Port Strike Conclusion Causes International Freight Pricing Drop

Key Insights for Shippers

International Freight Pricing Drops Post-Strike

Impact of the ILA Strike on U.S. Supply Chains

The ILA strike ended after the union accepted the U.S. Maritime Alliance (USMX) offer of a 62% wage increase over six years, extending the expired contract until January 15th. The key remaining issue is port automation, which continues to be a contentious point between the union and the USMX. While the wage issue is settled, the union remains opposed to automation that could eliminate jobs, and further negotiations are expected.

The strike by the International Longshoremen's Association (ILA) shut down America's East Coast and Gulf ports for three days, causing a backlog of containers and vessels. This disruption pushed some shippers toward air cargo, where rates were already high due to surging e-commerce demand. The trend is likely to intensify as air cargo approaches its peak season.

Container Backlog and Port Recovery

Although ports reopened following the strike, the three-day shutdown caused a significant backlog, with 45 to 60 vessels waiting at anchor. Clearing this backlog is estimated to take two to three weeks, though the Port Authority of New York and New Jersey remains optimistic that operations may normalize by the end of the week.

Shippers with containers at ports or on vessels anchored offshore will likely experience delays. The extent of the disruption for future arrivals will depend on how quickly ports restore normal operations. Reefer export bookings have resumed, and detention and demurrage charges are back in effect.

International Freight Pricing and Capacity Congestion

Before the strike, carriers raised rates for transatlantic containers by 44%, with prices reaching $2,331 per kilogram. Additionally, congestion at European hubs, including Hamburg, is exacerbating supply constraints and adding upward pressure on rates. Carriers plan to reduce deployed capacity to prevent rates from falling back to earlier levels.

However, despite these efforts Transpacific ocean rates were already easing before the strike and continued to drop during the closures. Surcharges announced by ocean carriers were suspended after the strike, and with peak season largely behind, rates are expected to continue decreasing. However, East Coast congestion may slow the decline in rates if port recovery takes longer than expected.

The early end to peak season for Asia-Europe trade, driven by longer lead times and Red Sea diversions, led to a 53% drop in rates since mid-July. Prices to the Mediterranean also fell by 42%, though they remain above their April levels. The port strike led to a temporary shift from ocean to air cargo, resulting in climbing rates on certain lanes. Air cargo rates between Europe and North America increased by 4%, while transpacific rates jumped significantly during the strike, reflecting a surge in demand. E-commerce volumes out of China have kept transpacific air rates elevated throughout the year.

China Stimulus Could Boost Global Shipping Demand Amid Weakened Factory Activity

China holds a key position as the world's largest manufacturing hub, often referred to as the "warehouse to the world." As a critical player in global supply chains, any major stimulus in China could significantly impact global shipping demand. With recent cuts in the U.S. Federal Funds Rate by 50 basis points, China now has more room to introduce an aggressive stimulus package that could spark a surge in manufacturing activity, driving up shipping volumes.

Global Factory Activity Weakens, Pressure on Policymakers

In September's data, global factory activity weakened, reflecting soft demand and economic uncertainty. This has put pressure on policymakers worldwide to implement strategies to support fragile economic growth. A drop in oil prices temporarily reduced input costs, but concerns are rising about escalating Middle East tensions that could drive oil prices back up and hurt production costs.

China's factory sector is also facing challenges. The Caixin/S&P Global Manufacturing PMI fell to 49.3 in September, its lowest level since July 2023. This downturn highlights the struggles in the manufacturing sector, despite China's recent stimulus efforts. Chinese authorities have been cautious with their fiscal measures, as excessive spending can lead to debt-fueled risks.

While some worry that China's stimulus could be a debt-fueled spending binge, domestic US banks are anticipating a large package, estimating between 2-3 trillion yuan. These funds are expected to fuel major national projects, including technology, infrastructure, and disaster relief. Moreover, the government is extending subsidies for industrial equipment and consumer goods like electric vehicles, in an effort to stimulate manufacturing.

Just before the Golden Week holiday, China rolled out a series of stimulus measures, including interest rate cuts, added liquidity for banks, and a pledge of up to $340 billion to support their struggling stock market. Although the market surged 30% initially, it quickly retreated by 7%. However, the stimulus relief could still provide aid to manufacturers in the coming months.

Global Manufacturing Slowdown

Manufacturing weakness isn't limited to China. In India, factory growth dropped to an eight-month low in September, with new orders increasing at their slowest pace since December. South Korea and Japan also saw a deceleration in exports, indicating a slowdown in economic growth. Japan’s final PMI dropped to 49.7, marking its third consecutive month of contraction.

The eurozone is facing similar challenges, with manufacturing activity declining at its fastest pace this year. Germany, the region’s largest economy, recorded its most severe contraction in the past 12 months. The HCOB Eurozone Manufacturing PMI dropped to 45.0 in September, highlighting a widespread downturn despite efforts by factories to lower prices.

A potential rebound in manufacturing, driven by China's stimulus package, could significantly impact international transportation costs. As factories ramp up production to meet increased demand, global shipping volumes are likely to rise, particularly for goods originating from China, the world's largest exporter.

This surge in shipping activity may take months to be realized, however it would lead to higher freight rates, as demand for ocean and air cargo space tightens. Additionally, with the potential for congestion at key ports, especially in Asia, Europe, and North America with carriers not operating at full capacity. Shippers may have to face longer transit times and increased shipping charges for container loads. While the stimulus aims to boost economic growth, the increased transportation demand could place upward pressure on logistics costs, particularly in regions still recovering from supply chain disruptions.