Panama Canal Drought and Red Sea Crisis Push Ocean Freight Rates to 16-Month High

Ocean freight rates surged to their highest level in 16 months, driven by a combination of geopolitical crises, seasonal demand spikes, and logistical challenges.

Transport Intelligence’s (Ti) Ocean Freight Tracker Q1 2024 report shows that headhaul rates—prices for the primary leg of a freight route from major export to import regions—have soared to 153.6 index points, marking a 173.8% increase compared to the previous three months. 

According to Freightos, in early February 2024, the cost of shipping a 40-foot container on the following routes reached:

• China to US East Cost: $6,589, a 193% rate increase since October 2023
• Asia to North Europe: $5,758, a 286% rate increase since October 2023
• Asia to Mediterranean: $4,697, a 412% rate increase since October 2023

Freight rates may unfortunately continue to rise due to shipping giants implementing peak season surcharges starting from Q2 and general rate increases to account for the additional costs associated with dealing with ongoing geopolitical tensions around major trade routes. More on that below.

Note: A Freight Rate Index is a benchmark that tracks and measures the cost of shipping goods by sea over specific routes. It reflects fluctuations in freight rates, which are influenced by various factors including supply and demand, fuel prices, port congestion, and global economic conditions.

4 Biggest Factors Driving the Surge

1. Red Sea Crisis

The crisis in the Red Sea has significantly impacted shipping routes, capacity, and rates. Since October last year, Houthi rebels in Yemen have been attacking commercial ships, exacerbated by Israel-Hamas hostilities. These attacks have forced shipping companies to reroute vessels (e.g., choosing the Cape of Good Hope route to avoid Suez Canal), leading to increased spot rates – short-term freight pricing – and additional surcharges.

According to Drewry, an independent maritime research consultancy firm, spot rates on routes from Asia to Europe/Mediterranean have increased by over 300% since mid-November, and rates from Asia to the US East and West Coasts have risen by more than 90%.

2. Panama Canal Disruptions

The Panama Canal, a crucial waterway for global shipping, has been gravely affected by the El Niño weather phenomenon. October 2023 was the driest month on record for the canal basin, raising concerns about its future capacity.

The reduced water levels have caused delays and increased costs, as ships are forced to find alternative routes. This could involve longer routes around South America or increased use of US West Coast ports like Los Angeles.

In fact, the restricted capacity of the Panama Canal has made it significantly more expensive to ship containers from Shanghai to Houston than Shanghai to LA.

According to Xeneta, the spread in spot rates for shipments from Shanghai to Houston compared to Shanghai to LA has exceeded $2,000 per FEU (40-foot equivalent unit). This substantial difference illustrates how the canal’s disruption affects shipping costs on routes passing through it versus those that do not.

3. Peak Season

As the ocean peak season draws near (August through October), the volume of freight is climbing. 

Global demand for ocean freight space has increased by 9% year-over-year and is anticipated to rise further in the upcoming months, Norman Global reported. This increase is largely driven by a major uptick in US imports from Asia, which have already surged over 19% year-over-year in 2024. Retail businesses are predicting that this growth will continue into fall peak season, indicating robust market activity and heightened demand for shipping services.

4. Coordinated Price Increases by Shipping Lines

The ongoing conflict in the Red Sea region and the disruptions in the Panama Canal have led shipping lines to coordinate increases in freight rates to cover the higher costs associated with longer reroutes and enhanced security measures.

Moreover, preparing for the upcoming peak season has also contributed to the rate increases. In periods of high demand, shipping lines typically introduce peak season surcharges (PSS). These surcharges are typically coordinated to ensure that all industry players can capitalize on the heightened demand without engaging in price undercutting.

Aside from implementing PSS, shipping companies may also lower capacity and limit available slots to manage the balance between supply and demand while leveraging market conditions to their advantage. By controlling capacity, they can ensure their vessels are fully loaded, maximizing efficiency and reducing the number of partially filled voyages during peak season. However, with limited capacity, they can also create a supply constraint which can drive up freight rates.

This strategic reduction has resulted in general rate increases and Peak Season Surcharges, thereby significantly elevating the freight market.

• Maersk introduced rate increases for North Europe Freight All Kinds (FAK) rates effective from June 1st, with charges up to $6,000 per 40-foot container.
• CMA CGM: Announced new FAK rates for routes from Asia to North Europe starting June 15th.
  • 20’General Purpose (GP) container: $3,700
  • 40’ GP: $7,000
  • 40’ High Cube container: $7,000
  • 40’ Reefer: $7,000
• Hapag-Lloyd: Implemented PSS for shipments from East Asia to North America. The following surcharges are applicable for containers checked in from June 1st to 14th:
  • 20′ Container: $480
  • 40′ Container: $600
  • 45′ Container: $600

A higher PSS will apply to containers gated in from June 15th, and until further notice:

• 20′ Container: $1,000
• 40′ Container: $2,000
• 45′ Container: $2,000

Industry Outlook

According to Linerlytica, the Shanghai Containerized Freight Index (SCFI), a well-known freight rate index that tracks the cost of shipping containers from Shanghai to various destinations around the world, surged by 18.8% after May 1st, reaching its highest level since September 2022. The ongoing disruptions in the Red Sea and Panama Canal are the primary drivers behind these rate increases.

However, there is potential for a significant downward shift in rates if these issues are resolved, given the large number of ships on these routes. Despite this, industry sentiment for the first quarter of 2024 leans towards continued rate increases, particularly on the Asia to Europe Northwest route.

Implications for Amazon Sellers

For Amazon sellers, the surge in ocean freight rates has several implications:

1. Increased Shipping Costs

Amazon sellers importing goods from Asia to Europe or the US will face significantly higher shipping costs, impacting profit margins. 

If you’re an Amazon seller who imports from China to sell in the US or European market, expect to face significantly higher shipping costs due to the increased freight rates and surcharges.

Suppose you previously paid $3,000 per 40-foot container, you might now pay up to $6,000. This increase could erode your profit margins unless you:

• Increase product prices to offset the higher shipping costs.
• Negotiate better rates with freight forwarders or shipping companies, or explore different shipping routes.
• Optimize inventory management to ensure you have enough stock to cover potential delays without overstocking.

Related: Amazon Supplier Negotiation Strategy, Lead Time in Inventory Management for Amazon Sellers

2. Supply Chain Disruptions

Rerouting and surcharges due to the Red Sea and Panama Canal issues can cause delays, affecting inventory levels and order fulfillment timelines. Sellers must closely monitor their supply chain and consider alternative shipping routes or methods to mitigate disruptions.

Related: Amazon FBA Freight Forwarder Tips to Avoid Stockouts and Reduce Costs

3. Inventory Management

Higher freight costs and potential delays necessitate better inventory planning and management. Sellers may need to increase their inventory levels to buffer against delays, which ties up more capital in stock.

Related: Buffer Stock vs Safety Stock vs Anticipation Inventory

4. Competitive Pricing Pressure

With increased costs, maintaining competitive pricing on platforms like Amazon becomes challenging. Sellers may need to explore cost-cutting measures elsewhere or adjust their pricing strategies to remain profitable.

5. Strategic Adjustments

Diversifying suppliers and exploring different regions for sourcing products can help mitigate the impact of regional disruptions. Utilizing Amazon’s fulfillment options like Pan-European FBA can optimize inventory distribution across Europe, potentially reducing shipping costs and improving delivery times.

Final Thoughts

The first quarter of 2024 has seen unprecedented increases in ocean freight rates due to geopolitical conflicts and environmental disruptions. While these challenges pose significant hurdles, proactive measures and strategic adjustments can help sellers navigate this turbulent period in global shipping.

Related: Right-Size Products To Save on FBA Fees, Master Carton Calculator to Optimize Packaging & Reduce Shipping Costs