The cost of container shipping is falling due to lower consumer spending — FT
The cost of shipping containers on major global sea routes has fallen 85% below its peak as the cost-of-living crisis hit consumer spending and pandemic-related disruptions to supply chains eased. The Financial Times writes about it.
This month, shipping a 40-foot standard container (FEU) from eastern China to the U.S. West Coast on a short-term basis cost $1,444, according to Xeneta, compared with a peak of $9,682 last March. The significant delays and queues that plagued the ports at the height of the pandemic have also disappeared.
According to the German analytical center Kiel Institute, despite a monthly increase of 2.1% in January 2023, the volume of shipped goods decreased by 5% compared to the corresponding month of 2022.
The decline is due to a decrease in demand for goods, 90% of which are delivered to local retailers by public transport. "Demand has slumped due to a sharp rise in inflation, which has caused a serious cost-of-living crisis in several countries and prompted central banks to try to curb spending with higher interest rates," the paper notes.
In the US, spending on goods declined by 5.4% in real terms from their peak in March 2021. UK sales are back below pre-pandemic levels after rising 10% in April 2021.
With inflation still high and central bank rates set to rise, demand is expected to remain weak through the end of the year.
Shipping group Maersk predicts that demand for container transport will fall by 2.5% this year. S&P's monthly survey of purchasing managers showed that new export orders in the second half of 2022 and January 2023 declined globally. Last month, the IMF forecast that global trade growth would be 2.4% this year, up from 5.4% in 2022.
Leah Fahey, an economist at research firm Capital Economics, believes that while China's post-quarantine reopening has "improved" the outlook "somewhat," "weak demand elsewhere will keep trade low for some time."
After two years of bumper profits, shipping groups CMA CGM, Hapag-Lloyd and others have warned investors of earnings risks. Maersk said last week that operating profit this year will be limited to $2-5 billion, compared to $31 billion last year and $20 billion in 2021.
However, the drop in prices is welcomed by importers, who are also having to adjust to lower demand caused by the cost of living crisis.
This is a rather significant positive result," said the executive director of the manufacturer of household appliances Electrolux Jonas Samuelson.
As the publication notes, shipping groups have a considerable number of long-term contracts, which turned out to be less volatile. Carriers are likely to retain the benefits of higher rates for at least the current quarter, before new long deals reflect lower prices.
In an attempt to lower freight rates, shipping groups are also cutting back on sailings. According to data provider eeSea, last year carriers canceled or missed 1,639 flights between East Asia and Europe or North America, a 40% increase over 2021.
However, the drop in traffic volumes leaves companies with overcapacity.
During the pandemic, the demand for container transportation increased dramatically, so many companies invested in the construction of new vessels. According to shipbroker Braemar, the total capacity of vessels on order last month was equivalent to 30% of the active global fleet. For comparison: in January 2019, this figure was 13%.
Bringing these containerships to the market can increase excess capacity, which will further reduce freight rates," the publication says.
If that happens, shipping groups may resort to decommissioning tactics they used at the start of the pandemic. That created "the most favorable supply and demand dynamic" and led to a sharp rise in rates when demand for commodities skyrocketed, recalled John McCown, founder of consulting firm Blue Alpha Capital. According to him, the carriers will now "be more aggressive in cutting capacity than before because they have seen how elastic these rates are."