In recent months, the spot rate market for sea freight has experienced a significant surge. In its recent market updates, advisory firm Drewry has offered its insights on how this change has come about.
Red sea diversions and slower ports
According to Drewry, disruptions in key shipping lanes, particularly in the Red Sea, have caused significant delays and rerouting of vessels. This has led to congestion at alternative ports, further exacerbating delays and increasing costs.
Additionally, slower port operations due to labour shortages and infrastructure challenges have compounded these issues, leading to a tighter supply of available shipping capacity and skyrocketing spot rates.
What’s driving the spot rate surge
Philip Damas, Managing Director, Head of Supply Chain Advisors at Drewry, has identified four key factors that have sparked a sudden rise in rates.
Firstly, Damas says that ongoing congestion at major ports, driven by increased cargo volumes and labour disputes, has significantly reduced the efficiency of global shipping operations. Ports in Asia, such as Singapore and Colombo, have seen substantial year-to-date increases in throughput, contributing to longer wait times and higher costs.
Additionally, supply chain disruptions, including diversions in the Red Sea and slower port operations, have led to rerouted vessels and alternative port congestion. This has limited shipping capacity and pushed up rates.
Furthermore, the uncertainty surrounding geopolitical events, including potential conflicts and resolutions, continues to create volatility in the market. This has influenced spot rates as companies rush to secure shipping capacity.
Finally, Damas states that despite new shipping routes, the persistent disruptions and blanked sailings indicate a market still grappling with balancing supply and demand. This has resulted in planned rate hikes to manage the constrained capacity effectively.
Looking forward
Will this trend continue? Speaking during the latest Freight Loop podcast, Damas said that Asia-Europe rates would begin to reverse, with trans-pacific rates also set to stabilise or soften:
“While weather conditions won’t always be so bad, lead times are expected to remain elongated as we share Maersk’s view that the Suez Canal will not return to full scale use before the end of this year. Now, if demand continues to perform above expectation, the pressure on liner networks and container availability could remain high. Taking into account these caveats, we forecast that the current spot rate rally on the Asia Europe route will start to reverse in June and that the Trans Pacific market will stabilise or soften in the second half of 2024 as record additional capacity is delivered.”
DHL: strategic approaches can reinforce supply chains amid rising spot rates
Given the rise in rates, many companies will naturally be considering what steps to take to mitigate the effects of increased logistics costs.
DHL’s recent trend report, “Supply Chain Diversification,” suggests strategic approaches companies can take to bolster their supply chain resilience amid rising spot rates.
In the report, DHL emphasises the importance of multi-shoring, multi-sourcing, diverse transportation modes, and robust logistics operations.
For those unfamiliar with the first couple of those factors, multi-shoring involves diversifying manufacturing and supplier locations across different regions or countries to mitigate risks, including duplicating manufacturing capabilities and utilising the same supplier in various locations. As for multi-sourcing, it expands the network to incorporate redundant suppliers and manufacturing capacities, addressing financial and operational risks.
DHL adds that using multiple transportation modes across all stages of transport, from first mile to last mile, helps diversify routes and reduce risk, while enhancing logistics operations by adding functions like hubs, warehouses, and distribution centres, helps here too.
By pursuing these strategies, DHL says business can mitigate risks associated with geopolitical crises, natural disasters, and market fluctuations. Moreover, the company argues that by diversifying supply chains, shippers can better manage disruptions and maintain continuity in their operations.
Finally, DHL also encourages businesses to stay informed about market trends and port conditions, both of which can help in making timely and informed decisions.
Photo by Frank Reppold