The combination of an early start to peak season back in May, Red Sea diversions making capacity tight and knock-on port congestion making supply even tighter has pushed ex-Asia container rates to double or triple in the last two and a half months from their already elevated levels in April.
Prices from Asia to N. America West Coast and to N. Europe are at about $8,000/FEU, far exceeding their previous 2024 highs in January and February. East Coast rates are now above $9,600/FEU, with rates for all these lanes last at these levels during their comedown from pandemic highs in the summer and fall of 2022. With transpacific demand projected to increase into August rates are likely to continue climbing.
So what happens next? Are we heading for a repeat of pandemic-level disruptions and rates?
Best Case
Though it’s both supply and demand that are driving current rate spikes, the root cause is Houthi attacks on Red Sea traffic leading to wide scale diversions away from the Suez Canal with capacity being extremely tight as a result.
The extra seven to ten days required to sail around the Cape of Good Hope as well as the addition of extra vessels to these loops needed to try and keep to weekly schedules significantly reduces effective capacity for the entire container market.
And the strategies that carriers are using to try and maintain schedule reliability – heavy reliance on transshipment in ports like Barcelona and Singapore (i.e., long-haul ships offloading containers at these ports instead of delivering them to their final destination) and an increase in ad hoc port omissions – are also the main causes of congestion.
So, a best case scenario would result from the reopening of the Suez Canal to container traffic some time soon.
Unfortunately, a resolution to the Houthi threat does not look imminent. When safe passage is restored, though, there will still be an adjustment period – possibly of a couple months – during which schedule disruptions and congestion would remain significant or even worsen. But following the reshuffle, vessel supply would outstrip even peak season demand, operations would stabilize, and rates would drop, possibly as low as those seen late last year before the Red Sea crisis began.
Worst Case
For rate and disruption levels to get as high as those seen during the pandemic, Red Sea diversions would need to continue, peak season demand would need to stay significantly elevated into October and port congestion would have to remain as bad or worse than it is right now as a result.
Congestion at the current disrupted hubs – Singapore and Barcelona – has led to disrupted schedules and congestion in the form of vessel bunching at major ports in China. If these delays worsen, they could, in turn, lead to disrupted schedules and vessel bunching at destination hubs in Europe and North America.
The knock-on congestion may not lead to delays as bad as those seen during the pandemic, but enough congestion tying up enough vessels could push rates even higher and approach those seen in 2021. In other words, while we are unlikely to experience 100 ships waiting off the coast of Southern California, it’s possible that vessel bunching would result in the need to wait several days for a berth.
If peak season demand remains strong through October – which it often has in the past – there may be only a brief lull in demand in December before pressure begins again in the lead up to Lunar New Year in early 2025. Congestion would likely remain significant and rates not much below their 2024 highs through Q4 and then worsen, with rates climbing again in January and only subsiding after the Lunar New Year.
And any additional stress to the system – the real worst case – would make things even worse.
There’s always the possibility of something unforeseen further restricting capacity or causing an unexpected increase in demand. One already on the horizon, and a likely component of the early increase in transpacific demand this year, is the prospect of an East Coast and Gulf port labor strike when the ILA’s contract expires on September 30th. Significant labor action would lead to backlogs at those ports and possibly diversions to West Coast ports. The resulting increase in congestion would further reduce supply and increase delays and rates.
Other possible disruptions could stem from additional tariffs or the anticipation of additional tariff introductions before or following the US elections in November, or increased tensions or actions in the South China Sea.
Most Likely
As we said, rates are spiking on both an increase in demand and a reduction in effective capacity due to Red Sea-driven disruptions.
On the demand side, some US forwarders report that most of their recent demand increase is from specific product categories being pulled forward ahead of August tariff increases on some Chinese goods.
Other shippers started moving peak season goods in May to avoid possible Red Sea-driven delays later in the year which would threaten inventory availability in Q4, with the recent increase in disruptions and rates possibly spreading that urgency to other importers as well. And, again, concern over a possible East Coast and Gulf port labor strike in October is likely also playing a role.
For Asia – Europe trade some of the current volume increase reportedly already includes peak season goods, though July tariffs may also have pulled some demand earlier than usual.
Each of these factors suggest the demand increase that started in May is a pull forward of volumes that normally would have come later in the year (or have been spread out over time in the tariff example).
The National Retail Federation projects US ocean imports will peak at 2.22 million TEU in August – a level last reached in 2022, but well below volumes during many of the pandemic months – before easing in September and October, suggesting an early start to peak season will also mean a somewhat early decline.
Taken together, it is likely that congestion, delays and rate levels will increase and be at their highest in July and August – and there are signs that rates may have already hit their peak in mid-July – but volume levels are not likely to overwhelm ports or trucking capacity over that period and demand side pressure will ease thereafter. With it rates will decline too, though no lower than their floor reached in March and April as long as Red Sea diversions continue.
Recent reports that congestion is already easing in places like Singapore and China may also point to the likelihood that congestion will remain a problem, but not one that just continues to compound upon itself like the backlogs seen during the pandemic.
If diversions continue and congestion remains a problem into 2025, we can expect another, possibly less severe rate spike in the lead up to Lunar New Year in February, possibly beginning as early as December.
