Will continuing logistics disruptions renew interest in nearshoring?

Container prices have had the industry in a panic once again, with talk of rising prices if rates continue to escalate

Geopolitical events continue to cause concern — not to mention higher prices in container costs — for an industry that has come to once again flock to product from Asia having long since abandoned nearshoring efforts in places like Mexico and even South America.

It’s an irony that speaks directly to those who may have forgotten the supply chain disruptions in Asia during the pandemic when containers were in short supply causing spot rates to be more than $20,000 per can.

Once those rates eased to $10,000 or less, the industry cast a sigh of collective relief. Thus, Asia once again seemed like a bargain, once again aligning the industry with manufacturers in Asia who had plenty of excess capacity and were hungry for orders. By this past fall, container costs fell to just over $2,000 to the West Coast and well under $4,000 to the East Coast, making importers and their customers once again feel like they’d won big, although many of those goods offered a competitive juxtaposition against inventory shipped at the higher rates.

But for those who’ve forgotten, low container rates are more a mirage than anything else. The industry, like others, are beholden to shipping companies that wield the power to create or limit capacity, thus raising the cost of a container at a moment’s notice. But today’s circumstances are somewhat more complicated as capacity is also limited by diversions that are being caused by the aforementioned “geopolitical events,” notably the turmoil in the Middle East and the Red Sea along with droughts that are affecting water levels in the Panama Canal.

In her recent column for Home News Now, Rachel Shames of CV International perhaps put the situation bluntly, noting, “As 2024 gets under way, container shipping is experiencing the most disruption the industry has seen since the height of the pandemic.”

Editor-at-Large Ray Allegrezza followed this up with observations of his own that highlighted some recent surcharges being imposed by some of the largest shipping companies relating to disruptions in both the Suez and Panama canals.

And in its latest Supply Chain Tracker report sent out Jan. 31, TD Cowen notes that container rates on both the East and West Coast from China have risen 146% and 147% respectively from their December levels, largely “as Red Sea diversions have tightened capacity globally.”

Of course those percentage increases sound high and they are. But realize too that they are coming off extremely small numbers — those same numbers that have made the industry feel well off, once again. Several sources we spoke with on the issue, for example, quoted landed container rates as low as $1,800 to the West Coast from Asia and $2,800 to the East Coast in November. Of late that has jumped to $4,000 to $6,600 or more on the East and West coasts, respectively.

Again the increases are significant as they are coming off a lower number. But they are not necessarily anything to panic about yet, particularly as they are nowhere near the rates the industry saw during the height of the pandemic.

How this plays out will depend on any number of factors, including demand, which we hope continues to rise in the coming months. An ongoing drop in demand as we’ve seen of late could have an impact on the cost of shipping — including contract rates in the coming months — but it’s not a long-term solution by any means.

How the conflict in the Middle East plays out — the hope obviously being for a peaceful resolution sooner than later — also will determine the impact on shipping lanes and costs moving forward.

Some clarity regarding shipping rates also may materialize as shipping resumes following Chinese New Year and Tet, which start Feb. 10 and run as long as two weeks through the Lantern Festival on Feb. 24. The hope is that we see more stability and fewer wild increases that are building some talk of price increases as we approach the spring market cycle.

Of course hope isn’t a strategy for anyone during these challenging times. Instead success depends on a strategy that aims to limit the impact of global upheaval.

Does that mean nearshoring or shifting some sourcing back to Mexico? Does it mean shifting some production back to the U.S.? Or some other part of the world?

That is a highly individual business decision that can benefit from customer buy-in. But for the sake of those customers, having a diversified supply chain might not be such a bad thing as we have learned no thanks to these ongoing disruptions in the logistics supply chain.

Thomas Russell

Home News Now Editor-in-Chief Thomas Russell has covered the furniture industry for 25 years at various daily and weekly consumer and trade publications. He can be reached at tom@homenewsnow.com and at 336-508-4616.

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