Premium Ocean Cargo Pricing; What is it and how does it affect me?
In the last 12 months, ocean carriers started pulling vessels out of rotation. This was for various reasons.
- Covid Protocols as vessel crews got sick
- Drop in demand as the world shut down
- Carriers losing money on bargain basement pricing in 2018-19
- Cost of retrofitting vessels for IMO low sulfur standards.
Vessels want to move full or close to full. When the pandemic hit, demand dropped drastically. A simple math equation with 5 vessels at 75% full can be converted to 94% if you take one vessel out of rotation.
The benefits of pulling a vessel out allows for the vessel to be serviced, the crews can rest and of course the ability to raise rates in traditional supply and demand.
Some vessels were even parked at anchor waiting for the pandemic to pass us by.
About June 2020, the idea of paying a “premium” for space guarantees started to ramp up. It only affected the last-minute bookings. If you had a good planning schedule, the space was booked in advance and premiums were not going to be an issue. Regular business allows for allocations.
Air Freight was always a backup in an emergency. However, air freight is not even close to capacity as people cannot move about the globe because of the pandemic. There are freighters that move freight ”all-kinds” but passenger aircraft have always been able to be in the capacity mix. Without passenger aircraft option, our freighters are running full. Cargo tonnes-kilometers are back to pre-pandemic levels in air cargo. The air cargo pricing is still above pre-pandemic levels and there is doubt if it will level off or remain volatile.
The ocean cargo premium model has been growing to a point that as 2021 hit; now we have equipment issues, port congestion with dwell times at 8 days in the port of Los Angeles and Longbeach, rail congestion and all the coastal warehouses are full. A cyclical lull of China New Year did not fix any of the congestion. The USA is starting to “open” as vaccines are administered and schools and workplaces regain normality.
Cabin fever and stimulus checks make for buying sprees. Demand grows again.
A recent article stated that as much as 30% of goods are backlogged and waiting in China to load vessel. Premium is now in the spotlight even more. Base rates shared in the Shanghai Containerized Freight Index (SCFI) currently average as follows:
|China/East Asia to USA West Coast||$ 5,190.00|
|China/East Asia to USA East Coast||$ 6,002.00|
The base rates above do not include the premium pricing which, as mentioned, would be for the last minute bookings…are now for almost all bookings. Add about $2,200.00 to secure space on these vessels. If not, the bookings will roll until the carrier finds you space on the next available (kinda like stand-by). Planning your purchase orders with your NVOCC is still important but not a guarantee of space or equipment. In the current climate, consider the premium service or you will indeed run out of stock.
Annual contracts traditionally end 30APRIL for TransPacific Asia to USA Contracts. As the carriers test the waters with the big retailers, it will be interesting to see what the May 2021 contracts will settle on.
This article is based on observation and by no means the crystal ball on what we have next in logistics. Hold on for peak season!