As the cost of living crisis affects consumer purchasing and the impact of the pandemic-related supply chain disruption lessens, the cost of shipping goods on important global commerce routes has decreased by 85% from its peak, as reported by FT.
Decline in demands
This month it cost $1,444 to ship a standard 40ft steel container from eastern China to the US west coast at short notice, according to shipping data specialist Xeneta, down from a peak of $9,682 in March last year.
The widespread delays and queues, which hit ports at the height of the pandemic, have also dissipated.
Behind the fall is a decline in demand for goods — 90% of which reach retailers by ship.
Demand has plunged as inflation surged, triggering a severe cost of living crisis in several economies and leading central banks to attempt to restrict spending with higher interest rates.
In the US, spending on goods is now down 5.4% in real terms from the March 2021 peak.
High inflation
With inflation still high and central bank rates set to rise further, demand is expected to remain weak for the rest of the year.
The S&P monthly survey of purchasing managers indicated that new export orders contracted across the world throughout the second half of last year and in January.
Last month, the IMF forecast that global trade growth would decline to 2.4 per cent this year, from 5.4 per cent in 2022.
Leah Fahy, economist at research firm Capital Economics, said while China’s reopening had “somewhat improved” the outlook, “weak demand elsewhere will keep trade subdued for some time”.
“It’s a fairly significant positive,” said Jonas Samuelson, chief executive of consumer appliances producer Electrolux.
Long-term contracts
With many clients on long-term contracts, which have proven less volatile than short-term rates, shipping groups are likely to retain the benefits of higher rates for at least the current quarter before new agreements reflect the decline in prices.
In a bid to put a floor under freight rates, groups are also cutting sailings.
In 2022, carriers cancelled or skipped 1,639 shipments between east Asia and Europe or North America, a 40% increase on the previous year, according to data provider eeSea.
As demand for container space soared during the pandemic, many carriers ploughed money into new ships.
This compares with 13% in January 2019.
Lowering freight rates
The arrival of these vessels could increase the amount of unneeded transportation capacity, further lowering freight rates.
However, if that does occur, shipping groups will probably turn to the same strategies employed during the pandemic’s initial shock. The groups rendered a large number of vessels inoperable as manufacturing closed. According to John McCown, founder of the consultancy firm Blue Alpha Capital, this resulted in the “most favourable supply and demand dynamic ever,” which caused rates to increase as demand for goods increased.
Because of how elastic these rates are, carriers will be more aggressive than in the past about reducing capacity, McCown continued.
Challenging geopolitical conditions
Those who depend on goods shipped by container are also worried that, in the long term, market power has shifted to the carriers.
Gerard Lyons, sales manager at logistics group Publiship, which helps publishers import books into the UK, said: “If [book orders] do start creeping up . . . I have very little faith in the carriers being able to switch the volumes back up.”
There are more challenging geopolitical conditions too. Russia’s full-scale invasion of Ukraine and pressure on businesses to decouple from China have added yet more headaches.
Vincent Clerc, Maersk’s new chief executive, said despite the recent improvements customers were well aware that shipping services would continue, from time to time, to be disrupted by global events. “I don’t think any of them are looking at the coming years and saying ‘our problems are solved’.”
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Source: FT
