U.S. importers, struggling under a tapped supply chain, are increasingly bidding top dollar for long-term shipping contracts that may not even be fulfilled, while doing everything they can to ensure the arrival of their products.

The pandemic-induced boom in demand for goods pushed both contract and spot shipping rates to records – moving goods from place to place costs about 11 times more than before the Covid-19 outbreak. With demand so high and capacity limited, importers are paying to avoid a repeat of 2021, when some contracts at lower prices were breached, leaving customers without their stuff.

Importers are accepting higher contract rates because they are “afraid the market could get even worse,” said Lars Jensen, chief executive officer of Copenhagen-based Vespucci Maritime, a company that analyzes the shipping market. “The fear of losing capacity to some extent trumps the fear of overpaying now.”

Contracts are usually negotiated on an annual basis with importers and carriers, agreeing on a minimum level of capacity between certain ports and the spot market used for cargo carried outside the agreed terms. But this year, importers are willing to pay more, holding on to higher pandemic-era prices for two or even three years – despite some predictions that they won’t remain as high – to protect themselves from the volatile spot market.

The shipping chaos has completely changed the way David Kunelius, president of MedSource Labs, a Minnesota medical device company, transports goods from Asia to the US.

“Pre-pandemic, we would set up full-year shipping contracts,” Kunelius said, paying about $4,000 per 40-foot container, enabling planned investment in research and development. But starting last year, MedSource Labs got a new freight quote every two weeks, increasing by thousands of dollars each time to about $23,000 now.

Rates are unlikely to return to where they were before the pandemic, when carriers faced years of overcapacity and low profits, said Stephanie Loomis, vice president of international sourcing at freight forwarder CargoTrans, Inc.

“It’s establishing itself in the market now that the days of really very low, ridiculously cheap ocean rates are over,” she said, adding that prices probably won’t stay at this level for more than a few years and will probably go down a little bit.

While shippers are interested in entering into longer-term freight contracts earlier and for a longer period of time to ensure reliability and predictability, carriers only have so much space on board ships. New capacity orders hit a record last year, but that won’t relieve the markets until 2023 and 2024, data from VesselsValue shows.

And with supply chain disruptions resulting from Russia’s invasion of Ukraine and China’s Covid Zero policy shutting down major manufacturing regions in the Asian nation, it could become more difficult to predict in the near term. All this while US imports of goods remain at record levels amid decades-long inflation rates.

The major ocean carriers have been criticized for charging such high rates, leaving many shippers and importers — or low-cost freight carriers known as BCOs — out of options.

President Joe Biden asked Congress to look at the largest ocean carriers and whether the three major shipping alliances they’ve formed are anticompetitive. Exporters are also paying the price, as carriers often skip the pick-ups to rush containers back to Asia for a fresh load of more lucrative imports to the US West Coast.

Larger freight forwarders also sign multi-year agreements and pay more for collateral through add-ons, said Robert Khachatryan, CEO of Los Angeles-based freight forwarder Freight Right Global Logistics.

In addition to a contract rate with a guaranteed space allocation, a carrier can carry 20% of your contracted containers at a lower price with guaranteed space — provided importers also book other containers at premium rates, Khachatryan said.

Last year, ocean carriers offered many “premium services,” including making sure cargo was loaded onto the first ship. Those extra costs became a substantial part of container shipping from Asia to the US, and while they’re less common now, they could be making a comeback, Loomis said.

Meanwhile, importers like Kunelius continue to fight the volatility.

“If we can go back to some of those more stable prices on the long-term contracts, we certainly would.” He said. For now, the company will pass on some of the price increase to its distributors, who supply hospitals, emergency services and fire departments. “It can’t last forever,” Kunelius said.


This post Pay-Anything Mood Grips US Importers Afraid of Shipping Problems was original published at “https://www.bloombergquint.com/global-economics/u-s-importers-ready-to-pay-up-for-shipping-after-being-ghosted”

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