The intensification of disruptions and rising costs: Freight rates surge on the U.S. West Coast

Source: 5688.cn

Shipping costs from Asia to West Coast ports are on the rise, a direct consequence of the Red Sea crisis.

As the disruption in Red Sea shipping intensifies, spot prices for container shipping at the other end of the globe, transporting goods from Asia to the U.S. West Coast, are also increasing.

The Red Sea crisis coincides with the drought restrictions in the Panama Canal. Asian goods bound for the U.S. East Coast and ports along the Gulf of Mexico used to be transported through the Panama Canal, but now they are diverted around the Cape of Good Hope, resulting in a longer journey.

The shorter route from Asia to the West Coast is becoming increasingly attractive.

According to data from Sea-Distances.org, the sailing speed from Shanghai to New York via the Cape of Good Hope is 14 knots, taking 43 days. Direct sailing from Shanghai to Los Angeles only takes 17 days (plus additional time for overland transport).

The current challenge is how long the disruptions in Panama and the Red Sea will last, bringing new dynamics to spot rates on the West Coast of Asia.

Annual contracts in the trans-Pacific region are typically executed between May 1 and April 30, with negotiations taking place from February to April. If the spot rates for trans-Pacific currencies receive support for several months (rather than weeks), supply interruptions may push up annual contract rates.

Rates from Asia to the West Coast have risen by double digits.

According to the Drewry World Container Index (WCI), the spot rate for Shanghai-Los Angeles was $2,726 per 40-foot equivalent unit (FEU) as of Thursday, a 30% increase from the previous week (December 21, due to holidays).

On Wednesday, the Baltic Daily Freight Index (FBX) showed that China-West Coast rates were $2,713 per FEU. The current FBX reading is 34% higher than the same period in 2019 and 95% higher than the level in early January 2020, before COVID-19.

From Monday to Wednesday, the FBX China-West Coast index soared by 73%. The FBX China-East Coast index directly affected by the Panama and Red Sea issues reported $3,900 per FEU on Wednesday, a 51% increase from Monday.

Xeneta tracks both short-term (spot) and long-term (contract) rates. The company's data shows that the average spot price from the Far East to the West Coast on Thursday was $2,282 per FEU, a 28% increase from Sunday.

According to Xeneta's data, contract prices from the Far East to the West Coast have consistently exceeded spot prices for most of 2023, despite the annual contract prices being reset lower last spring. However, after the recent surge, the average spot rates are now 36% higher than the average long-term rates on this route (for all still valid contracts, including those signed during the last round of annual negotiations).

Will the disruptions increase trans-Pacific contract rates?

Whether the recent rise in spot rates on the West Coast will last long enough to push up trans-Pacific annual contract rates expiring in May depends on the duration of the Red Sea and Panama Canal disruptions.

The situation in the Red Sea is highly uncertain. On Wednesday, a military alliance led by the United States issued a final warning to Houthi forces, suggesting that ground strikes in Yemen could be imminent. Another security incident occurred on Thursday; a Houthi drone loaded with explosives detonated in the Red Sea.

Meanwhile, the restrictions in the Panama Canal appear almost certain to continue through the trans-Pacific contract negotiation period, despite higher-than-expected rainfall in November, leading to slightly increased transit bookings for this month and February.

Panama is currently in the dry season, and the next rainy season will begin in May when trans-Pacific annual contracts are already signed.

"By May 2024, the rainy season will resume, which is the timeframe we have been working towards," said Ricaurte Vásquez Morales, head of the Panama Canal Authority (ACP), in a speech at the end of December.

"Everything we do, including scheduling, reducing transportation, adjusting consultations and regulations, allocating time slots, and everything we do to manage capacity, is to operate the canal throughout the dry season. When the rains resume, we will resume normal operations based on actual rainfall."

Amit Mehrotra, transportation industry analyst at Deutsche Bank, believes that the current rate strength is unsustainable.

In a research report on Thursday, Mehrotra warned: "We believe that, given the overall container shipping environment, upward pressure on rates will be a short-term phenomenon, and the overall container shipping environment still faces challenges."

"Based on the latest orders and delivery plans, we expect net fleet growth rates for 2024 and 2025 to be 7-8% and 5-6%, respectively, while demand growth rates in ton-miles for 2024 and 2025 may be only 3-4% each."

"In other words, we don't expect to return to any multi-quarter or multi-year container shipping cycle like during the pandemic. Although the current situation may be favorable for freight rates in the short term, it is happening against the backdrop of a soft container shipping market."

Regarding the Red Sea crisis, Mehrotra said: "Geopolitically, the United States, Europe, Egypt, China, and others all have vested interests in ensuring the free flow of energy commodities and container goods through the Suez Canal. Considering the number of self-interested parties hoping to keep the region stable, we believe that achieving a certain level of stability is only a matter of time."

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