December 2022 is nearing its end. For another year, Santa's elven-maintenance team successfully ensured The Sleigh was well-oiled and ready. The reindeer finished the third phase of their grueling- annual cardio routine, which allowed them to successfully push through Christmas Eve's Winter Bomb Cyclone. As per our source, Rudolph was challenged by Donner for sleigh lead, which caused internal friction amongst The Sleigh Team. And in the true spirit of giving belated Christmas gifts, the Island Leaf Team has concluded that it's high time to share our recent shipping experiences. After all, we've made it a de-facto tradition to compose at least two yearly long-form blogs that discuss shipping.
We wrote our first shipping blog in mid-2021, a year of contradictions for those involved in the shipping industry. On the one hand, exporters faced exponentially accelerating freight rates. As a result, exporters and traders passed these inflated rates onto their customers, who passed them onto their customers. Naturally, this drove up materials costs. Yet, on the other hand, freight forwarders and shipping companies reaped record profits.
While freight forwarders' and shipping lines' cash piles grew like the backlog of vessels anchored off Long Beach Port circa October 2021, everyone had to wait long periods to receive their goods. This was because lockdowns and under-staffed ports slowed container processing to a trickle. To remedy this, by the end of 2021, port authorities and government officials had made decisions that would potentially fix the global shipping snarl.
A few months later, all players involved in international business had high hopes that the shipping crisis would begin to fade. When summer rolled around, the fact that the omicron variant was not very virulent and most countries were open for business provided us international-business people with an exhilarating hit of dopamine. But, unfortunately, like the cause of most exhilarating dopamine hits, this news was only instant gratification.
Everyone knew it would take time before port congestion cleared. And forebodingly, the worldwide effect of China's draconian and ridiculous Zero Covid policy was unknown.
So five months after publishing our last blog about the global shipping situation, we ask, "how much has the situation improved?" Has the shipping crisis abated to the point where we can honestly say that the shipping crisis is over?
As per the standard State of Shipping Cannon, we'll share the Island Leaf shipping experience from the past six months. Then, we'll delve into a macroeconomic review of the shipping industry. Finally, we'll offer our analysis and concluding remarks based on our own experience and the bigger macro picture.
Island Leaf's Experience: 2H2022
During the summer, the beginning of peak shipping season, we braced our bank account for the continued impact of astronomically high freight rates. Indeed, by July, freight forwarders and shipping lines were quoting $12,000.00 for a 40' HQ from Kaohsiung, Taiwan, to Long Beach, California. For our mid-western-based customers, the most competitive rate (for us) from Kaohsiung to Houston registered at $14,000.00/40'. Due to the impending high season, we anticipated even more of a bloodbath to end the summer. Curiously, the crescendo of financial gore never came.
Ultimately, shipping prices began to decline seriously in August 2022. Rates from Taiwan to California plummeted to less than half of their July highs. Rates also fell from major European ports to Asian ports like Klang and Kaohsiung. But rates are only part of the transportation game. Another significant factor for any party engaged in import and export is transit time.
At the beginning of the summer, transit times were indeed a mixed bag. Goods' transit time depended not only on origin and destination but especially on the transshipment port. In the shipping blog we wrote earlier this year, we mentioned that intra-Asian routes (excluding ones that transshipped or called at Chinese ports) and direct shipments from Taiwan to North America had dramatically improved. This trend continued, and no major disruption amongst these routes occurred. Even today, North American-based delays are mainly occurring on the ground, as trucking and rail space remains tight. In fact, we even had a customer rent a U-Haul to transport his goods from the port to the final place of destination. He did this because no trucks were available before demurrage reared its ugly head. This customer's proclivity to think outside the box impressed the Island Leaf team.
Once freight hits the ocean, it's usually guaranteed to reach its destination port in due time. Therefore, we're not experiencing any crippling delays as we did in the past. However, if we order material that transships in Chinese ports, we will plan for a delay of at least two weeks. We encountered these delays when we transshipped material at China's Xiamen Port. These delays happened parallel to the rolling lockdowns that the Chinese government continues to impose on the country. Luckily, transshipments in Chinese ports are exceedingly rare. This is because shipping lines caught onto this global trade-anchoring headwind and avoided (at least for our shipments) Chinese ports.
The Island Leaf shipping situation has improved. With rates continuing to fall and delayed transit times becoming more of a rarity, we're exuding a growing glow of optimism. But is Island Leaf's situation just a microcosm? Or is the entire global shipping situation improving?
The Macro View of the Dwindling Shipping Crisis
When looking at the bigger global picture, several optimistic developments abound. Recently, a popular freight forwarder and legit research provider reported that the global shipping crisis is showing signs of ending. The report noted that although shipping rates are still higher than during the "good old days" of 2019, freight pricing for several well-traversed shipping lanes has indeed dropped. For example, the average prices for a 40' container originating in Asia destined for the US West coast are at their lowest levels since June 2020. While these low levels are still 83% higher than the ideal 2019 prices, they're reasonable. Eight months ago, we could not find a quote better than almost $20,000.00 to ship a 40' container of recycled plastic material from Kaohsiung, Taiwan, to Oakland, California. Things are looking up!
Ocean freight rates are down, but what of port congestion? One year ago, several major US ports faced an inundation of vessel backlogs, which contributed to critical supply-chain disruptions worldwide. For a stretch of months, vessels would sit idle and fully loaded for an average of 2 weeks just off the shores of Long Beach/LA Port. Only 13 months ago, over 100 ships sat idle outside that port. However, to say the situation has changed would dramatically understate the turnaround.
A few weeks ago, Long Beach/LA Port Marine Exchange Captain and Executive Director Kip Louttit stated that the ship backlog was over. So how did the Port of Long Beach/LA end the ship backlog at the world's top economy's busiest port?
A few key things occurred. First, the port hired a glut of workers to accelerate container processing time. Second, the port encouraged enroute ships to travel slower to prevent the logjam from continuing.
The rest of the world's ports are following the trend set by the Port of Long Beach/LA. As of the time of this writing, in early December, worldwide port congestion was only heavy in Taichung, Taiwan, and medium in Incheon (Korea) and Singapore. At all other major ports worldwide, ship congestion remains either light or nonexistent. Indeed, we're out of the Global Shipping Crisis Woods.
Out of the Woods…For Freight Purchasers
Finally, the shipping crisis is winding down, although we're not back to pre-2019 norms. Decreasing shipping rates and a monumental improvement in port congestion bring smiles to those involved in international business. These two positive trends could also serve as medicine for the fight against inflation.
The current inflation level in the United States is at 7.1%, the highest level in decades. While 7.1% is much higher than just a few years ago, we emphasize that inflation is trending downwards from a high of over 9%. Ironically, inflation started to recede during the summer of 2022, when shipping costs began falling. Of course, shipping costs are not the primary driver of inflation—monetary policy plays the lead role. But higher freight costs are, in most cases, passed onto end consumers. This has profound effects on import-dependent economies like the United States. It will take a few quarters for retail goods to reflect lower freight costs, and the Federal Reserve's aggressive rate hikes will also contribute to deflation in the coming months.
Moreover, shipping lines themselves made moves to expand during the height of the supply chain crisis. A recent logistics industry report suggests that a record number of container ships and containers are on track to come into full service in 2023 and 2024. A glut of container space will saturate the market if an equal number of vessels and containers aren't retired. In short, a container-space oversupply is possible, which should contribute to even lower freight costs.
Shippers and freight forwarders are experiencing on-time vessel arrivals, coupled with too many empty containers at port depots. This is good news for consumers, who won't have the burden of higher costs of goods due to shipping rates. In addition, this is potentially good news for companies like Island Leaf that ship material trans-continentally.
Finally, we need to touch on the Chinese government's backward and now lifted Zero Covid / Dynamic Covid (which seems to be a euphemism) Policy. While the recently ended, it never caused a Supply Chain Crisis relapse, and we have yet to see to what extent impending mass-infections hinder the Chinese economy. But Island Leaf can testify that Asian-bound freight from North America rarely transships in Chinese ports. So while discussing the current supply-chain situation in China would require an in-depth content piece dedicated solely to the topic, we see Zero Covid / Dynamic Covid already fomented manufacturers to leave China and set up production elsewhere.
For those involved in international business, the two-and-a-half-year period from early 2020 to 2022 felt more like half a decade. We learned how to cope with long transit times, high shipping costs, and sparse container space. It will be exciting to see how the ocean-freight industry adapts to less consumer demand, more vessels, heightened container space, and clear ports.
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