to costs? My thoughts are simple. Steamship lines have seen the levels of profitability they can deliver, both for private and publicly held organizations. They have witnessed that the world is literally at their mercy, and the profit potential is driving these huge rate adjustments. So if I were forced to answer that one question “is this the new normal?”, I’m afraid to say YES, I think volatility and huge swings in costs may be here to stay.
