Exploring Why Sea Freight Is So Expensive In Summer '21 [Podcast]

In This Episode…

Renaud is joined this week by global logistics expert Jon Monroe who boasts over 30 years in the logistics industry and has a strong focus on Transpacific trade who shares detailed information about how the sea freight and logistics industry works. They discuss the current global shipping crunch (in June/July 2021) that is hitting a lot of importers with both towering costs and long lead times, and explore how we even came to this point while dispelling certain misconceptions. Jon also gives some insight into the situation in the USA specifically, but touches on other areas, such as Europe, too, and talks about alternative shipping methods like air freight.

So, if you’ve been affected by the shipping crunch this year, this episode is for you!


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🎧 Jon Monroe | How Did Sea Freight End Up In Such An Expensive Mess In 2021? 🎧

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Episode transcript

Welcome back to the podcast, you’re listening to episode 60 and this week Renaud is joined by a special guest. His name is Jon Monroe and he’s an American expert on logistics and sea freight. As you may know the industry at the moment is gripped with crazy high prices and long delays so let’s get to the bottom of this with Jon and get an understanding of what’s causing all of this.

This week I’m talking with Jon Monroe who has been involved in logistics and especially Asia to US logistics for more than 30 years and we’re going to cover the current situation with the difficulty of sea freight of getting the goods across the oceans and the extremely high prices and we heard from many importers that this is really a very big concern of theirs. Hi Jon, first can you tell us a little bit about what you do and what you’ve been up to?

First of all, thank you for inviting me to this podcast, I think it’s very important to clarify a lot of misperceptions about what’s going on and how this has come about. My background includes I started out on the carrier side with container shipping lines I run a couple of NVOCCs both global and trans-pacific and in 1998 I founded Jon Monroe consulting and I work with a whole host of clients. Today I represent a large china-based NVOCC worldwide logistics, I also have a tech platform that factories book against orders online and since March of last year I’ve been tracking weekly covid and I provide a weekly update that anybody wants to be on the distribution list and I found it important because I was quarantined in China when this first came down and I was on the second to last Delta flight coming back to Seattle and I recognized how serious this was and felt that in the United States not a lot of people were taking it that seriously so my China team helped our clients understand when the factories were reopening. But when Covid came to the US they didn’t know what to do so I created this update blog if you will that goes out every Thursday that talks about all the facets of covid in the supply chain.

If you’ve been tracking that since March of last year so you’ve seen really the situation get from normal to this very little demand to where are we all today right and can you give us a sense of actually what happened what are the factors that led to the situation that we’re in today because a lot of people are still wondering what exactly is going on?
Sure, first of all when this happened, when everybody began shutting down China shut down first and of course, China is different from the US they shut down completely and we could see and because I was on the phone with China basically nightly and on WeChat, I could see how they were handling and how effective it was. When it came to the US of course we had a little bit of a different approach to it so we struggled with it for a long time I think that as we started opening what I really noticed in May that’s about the time that the contracts with the carriers for the North America trade are negotiated every year they initiate blank sailings to tighten the space to keep people focused on keeping the rates up. What nobody expected was as soon as those contracts were concluded they had three GRIs and a PSS within the first four weeks so rates were climbing.
So you mean in May (2020) basically they’re trying to project how much demand is going to be in the next year right and then in May obviously people were kind of thinking demand is not going to be very high in the next six to 12 months right it’s a big accident basically and China is not shipping much and so the projections were probably lower than the previous year, would that be correct?
Yes, I mean everybody thought that the market was gonna crash, nobody was gonna buy, however even in May we could start seeing the market sort of come back May/June, but whatever the market is when you initiate blank sailings you keep the capacity below what that market is and I believe the carriers kept it about five to six weeks too long and so all of a sudden you had this backlog and in July there were 18 extra loaders meaning extra vessels and by then they’d stopped the blank sailings and that represents about 180 000 TUEs so about 18 extra loaders in a four week period that went into Southern California so you had a tightening and it’s almost like a slingshot effect when that happened and all the containers started coming into LA Long Beach truckers started sucking up the chassis and hoarding them so that was the first of all of a sudden we find that there’s a shortage of something was really the chassis in Southern California. Then as time went on demand started to grow because the US shut down and what a lot of people didn’t realize is as people shut down they had nothing better to do so it’s what I call the ‘add to cart mentality’ so everybody took that mentality and started adding to cart and things were delivered to their house and people started working on remodeling projects, working remotely, and all of a sudden we had this massive surge, if you will, that that hasn’t stopped since that time.
Yes, a lot of home office products, gym equipment, do it yourself sort of home renovation products, and so on, these categories have been pretty hot and, of course, in the beginning, there was a lot of PPE and I mean it was huge.

So now you’re taking us to let’s say summer of 2020 right so you’re starting to have a certain demand, but at the same time shipping capacity has not really been allocated based on that much higher demand, so what happens then? Why can’t they just add capacity and then the system gets back to normal?
As rates begin climbing you would see Asian ports allocating equipment in space based upon the highest rate. What that meant was when you look at the Trans-Pacific trade you have a natural imbalance of about 2.5 to 1 in favor of imports as opposed to exports, but if you start allocating equipment elsewhere, Europe, whatever the highest rate is, you don’t have that equipment balance anymore and that’s what’s happened to throw everything out of sync with the equipment. It was going to wherever there were high rates, South America, etc. I heard of one equipment control manager for a carrier that will remain unnamed, but he’d allocate it based upon the highest rate, so equipment started going everywhere and of course, by Christmas of last year I would say North America wasn’t as bad as the UK. You may remember that in the UK carriers were dropping things off in Mainland European ports that were destined for the UK and saying ‘come and get your containers’ and people are having to find a way to get them to Felixstowe or wherever they were destined for and so that was the UK’s Christmas!
Wow, yes, and when you say it went to the highest rates the people willing to pay the most, was PPE still playing a role there, because I think people were desperate at one point in paying whatever they have to pay or was it not very closely related?
Well, it wasn’t necessarily related to PPE because everything was surging. I think one CEO of one e-commerce company basically said that they believe that what happened under COVID is it pushed the development of e-commerce activity forward maybe five years because before Covid a lot of people didn’t want to book online or order online, but since there was no choice people became comfortable with ordering online and so whenever Covid goes away I think online shopping won’t and the way I always tell everybody is we have two pandemics here. We have covid and we have a container pandemic and that has spread and this year it’s gotten worse because what it means is people talk about the supply chain but what people don’t talk about is the asset chai, and by asset chain I mean container to terminal, to ship, to terminal, to truck, to terminal, to railroad, to truck. That chain that we took for granted has broken and those asset-based companies and chassis providers are not talking to one another so today if we look at what the situation is the US you have basically a log jam all up and down the US. So in Seattle, for example, we have terminal T18. They’ve only been working one gang rather than three for the vessels which has slowed it down quite a bit and the reason is that the railroads are not picking up the containers off the terminal fast enough. They’re going inland to Chicago, Minneapolis, and all the inland locations so they can only work so fast and what that is doing is it’s backing everything up, so probably the hottest spot in the US right now is Chicago because it’s hard to get to Chicago and once you get to Chicago it’s like the old musical group ‘Humble Pie’ from the 70s and their song 30 days in the hole, as I think I said last week, if you go into Seattle T18 or if you go into Chicago Global 4 intermodal terminal you got 30 days in the hole.
Wow, so basically in that case that link in the supply chain, the railway, has not been able to ramp up its capacity based on what it was doing in the previous years? That is the key problem here, yes.
So, LA Long Beach used to have 50 plus vessels waiting for a birth and that’s now about 16, so it’s gotten better on the shipside activity, it’s gotten through the covid infections with labor, but what it hasn’t gotten through is getting the IPI containers off their terminal by the railroad and what has happened as a result of that is in China and in Asia a lot of the carriers stopped accepting IPI cargo, so they’ve limited the bookings for IPI. The other thing that has happened is vessels have been skipping ports. Vessels have been delayed in LA Long Beach so imagine you’re sitting in a large port like Shanghai or Ningbo or anywhere and you book against a vessel that’s got an etd of say the first of July and then all of a sudden the ship doesn’t arrive because it’s still sitting waiting for a birth and it doesn’t ride for another 10 days. So what happens to your allocation if you’ve got 10 containers a week under a contract or 100 container whatever it is? Do you think the carriers give you another allocation for that week? No, you lose it, it goes with that ship whenever it goes, in the meantime that week is dead and that is what’s happening. So as the rates have gone up a lot of the contracts are only partially honored by the carriers and this is the first year I’ve seen carriers walk away from what a BCO is, which is basically which we call a beneficial cargo owner, and it’s basically not the forwarder but the person that takes title to the goods, so that’s what the shipping lines call it VCO and that company all of a sudden is not getting their allocation fulfilled so they’re going to the NVOCCs. The NVOCCs are buying in the spot market, but today it’s not just about the ocean freight rate.

I talk a lot about the indexes, I say that the indexes are broken because they’ll tell you that the rate is 6000 or whatever it is and they publicize that and then the CEOs of all the big American companies go to their people and they say why are our rates not this cheap? Because they’re not accounting for the premium charges. So that’s the theoretical basic price, but that’s not what paying people are really paying for, right? Yeah, so there’s a lot of misinformation out there. Like I said everything’s a bit broken, the vessels are out of sync. Suez has made it worse and the crisis in Yantian made it even worse because there was a backlog of about 160 000 containers which is not yet cleared up.
Just for for people to understand, the Suez canal was blocked for about a week by that huge ship and that sort of puts a lot of the ships on pause that were going to and from Europe to Asia and then Yantian is the main port of Shenzhen and I think the west side of Yantian had some covid cases and then they shut it down for two or three weeks and there were some satellite photos of a lot of ships waiting just next to it.
Yeah, I think Maersk had 40 vessels they announced were bypassing Yantian, Hapag Lloyd 16. There was a woman who’s the deputy general manager of a subsidiary of Yantian port that came out with everything was well and fine and I think people don’t drill in deep enough to understand the backlog because you not only have a backlog of containers, you have so many vessels that have bypassed the port that were bringing in empty containers that are no longer available, so over time this is going to be felt for quite some time. Yeah because there’s the Shekou port of Shenzhen right and then there’s the Nansha Guangzhou port but they’ve never really been developed for long haul shipping they’re mostly used for shipping to other Asian countries, right?
Mostly, but Nanshan now is over 13 million TEUs so they’ve grown dramatically and they’re really almost neck and neck with Yantian, but it’s it’s West, so not enough factories have gone there to really take it where it needs to go, but I think that’s the direction. In fact, I talked regularly with the port of Nansha and they picked up quite a few new services this year as a result of what was going on in Yantian.
Okay, and did Hong Kong take any of the slack?
Not to my knowledge, but I think that’s just because of the carriers and a lot of this now is controlled by the carriers and what they decide to do on their routings whether it be a blank sailing or port rotation and sometimes that’s a problem because they’ll bypass ports and when we look at China, Ningbo is slammed so a lot of people are draining Ningbo cargo to Shanghai and Fuzhou is really going to Xiamen because the carriers have to service these ports, they have to reposition empties in and take fulls out so if they’re bypassing those ports, so they want to service the main big boats the Xiamen the Ningbo and the Qingdao and so on. Maybe they don’t want to go to secondary ports that actually don’t even have a very good reputation from what I heard like Fuzhou which has a lot of problems there.

It typically used to be the standard when you set up your procedures with the forwarders or whoever your booking agent is you’re on an FOB basis most of the companies will say I want this booked 14 days or two weeks in advance of the cargo ready date of the factory but today it’s four weeks, everybody’s booking four weeks out, July is already done. I mean we’re sitting here at the end of June and that’s pretty unique, but July is done. I mean maybe you can squeeze something in because you pay more in the last week of July, but it’s already a made month.
Wow, yeah, so you need let’s say four weeks at least lead time, plus you’re not sure you’re really gonna get on that ship anyway?
Right, yes, a lot of it is like the airlines with the book extra because they know there’s gonna be a cancellation and then well that’s always been the case because there’s always been a certain fall down, but what’s happening now there’s no choice, everybody’s trying to get a booking out of China or out of Southeast Asia as well so they might book with multiple parties because they don’t know if that carrier is going to cancel or not. First, you have to make a booking and it used to be that with the carriers you could make a booking and then they’d respond with a booking confirmation. Today they’ve basically taken that apart, so you have people that to get the confirmation once you make the booking you have to go to their website, put in your booking number and push to find out when they’re going to release equipment and keep pushing send or submit until you get a response. Once you get the booking confirmation that does not mean you’re going to get a container and once you get a container that does not mean you’re going to get on the ship. I had one company call me and the problem they had is they had 20 containers that were confirmed, they were on their way to pick them up and the carrier canceled them at that time and said if you pick up that equipment we will make you pay for it and we will cancel everything so it’s a carrier’s world right now and we got to live in it.

I think it was last week I read about 40 feet containers that were going at the rate of 20,000 USD have you heard similar rates? I’ve heard 27. Wow! I posted on linkedin this morning and somebody came back well with the new GRI it’ll be 30. So the rates have gone up and up. I advise a few companies at a CEO level because a lot of the c-suite executives in America woke up in the first quarter to find out that their product was six to eight weeks behind schedule and it was costing them to five to six times as much, we’re now at the point that it’s almost ten times as much so it’s really hard for a lot of companies to digest and the problem is it’s not just the ocean line. Now everybody’s raised their rates, the trucking companies, everybody is trying to make an extra dime on us and if you think about it, last year was a record year for the entire industry I can’t remember what the number was but I think they made about 18 or 19 billion US dollars in aggregate. First-quarter this year I think they made 16.9 billion. Now if you look at the ZIM’s earnings release you could sort of see what happened, when I read that I sort of smiled, because it talked about them allocating, because that’s for their investors they really don’t publish that shipping market, but for investors. ZIM is s shipping company who in their earnings report they talked about they allocated so much for contracts and they allocated so much for fak. Well if you read between the lines you read oh fak premium that’s what that’s all about because we started this year with premium rates which were the additional charges that you put on fak rate so you have a contract rate but they can’t get allocation on their contract rate so they go to an fak rate which is higher and then very few carriers on or just a plain fak rate without a premium so you got a premium on top of that, so if you’ve got an fak rate of seven thousand dollars which I think is what the drury index says it is then you add the premium charges are anywhere between six and eight thousand dollars the highest one is nine thousand nine hundred ninety-nine dollars I think, to the east coast now 18 months ago an all-inclusive ocean freight rate was 2400 to the east coast and about 15 to 1600 to the west coast.
This is really crazy, just crazy, so wow.

And what about air freight actually, because we hear a lot about sea freight, but what about air freight since there are fewer passenger flights there’s less capacity for carrying cargo is that right?
Yeah, I talked to a friend of mine that’s with one of the big China-based master loaders for airframe, what he told me on Monday was already some of the big brands are securing air freight for this holiday season because everybody’s big concern is to make Christmas and right now as I’ve recommended to a lot of companies last year, you gotta increase your lead time about four to six weeks, but right now you really need to think about eight to ten, so a lot of people are concerned that they need the air freight space for Christmas and some of these companies, typically about ten per cent of the total volume product volume is going air freight and what I learned last week is that some of these companies are gearing up to do 90 per cent air freight, that’s meaning moving hundreds of containers at a time in the air.
Is there enough capacity for that?
There isn’t, but I mean it’s just the same way with the ocean freight right now. There’s not enough capacity on the ocean side, there won’t be enough capacity on the air and rates will probably go back to what they were when there was the big demand for PPE and all the charter which will be 14 to 16 a kilo, so very expensive air freight this summer and through September October basically for the holiday.
Okay, but if you’re a footwear or an apparel company or somebody that’s dealing with a higher value product you can pull it off. Not everybody can do that, right. If you should do smaller electronics high volume, yeah that that might make sense, but if you do furniture maybe not.

Okay, that makes sense, so have you seen a lot of impact already on importers, because a lot of companies were buying year in year out some products, maybe furniture products are very hot these days, right, and actually clearing out the margin of say 10. I remember when Trump put the tariffs in place a lot of companies said ‘wow I’m already losing money, now the suppliers have to get the price down and I got to get my selling price up, otherwise we’re not afloat anymore.’ So actually the current situation is probably even worse for a lot of companies?
Yeah absolutely, I mean companies are struggling. There’s been a number of companies that have already gone out of business, it’s not easy, like one company I talked to they said ‘Jon we don’t know how to budget, we don’t know how to plan,’ and that’s the biggest issue. How do you budget for a year where every two weeks the rates are changing and you can’t get your contract honored? This is the first year I saw carriers walk away from old relationships because they obviously wanted the spot market, right? The money now. Because the old relationships actually were never very profitable in normal times. I heard a couple carriers say well for the customers that have been beating them up over the years the tables are turned.
Yes, now they’re the ones with the feet on the table!
Right now a lot of companies are really relying on the NVOCCs so a shipping line is a VOCC or a vessel operating common carrier, that’s the technical term for it, an NVOCC is a non-vessel operating common carrier or a forwarder. That term is really only probably used in the US. In Europe they just call it a forwarder, but for some reason, the federal maritime commission made a distinction between a forwarder and an NVOCC, basically, it means those are the companies that have contracts with carriers, they issue their own bill of ladings and so companies go to them for space, and right now that’s what everybody is doing. Looking for two three four five NVOCC forwarders to help get whatever space they can get and yeah the result has been the market share of the forwarding community now is above 50 which is not something the carriers like to see, I think it’s about 54 right now, versus at the beginning of the last year was about 44.

Okay, thanks a lot for all of this information. It’s really nice to go as close as possible to the source with someone like you who’s been tracking all of these changes since last year.


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