The ever-increasing container shipping rates have finally dropped at least for the moment. Although the overall ocean freight rates are still extremely higher than usual, we can see a drop in freight rates between China to the USA. This is indeed very good news for the shipping industry that has been reeling under the effect of blank sailings, high rates, and equipment and space shortages. In today’s post, we are going to discuss the causes behind the brief drop in ocean freight prices and the future scenario.
Explaining the drop in ocean freight rates and its implications for the container shipping industry
The drop in the main international sea freight market prices started during the Chinese Golden Week holidays. However, the latest figures from Freightos indicate that this trend has continued especially on the transpacific trade lanes. The fact that shippers are now booking freight just a week in advance without any extra payment is indeed positive news for the container shipping industry. In other words, there is enough indication that the Asia-USA sea freight demand is finally easing. Moreover, the freight rates from Asia-US West Coast have not shown any signs of increasing. These rates are in fact 16% lower compared to the mid-September peak.
LA-Shanghai freight rates drop
The container shipping rates have considerably dropped on the Shanghai-LA trade route. The price for a 40-foot container has dropped by 8.2%. Moreover, a report from Freightos suggests that the rates inclusive of surcharges and premiums have dropped by 11%. The temporary drop in the sea freight rates should not blind us to the fact it is way higher than then pre-pandemic levels. However, the recent drops in international shipping prices can mark either the start of a season decreasing trend or the beginning of steeper costs in the future. The lull in shipping prices is probably temporary since it might start rising as the Lunar New Year approaches.
The drop of China-US freight rates continues through the 1st week of November
The drop in the China-US spot that started in early October is continuing in the first week of November. Moreover, the NVOCCs that booked containers in advance are now dealing with unsold capacity. This is because of the production decline in China due to power shortage. This is allowing independent freight forwarders to obtain spaces at a much lower rate. According to Judah Levine, the head of Freightos, “It’s possible some reduction in available supply is curbing container demand and freeing up some of the additional capacity that carriers have added during peak season…It is also possible that ocean delays making it increasingly unlikely that shipments not already moving will make it in time for the holidays. The price drop also shows that the peak of peak season is behind us.”
Shippers are paying lower premiums
After a long time, shippers are able to book transpacific freight space without premium guarantees. This is largely due to the delays as forwarders are waiting for their shipments en-route and canceling the additional cargoes. The supply shortage because of the power outages in China is playing an important role in the dip in prices. It is also leading to a shortage of demand. This trend might continue till March 2022. On the other hand, the Asia-Europe spot rates are unchanged despite the lull in Chinese production and the port congestion problem. Therefore, the drop in spot rates in the China-USA route most likely suggests a drop in the peak season demand. As suggested by the present market scenario, the rates might go higher as the Chinese New Year approaches. After this, the container shipping industry might see a stabilization of the rates or even a downward trend.
The future scenario
Nevertheless, the brief drop in shipping rates might soon be eclipsed by a rising backlog of unfulfilled orders. The power outages coupled with the impact of the lockdowns have decreased the production output in China. This implies that the manufacturing orders from Europe and the USA are not getting timely delivered. This could lead to diversification of the supply chain in the US and Europe which in turn will result in rising prices and inventory shortages. However, the low spot rates are great news for forwarders with inventories in China. Now the most important question facing the sea freight shipping industry is whether there is enough cargo to fill the empty boxes.
For now, the ocean freight shipping industry is waiting for the Chinese New Year in February 2022 to see how things unfold. Usually, there is a steep rise in volume from early January all the way up to the Lunar New Year celebrations. Nevertheless, the disruptive market trends along with the absence of material enhancement in October will most likely lead forwarders to accelerate their logistics requirements. This will allow them to add enough buffer to their supply chain. In other words, the container shipping industry might soon witness a surge in cargo in the coming weeks. This could further complicate the problems and lead to a rise in the spot rates.