McKinsey: Container freight rates will remain elevated throughout most of 2022

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MCKINSEY: CONTAINER FREIGHT RATES WILL REMAIN ELEVATED THROUGHOUT MOST OF 2022

March 24, 2022

Container freight rates will remain elevated throughout most of 2022 while the containerized logistics disruption persists according to a report by management consultancy firm, McKinsey & Company.

Global supply chains have seen unprecedented disruption, and container freight rates are at record highs.

COVID-19 led to a boom in the US containerized consumer goods demand, causing congestion, and reducing effective container logistics capacity. Global container shipping rates have, on average, increased to four to five times their 2019 levels while some spot markets have seen even higher rates.

Shippers have struggled to locate capacity, with acute shortages of vessel space, container boxes, chassis, warehouse space, intermodal capacity, and labor.

Shippers that managed to find access to the constrained capacity have experienced record low reliability both at sea and on land. Average container schedule delays have doubled globally and increased by six times on the Far East and North America trade from two days in the first quarter 2020 to 12 days in the last quarter of 2021 (Exhibit 1).

Global demand growth is moderate; the challenges are caused by a North American import demand boom

COVID-19 caused substantial fluctuations in containerized goods demand that upset the global containerized logistics supply. Restrictions and shutdowns imposed by most countries early in the pandemic decreased container trade and demand.

Demand recovered in Q3 2020 across the globe, particularly in North America which saw import volumes jump an average of approximately 20 percent throughout 2021 when compared to 2019. By comparison, global import volumes have grown around 3 percent when compared to 2019 (Exhibit 2).

The spike in rates is driven by a sharp reduction in effective supply, caused by congestion

When China went into lockdown at the beginning of 2020, export volume slumped. Retailers feared a global recession and cut backorders. Ocean carriers responded by canceling sailings and idling vessels to match the logistics supply with demand. This measure allowed ocean carriers to protect rates from crashing, but it failed to reposition empty containers back to Asia effectively.

Once China’s factories restarted, demand for containerized goods recovered by Q3 2020. Container box shortages at export locations increased rates as shippers scrambled to secure access to the limited boxes.

Lockdowns in North America saw a strong rebound in consumer demand and ocean carriers captured this surge in demand by shifting vessels and container equipment to the Transpacific and Transatlantic trade lanes. Allocated container vessel capacity on the Transpacific trade lane — Far East and North America — increased by 31 percent between January 2020 and December 2021, which is more than three times the growth of the next largest East-West trade lane by capacity, Far East and Europe (Exhibit 3).

Idle capacity, and smaller North-South trade lanes, contributed to vessel and equipment capacity being diverted to North American import-related trade.

As imports from Asia poured into North American ports, cargo operations started to slow down at container terminals.

By September 2020, the hinterland intermodal subsystems, particularly in the US West Coast, became overwhelmed and failed to keep cargo moving out of the congested terminals.

Slowdowns in Los Angeles and Long Beach began to radiate across the industry and other short-term shocks such as the Suez Canal blockage in March 2021, and closure of Yantian in May 2021, and Ningbo in August 2021 due to COVID-19 outbreaks, exacerbated the situation.

By December 2021, congestion had removed around 16 percent of global container ship sailing capacity when compared to September 2020 (Exhibit 4).

Ocean freight rates climbed higher in all major trade lanes as shippers continued to show willingness to pay premium rates to secure capacity, especially for containers carrying high-value goods.

Rates are expected to remain elevated throughout the 2022 contracting season and decline rapidly after Q3 2022 when competition between the ocean liners picks back up. Ocean tender and spot rates could come down close to prepandemic levels by Q3 2022 (Exhibit 6).

Freight rates on both the ocean and hinterland side are expected to remain elevated until normalization is robust. Ocean shipping rates will remain elevated through the contracting season of 2022 and 2023. Similarly, railroads will maintain current rate levels to keep operating ratios low while trucking and drayage rates may witness a slight decline. While ocean rates will come down, ocean carriers will better match capacity with demand, and shipping spot rates could stabilize at around 50 percent higher than prepandemic levels after Q1 2024.

All four scenarios assume disruption to last at least another five to six months. Regardless of which scenario occurs, shippers can take steps to improve supply-chain resilience right now.

Shippers are operating in a world where disruptions have become regular occurrences. Averaging across industries, businesses can expect supply-chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events can take a major financial toll.