Royal Coffee’s Inbound Traffic Specialist, Jodi Louws, shares her thoughts on market forces that will affect shipping costs in 2023.
TLDR; Shipping costs are not back to pre-pandemic lows, and we do not expect them to be. Freight rates are improving, but not “plunging”, and low East –West rates are not opening doors for low South-North rates.
Since 2020, the unprecedented ebb and surge of pandemic demands has roiled the shipping industry. Lockdowns and congestion triggered port closures, labor and shipping container shortages, packed ships, and excruciating waits for delayed cargo. By September of 2021, spot freight rates peaked and in the first quarter of 2022, the annual contract rates importers use to secure space commitments were set near market highs. By the fourth quarter of this year, we finally began to see performance normalize and the industry news is full of “plunging freight rates.”
I’ve been hearing many expectations of “back to normal” pricing and we should probably take a step back from that expectation. While some freight lanes (East Africa and Indonesia to US West Coast) are attractively near beloved levels, we’re still seeing higher prices and wide ranges between conservative and competitive rates on South-North Lanes. Of course, we’re doing what we can to get the best pricing and pass those savings on to you.
GLOBAL FACTORS
The factors at play here: East-West demand is in a temporary trough, so we’re seeing fantastic deals on short-term spot rates from Asia to the West Coast. This is hugely affecting our desire for lower prices; of course, we want them everywhere! However, volumes are expected to pick up and normalize and offers to secure East-West space on long-term contracts are higher than rates on the spot market. The current dip in demand is not substantial enough to move service from East-West to South-North, and South-North service remains steady and full. So, our long-term forecast has East-West pricing higher than current deals, while South-North pricing is lower than last year but not the dramatic drop we may have hoped for.
PORT CLOSURE RISKS
After these years of volatility, we can hope that East-West trade volumes stabilize in 2023 at levels that the West Coast ports can manage. In 2022, we saw key carriers close Oakland, Seattle, and Vancouver to South-North volume while the East-West trade congested the terminals and created long waits off the coast. We could continue to see this. Despite the recent plunge, East-West trade levels may stabilize at higher volumes than pre-pandemic. Oakland/Seattle/Vancouver have not notably increased their capacity for this. Oakland may even have greater struggles as the California loses thousands of truckers when AB5 comes into effect on Jan 1st, 2023. We are confident Oakland can handle more coffee volumes in 2023 than 2022; but some volumes will continue to route through Houston (Brazil) and L.A/Long Beach ports, if necessary.
FUTURE PRICE REDUCTIONS?
Steamship lines have invested profits from the recent boom in new large vessels now in production. These vessels will go afloat in Q4 of 2023 in East-West lanes, where ports are larger and deeper for accommodating the largest vessels. Older, smaller vessels may be retired or redeployed on North –South lanes adding space and frequency to affect lower pricing down the road. By Q1 2024 we can hope to see this supply impact furthering lowering long-term rates.
MANAGING COMPETITIVE RATES
We are working hard to secure reliable vessel space at the best prices available. This continues to be a more complex challenge today than “the old days” of low volatility and tight pricing ranges. On South-North lanes especially, we can still see a gap of several thousand dollars between the lowest and highest rates for the same service. The inflexibility of the space does not allow us to use only the lowest prices for every import. The coffee must move in several baskets to keep inventories supplied. However, we’re constantly evaluating our pricing assumptions as port closures and container shortages, among other potential impacts, affect pricing opportunities throughout the year.
Our best advice is to keep the lines of communication open with your trader. Email us to get in touch.
how about the availability of the containers themselves? Any easing of the supply/location shortage?
Hello, I do expect better performance from the lines regarding disposition of containers in 2023. The past years have seen so many shortages, especially in the Central and Latin American ports so critical to the coffee industry. With global freight volumes down, these issues will become less frequent. That said, temporary container shortages and rolled bookings have always been a aspect to peak export seasons. But I hope we’ll return to the days of minimal impacts!