Navigating Freight Disruptions

Not again! Shippers are concerned about soring freight rates and transit time disruptions.  What is the root cause and what can be done to mitigate?

Many of Noatum’s clients are concerned to see the steep increase in rates over the past two weeks, which is bringing back memories of Covid. On top of rate increases, transit times are increasing across the board. There are essentially four factors driving these increases:

  1. The Panama Canal Drought;
  2. The Red Sea Crisis;
  3. Lunar New Year and longer factory closures; and
  4. The Annual ocean contract season.

Panama Canal:

Roughly 14% of all sea freight into the US passes through the Panama Canal.  It is the major trade route connecting Asia with the US East and Gulf Coast Ports.  The Panama Canal utilizes water from a series of man made lakes and rivers to operate the locks which historically allows 34-36 vessels daily to transit the canal.  However, due to drought conditions in the region, the Panama Canal Authority has had to restrict vessel sizes along with the number of vessels that are allowed to transit the canals each day.  Those restrictions have ranged from 18-32 vessels per day.  The options for vessels are to:

  1. Wait in line at the Panama Canal which is causing delays of approximately 20 days;
  2. Divert through the Red Sea / Suez Canal
  3. Divert through the Strait of Magellen; or
  4. Have cargo offloaded on the US West Coast to be moved via rail to the East Coast or transloaded and delivered via truck.

Red Sea:

Approximately 15% of all global trade passes through the Red Sea.  As a result of the conflict in the Middle East between Israel and Hamas. the Yemen Houthi Rebels are attacking vessels transiting the Red Sea headed for the Suez Canal.  While a coalition of military forces has been assembled to protect vessels transiting the area, the results have been ineffective, and the attacks have continued.  As a result, carriers have chosen to avoid the region and divert their vessels around the Cape of Good Hope at the southern tip of Africa.  These diversions are lengthening the transit times to their destinations (10-20 days) including the return trips back to their origins. This is impacting global schedules, container placement and increased rates significantly in all trade lanes.

Lunar New Year:

Lunar New Year, which is celebrated by many Asian countries, is set to begin on Saturday, February 10th this year.  The Lunar New Year typically begins on the first new moon and ends on the first full moon (February 24th).  The Lunar New Year celebration will last from three days to one week, depending on the specific Asian country.  In China, the Lunar New Year is the most important celebration of the year.  Most businesses will shut down for the entire first week of the celebration.  However, this year with the shipping irregularities caused by the Panama Canal and Red Sea issues we are hearing that many factories could close down for the entire Lunar New Year period.  Many shippers try to get all available cargo out of these regions in advance of the shutdowns which causes a spike in pricing.  As an additional result of the shutdowns, many carriers may limit capacity.  An extended shutdown could cause issues between supply and demand.

Annual Contract Season:

Beneficial Cargo Owners (BCO), Non-Vessel Owning Common Carriers (NVOCC), and Freight Forwarders (FF) are working with the major carriers through a mix of spot rates and “Annual Contracts”.  However, with over 45% of all cargo into the US coming from Asia, most of these annual contracts are signed in a period between the beginning of March and the end of April.   These contracts typically go into effect starting on May 1st and expire on April 30th of the following year.  During this period, carriers are always trying to negotiate a compensatory rate for the year and there is pressure during this period to have that contract rate as high as possible so the carriers can maximize revenue.  The current events in the Panama Canal, Red Sea and Lunar New Year are pushing rates much higher leading into this year’s contract negotiation season.  These events may also impact the contract signings and contract effective dates as well.

 

If you have any questions, please contact your local Noatum Logistics representative.