Ocean carrier consolidation appears to be a contributing factor for the substantial increase in shipping costs that began in the middle of 2020. Vice President and Senior RaboResearch Analyst for RaboAgrifinance, Roland Fumasi explained that ocean carriers suffered a period of more than a decade struggling with profitability issues. The initial impact of COVID had a compounding affect, also having a profoundly negative impact on the shipping industry. However, the economic recovery in the U.S. has increased demand for goods coming from Asia leading to record levels of cargo shipments.
“At that point the shipping companies had already gone through some major consolidation. So, a very small number of very large players that are essentially organized into three alliances,” said Fumasi. “Because of all the years of lack of profitability of these players and the high concentration now in the industry – really an oligopolistic situation – they’re not going to be really fast to give up the record profits that they’re now making.”
The supply and demand imbalance between the U.S. and Asian markets has also been a substantial contributor to increased shipping costs. Freight rates for products coming out of Asia increased by as much as 900 percent at their peak, because of exceptionally high U.S. demand for goods. While rates for cargo such as agricultural commodities leaving West Coast ports increased by as much as 300 percent, it was still more valuable to send back empty containers to be refilled in Asia.
Expectations are for shipping prices to come down from their peak highs that have been seen in recent months. Fumasi said that they have been projecting shipping costs to improve sometime in the latter half of 2022. However, given the carrier consolidation, producers should not be expecting rates to come back down to 2019 levels.
“Are they going to stay at these peak levels? Absolutely not, things will get more balanced,” said Fumasi. “But, [carriers] are going to be a little slower to bring on supply and capacity and we can expect higher freight rates than we saw pre-COVID for the foreseeable future.”
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