U.S. Warehouses are Congested: What Impact Does it Have on Trans-Pacific Spot Rates?

2020 and 2021 were record-breaking years in terms of consumer demand and U.S. imports. Ports struggled to keep up with the incredibly fast-paced consumer buying market and ports experienced severe congestion as a result. In addition to those issues, ocean spot rates – especially on the trans-pacific route – were raised to record high levels. All of that is beginning to change as consumer buying patterns shift over the last few months, and it’s having a major impact on the supply chain at large.

Significant Drop in Trans-Pacific Ocean Spot Rates

While demand remains elevated, it has dropped significantly over the last several months. Spot rates for trans-pacific shipments from Asia to the U.S. have dropped by $1,600 per FEU, which is roughly 24% down from July. Many forwarders are reporting that many spot rates are below $5,000 per FEU.

However, these lower rates aren’t all good news – they’re simply a correction made as a result of consumer demand – something that’s been plummeting over the last few months. In 2020-2021, consumer demand was at an all-time high and import volumes were breaking records nearly every month. But in recent months, the demand has dropped and U.S. based businesses and retailers are reporting their warehouses are entirely full.

The nationwide average vacancy rate in warehouses and distribution facilities was only 3.7%, indicating there is incredibly minimal space available. Despite the significantly lowered spot rates on trans-pacific shipment routes, the local demand and warehouse space simply doesn’t exist, deterring U.S. businesses from taking advantage of the rates.

It’s a strange situation to be in. We are in the midst of peak season, but demand continues to drop rather than rise. Businesses are already overstocked on most of the items they would otherwise be preparing to import, and U.S. consumers aren’t demonstrating any indication that demand will drastically rise over the coming month or two.

Regardless of the drop in spot rates, carriers are not hurting for money. Due to the income from the last several years of hiked spot rates and busy schedules, steamship lines are flush with cash and continue to make more than enough money. The sudden drop in rates was done to restore balance to declining buying behaviors, though it’s uncertain how much the lowered freight rates will impact the situation.

No Rate Crashes Expected

Forwarders and industry experts are expecting a small dip in import activity at the back half of this year, however, the situation is far from a rate crash. There’s still much debate around where rates will settle and balance in the end, but few people expect a catastrophic crash in demand to occur as import volumes still remain quite high compared to pre-pandemic levels.

For businesses who are looking for cost savings though, now is the time to plan ahead. Forwarders are booking shipments months out to take advantage of the lowered spot rates, and if you’re expecting to be importing much in the final two quarters of the year, getting ahead of the future consumer market trends could and booking shipments now could mean major cost savings.

Low Rates Don’t Solve Congestion Issues

The inflated ocean shipping market was certainly an issue, however, the lowered rates are not going to be a solution to the bottlenecks that currently exist in the U.S. to Asia supply chain. Despite lowered consumer demand and lowered rates, vessels are still severely behind schedule, there’s chassis bottlenecks, a driver shortage, and weeks of delays till containers are picked up at rail hubs.

Essentially, the savings from the decreased ocean rates are going to likely be offset by increased costs and delays on the inland side of things. Because of these bottlenecks, many big box retailers are actually re-exporting imported cargo to have their distributors and manufacturers hold onto it. The demand and capacity doesn’t exist on the local U.S. warehousing side, so orders are being returned, cancelled, and temporarily put on pause as local businesses wait for demand to naturally balance out the market.

Looking Ahead 

If you would like more information regarding this topic, contact our team at InterlogUSA and we will be happy to assist you on any questions or comments you may have! In addition, we have our weekly market updates that can provide you with relevant freight news, developments across the industry, and more.  

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