Supply chains: The ocean shipping backlog has led to a 'new peak in air cargo' rates, analyst says

Xeneta Chief Analyst Peter Sand joins Yahoo Finance Live to discuss the transition shipping companies are making in opting towards air freight cargo as the supply chain crunch continues to hurt shipping ports.

Video transcript

- President Biden is set to meet with executives of major retailers and grocery stores at the White House this afternoon to discuss the ongoing backlog they are experiencing in their supply chains. Our next guest says port congestions out on the West Coast that have led to shipping delays are starting to show signs of a peak, but it's a different story in the skies. Let's bring in Peter Sand. He is Xeneta chief analyst. And Peter, I know you've been gathering a lot of data on this front. It's interesting looking at your note here, saying that you're seeing the peak at the ports, but in many ways, it's because the demand has now shifted to airfreight.

PETER SAND: There is still very much demand being taken care of by global liner shipping, but obviously, especially over the past coming-- coming months, when capacity on board those ships were in short supply, obviously some shippers opted for airfreight out of the main hubs in Asia, predominantly Shanghai. And that, of course, led to a new peak of airfreight rates, air cargo freight rates. And obviously, something that is likely to stick around for still a couple of weeks because of the short time it takes for an airplane, of course, across the Pacific, as compared to a liner ship that needs to wait in line before cargo can be discharged in the US West Coast ports.

- And Peter, I want to talk to you about agriculture because farmers-- and this was anecdotal reports that I was getting as many as two months ago, but farmers were not able to secure the shipping for their grain to send to China and across the world because it was simply not economically viable. Those shipping containers that were coming into LA would simply empty and turn around and go back home for the next load of, I don't know, iPhones maybe. I'm just wondering because air traffic, airfreight is not a solution for everybody. I don't think it's a solution for grains. Have these kinds of situations ameliorated?

PETER SAND: Well, I think I've heard also some of the American agricultural exporters crying foul here. But if you look at the numbers, they are actually still capable of shipping quite a few containerized [INAUDIBLE] out of the US West Coast ports, but perhaps not as many as they would like to. And it is also fair to assess that liner capa-- liner shipping companies have preferred to turn around the boxes empty much faster, simply due to the fact also that it could not, or in economic terms, it made very little sense to spend, say, a week or two extra in North America for the cheap payload on, say, the back haul into Asia.

When you could-- when you could make 9,000 on the front haul, why do-- why should you basically take 1,500 on the back haul? But I think it's also a fair statement to say that the alternatives, of course, for many [INAUDIBLE] exporters is dry bulk shipping more than it's airfreight. So there are alternative modes of transport, obviously, but it remains very much still struggling supply chains in and out of the US West Coast, in particular.

- So Peter, talk to me about what the next three weeks or so looks like. I know a lot of people over this weekend have been doing holiday shopping. That's all going to be shipped out through airfreight in some way. How big of a surge are you anticipating?

PETER SAND: Well, what we would basically like the most is, of course, to get more belly capacity on the Trans-Pacific. That means we need more real passengers transiting the Pacific. But with the omicron pan-- virus variant striking across the board right now, we're very much unlikely to get added capacity on the Trans-Pacific trade lane for air cargoes. So it's very much a fight for capacity right now. But I think you will be unlikely to find empty shelves, but obviously, the selection that you will be capable of finding is likely to be a little bit slimmer than what you would otherwise expect.

But we will see full airfreighters out of the main hubs, and we will also see the big export hubs in China struggling with COVID, not only the omicron, but also the classical delta variant, as they also struggle not only to get all the goodness into the airports, but also battling a power shortage limiting somewhat some of the manufacturing hubs and their abilities to produce all the goods that is needed. But I think it's fair to say also that, in recent months, we have seen a record high level of inbound volumes into the American West Coast.

And it is easing, mainly on the hinterland connectivity side, as some of the measures taken not only by the local port authorities, but definitely when they work together with the entire supply chain, the rail operators and the truck drivers opening up 24/7 and actually making use of those vacancies, gate in, gate out, which has been a struggle from the very beginning, it's beginning to work. But obviously, it's no normal times.

- And really quickly here, there's a lot of accusations out there about the carriers taking advantage of this backlog that we're seeing right now, charging high prices, but also trying to lock in these long, multi-year deals. Talk to me about what you're seeing on that front. And how big of an increase are we talking about?

PETER SAND: When compared to the levels that the ships used to strike with the carriers at this point in time, we are talking about at least two to three times as high as they once were. And of course, we need to be very much aware that the spot market is still, like, twice as high as what the carriers are asking shippers to pay on long-term deals right now. But obviously, negotiations will be super tough.

At the end, it will be exciting to see whether shippers, as we expect, will prioritize stability and predictability in the supply chains ahead of basically haggling for the final dollar on the freight rate, which is often the case. But time-- at some point in time, at least for those annual agreements into Europe, in particular, up right now with those on the Trans-Pacific do as we move into the second quarter of next year. But tough times ahead for all parties involved.

- Well, also concerns that that could now be passed down onto consumers, as well. Peter, it's good to talk to you today. Xeneta chief analyst Peter Sand joining us there.