Some shippers are resorting to air cargo to avoid delays from US West Coast port congestion. But what are the additional costs of these expensive diversions?The recent US West Coast port congestion issues as detailed in last week’s Container Insight Weekly has temporarily reversed the long-term modal shift from air to ocean
as
shippers seek alternative ways to make sure their goods hit the stores
in time for the US holiday season.
World air cargo growth has for a
number of years lagged behind container shipping growth due to a
combination of factors, including higher demand for commodities that are
typically shipped by ocean freight, faster growth at the low-value end
of commodities such as T-shirts that reduces air cargo’s overall share
and finally the sea conversion of “mature” products. This is evident by
lower imports of electrical machinery into the US by air freight between
2005 and 2013, see Figure 1. Air cargo’s 8-year CAGR of -1.4% for the
said commodities is the near mirror-opposite of the same items moved by
containership.
Figure 1
US Imports of Electrical Machinery (HS Code 85) from World by Air (million tonnes)
Source: GTIS
Figure 2
US Imports of Electrical Machinery (HS Code 85) from World by Containership (million tonnes)
Source: GTIS
A
study published earlier this year by Seabury, commissioned by the
International Air Transport Association (IATA), revealed that the above
mentioned factors combined to reduce air cargo volumes by as much as 15
million tonnes since the start of the century, with modal shift
accounting for approximately one-third of that sum.
The shift
towards the much cheaper ocean freight mode has gathered momentum in
recent years as shippers have developed more sophisticated IT systems
and leaner inventory strategies. A greater faith in container service
reliability is often cited as another contributing factor, but this is
possibly overplayed and almost certainly misplaced as the container
industry has long struggled to deliver its promises. Drewry’s research
shows that barely 60% of containerships arrived at port on the
advertised day within a threshold of +/- 24 hours in the third quarter.
The
long-term trend from air to ocean transport is not expected to be
reversed, but are supply issues in the container sector, including poor
reliability, rolled cargo, missed voyages in peak cargo months and port
congestion starting to slow the modal shift? More recent numbers show
that international air freight growth is starting to keep up with
container traffic growth and even overtake it in certain months.
Figure 3
Comparative Freight Traffic Indicator (% change year-on-year)
Source: Drewry Sea & Air Shipper Insight
Some
shippers pre-empted the disruption in the container sector by moving
cargo earlier and via the longer all-water route to the US East Coast,
but as the countdown to “Black Friday” and the start of the holiday
season got ever closer, more expedient solutions were required.
Table 1 shows that average transit times from Asia to the US East Coast
are 15 days longer than to the West Coast. As well as having to contend
with longer lead times Asia-USEC spot freight rates also command a
considerable premium that has grown since it looked like the 1 July port
labour contract expiration wasn’t going to renewed quickly.
Data
from the World Container Index shows that the USEC rate premium over
USWC services has expanded from about $1,500 per 40ft container in June
to around $2,100 per 40ft by the end of November, see Figure 4.
Table 1
Representative Transpacific Container Service Port-to-Port Transits in Days, November 2014
Source: Drewry Maritime Research (www.drewry.co.uk)
Figure 4
Recent Developments in Eastbound Transpacific Container Freight Rates
Source: World Container Index (www.worldcontainerindex.com)
The
USWC port slowdown could not have been designed to have caused more
disruption or extra cost. Shippers converting to air freight are doing
so at a time when air rates are at their seasonal high point of the
year. In addition to its Container Freight Rate Insight database on over
600 different port pairs, Drewry also publishes air freight rates
covering 48 key trades in its Sea & Air Shipper Insight report which
is published monthly. Following four months of stable pricing,
East-West air freight rates surged in October on the back of continued
strong peak season demand and the conversion from ocean transport.
Drewry’s East-West Air Freight Price Index rose by 11.9 percentage
points in October to a year-peak of 115.6 points, the second highest
level since the data series started in May 2012.
Figure 5
Drewry East-West Air Freight Price Index (May 2012=100)
Source: Drewry Sea & Air Shipper Insight
As
well as the East-West index, Drewry groups together pricing on each of
the main trades into aggregate indexes, which are calculated as a
weighted average of rates on individual routes. These reveal that the
Asia to US route was responsible for most of the overall hike in
East-West air freight rates with Transpacific Eastbound Air Freight Rate
Index up by 17% against September. In contrast, container freight rates
on the route were in decline with the Drewry Transpacific Eastbound
Freight Rate Index falling by 7% in October.
Table 2
Comparison of Eastbound Transpacific Freight Rates by Transport Mode
Source: Drewry Sea & Air Shipper Insight
Generally,
air rates have held up better than ocean rates as Figure 6
demonstrates, and the rise in air freight pricing relative to much
weaker container shipping rates is widening the pricing differential
between the two modes. Drewry’s East-West Air Freight Price Multiplier
gained 3.5 points in October to x16.5, the widest margin since October
and November of last year. The multiplier compares Drewry’s two
East-West trade indexes for the modes by converting rates into
kilograms.
Figure 6
Comparative Freight Rate Indicator (May 2012=100)
Source: Drewry Sea & Air Shipper Insight
Figure 7
Drewry East-West Air Freight Price Multiplier
Source: Drewry Sea & Air Shipper Insight
Drewry
expects air freight rates will continue to show a rise for November as
the shopping season hits full swing, while tighter capacity will also
support stronger pricing on certain trades. The backlog at US west coast
ports has the potential to soften the traditional drop in Asia to US
rates in December and depending on how long the issue remains unresolved
could prop up air rates through until Chinese New Year.
Our View
Congestion on the US West Coast ports is a costly reminder to shippers
of the need for risk planning, particularly in peak seasons. The issue
will help to inflate air rates and demand temporarily, but it will not
reverse the longer-term trend towards ocean.
Source: Drewry Maritime Research (
www.drewry.co.uk/ciw)