The majority of shippers have finalized their 2022 contract negotiations covering ocean containers shipping from Asia to the United States. The traditional contract period, May 1, 2022 through April 30, 2023, will bring many of the same challenges that have plagued the shipping industry over the last two years. Record high freight rates, insufficient container allocation, and congestion will once again impact supply chains across the U.S.
Freight rates are expected to remain at unprecedented high levels when compared to the previous ten years. The unprecedented rate levels apply to both contract rates and open market rates. The carriers were able to leverage the tight market conditions to increase 2022 contract rates upward between 100% and 200%. Shippers that rely solely on open market rates to move their cargo should expect another challenging year when it comes to managing their freight costs. The gap between contract rates and open market rates closed in 2002. However, it will still cost significantly more to ship containers on the open market versus a fixed contract rate.
Carriers control 100% of the leverage in today’s market. Shippers had no choice but to accept the substantial contract rate increases offered during contract negotiations. Shippers that pushed back on the amount of increase were quickly faced with a difficult decision. Accept the full increase or risk losing container allocation to other shippers that were willing to pay. In the end, securing weekly container allocation, not rates, was the single most important factor when finalizing the 2022 contracts.
The U.S. supply chain system continues to struggle with the sheer number of containers being imported through US ports. West Coast port operators have already advised shippers to prepare for the same bottlenecks that hampered West Coast ports last year. Moving containers inland via rail will also present challenges to shippers. Carriers have made it clear that they do not want containers tied up for weeks due to rail congestion issues.
One area where the carriers increased capacity was on their Asia to East Coast ports routes. The decision to bolster East Coast capacity was likely attributed to the carriers concern that the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) will be unable to agree on a new contract. The ILWU represents port workers in California, Oregon, and Washington. The PMA represents carriers and terminal operators at West Coast ports. The current ILWU contract is set to expire on June 30, 2022. If a new contract is not in place by July 1, 2022, it will be a worst case scenario for the entire U.S. supply chain system. Potential worker slowdowns and disruptions at West Coast ports would only add to the severe congestion anticipated during the peak import period.
There is still a lot of uncertainty facing the shipping industry. Unfortunately, high freight rates and unreliable service levels are two issues that will certainly plague shippers through the end of the year.