Container freight rates weaken as demand begins to fall

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The huge increase in freight costs that began at the start of the pandemic is beginning to subside, with container shipping rates from China to the U.S. Pacific Coast having halved in the past two months. The cost of transporting goods has been one of many drivers of inflation over the past year, so the reversal will be a positive change for consumers if the savings are passed along the supply chain. supply.

Spot rates for shipping a 40ft container on this key trade lane have risen from $15,255 (£12,798) at the end of April to $7,568 by July 1, according to booking platform Freightos. The Freightos Baltic Index (FBX) – a meltdown of global spot rates – fell 27% over the same period.

The hefty surcharges that shipping companies imposed on customers to ensure containers were placed on ships are no longer being enforced as demand declines and congestion around major ports eases, said Eytan Buchman, chief marketing officer of Freightos, at Investors’ Chronicle.

Rates drop at a time of year when they usually increase as the peak shipping season ensues, when importers typically pay to reserve space on ships ahead of the back-to-school and Christmas trading periods. . According to Vespucci Maritime managing director Lars Jensen, spot rates are around 9% lower than they should be given typical seasonal patterns – or around 15% lower on transpacific routes. It’s an indication that importers are “seeing a slowdown in consumer spending”, he said.

Some importers have also been loading inventory onto ships ahead of the peak period “because that’s what they had to do” in recent years to secure space, Buchman said.

“With peak season coming to the United States, retail sales expectations are potentially not so good,” said Erik Devetak, chief product officer of shipping data company Xeneta. “The warehouses are full and we feel that many customers have overstock.”

A drop in container shipping rates has been expected for some time given the record highs they have hit, said Jonathan Roach, container market analyst at Braemar Shipping Services (BMS). FBX increased eightfold between the start of the pandemic and the market peak in September last year. Even after its recent drop, it’s still about 370% above the 2019 average, Roach said.

Roach argued that the current weakness was just the start of a correction, with inflation starting to bite and rising fuel bills reducing household disposable income.

“Consumer confidence in the United States and Europe is already on the downward slope and will continue through 2023,” Roach added.

The drop in Drewry’s World Container Index, which is a composite of spot and contract rates, was less steep at around 10%.

“Whereas [spot rates have] receded, the latter hardened,” said Simon Heaney, senior director of container research at Drewry.

Shipping lines must adjust upward the annual contract rates they charge to account for rising fuel prices, Devetak said.

The gap between spot and contract rates – which once reached around $7,000 on the China-Northern Europe route and over $10,000 on trans-Pacific routes – is now “almost non-existent”, with spot rates even falling briefly below the contract rates between China and the South. America, he added. Contract rates generally serve as a floor for spot rates, as they are intended to incentivize key customers.

Market momentum is reflected in the stock prices of shipping companies that have made outsized profits. Shares of AP Moeller-Maersk (DK:MAERSK.B), the world’s most profitable shipping company, have fallen 32% since the start of the year. Hapag Lloyd (DE:HLAG) shares are down 47% since mid-May.

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