Freight has Dropped by More than 60%! The End of the 'Era of Sky-high Prices' in the gGobal Shipping Industry?

The third quarter of each year is often the peak season for the global shipping industry. However, in this peak season this year, the shipping market has not felt the heat of the past two years: the freight rates of major maritime trade routes have been falling all the way, because the shippers have already shipped early and inflation. suppress consumer demand.

The global container freight index launched by the Baltic Shipping Exchange and Freightos shows that the freight rate from China/East Asia to the West Coast of the United States is US$4,787/40-foot container (FEU), down about 60% from January, and the freight rate from China/East Asia to North Europe The price was $9,128/FEU, down 42% from January.

From a global perspective, as of September 7, the global average freight price was US$5,286/FEU, down about 45% from January. From the historical trend, the price trend this year and the same period last year intersected, that is, this year showed a downward trend. The ocean freight rate is lower than the same period in 2021. However, it needs to be explained that the current freight rate is still much higher than the average price of $1000-1500/FEU before the epidemic.

According to industry insiders and experts, the reasons for the continued decline in freight rates on major routes include: excess inventory caused by European and American cargo owners “stocking up” in advance, insufficient demand due to inflation, and a significant reduction in port congestion, leading to a drop in freight rates.

Daejin Lee, chief shipping analyst at S&P GlobalMarket Intelligence, said that the sharp drop in container freight rates in the third quarter and the slowdown in container trade demand growth were a response to high inflation and consumption patterns. After the third quarter, the trend of de-containerization is expected to reverse. , part of the demand will gradually return.

Freight rates have risen roughly 10-fold in 2021 as importers scramble to grab space due to supply chain disruptions, backlogs at ports and a surge in cargoes. EU retailers suffering from sky-high shipping costs have adopted a "stocking" strategy in 2022. However, demand suppressed by inflation has led to excessive inventory. Many large clothing sellers disclosed in their earnings reports that inventory levels have surged since spring.

At present, the main reason for the decline in ocean freight rates is the decline in overall cargo volume. In previous years, from the Spring Festival to March, the volume of goods will increase again, but this year, until June, the volume of goods has not been pulled back. In the context of the continued sluggish consumption in mainstream markets in Europe and the United States, the industry is generally not optimistic about the growth of the "peak season" in 2022, which is expected to decline by about 30% compared with the "peak season" in 2021.

Significant reductions in port congestion, coupled with fewer cargo arrivals, are one of the main reasons for the sharp drop in freight rates. Based on expectations of weaker transaction volumes, extreme port congestion is not expected to recur in the coming quarters.

Multiple analysis reports show that the industry forecasts further declines in ocean freight rates for the remainder of the year and into 2023. A slew of new ships will be launched over the next two years, with net fleet growth expected to exceed 9% next year and into 2024.

Peter Sand, chief analyst at maritime data provider Xeneta, said that the global economic downturn is superimposed on the conflict between Russia and Ukraine, and there is currently a lot of uncertainty around the world.

Peter Sand wrote in the report that container freight rates in the seaborne spot market have fallen so fast that prices have approached long-term contract rates and in some markets are even lower than contract rates.

Most of the long-term contracts signed this year for the US-West Line are around US$7,000-8,000/FEU. At present, the freight rate in the United States and West has fallen below $5,000/FEU. Although freight rates will continue to fall, most shipping industry figures and analysts say they do not expect freight rates to return to pre-pandemic levels of around $1,000-1,500/TEU.

The top ten largest liner companies in the world have made huge profits in the past 2 years. Industry leader Maersk's most recent quarterly earnings of $8.59 billion beat the typical full-year earnings. But many companies have warned that market conditions will weaken in the second half of 2022. Shipping executives and analysts said they did not expect freight rates to return to pre-pandemic levels, in part because of higher fuel costs. In 2019, the average cost of a container crossing the Pacific Ocean to the West Coast of the United States was $1,500.

Shipping companies are investing billions of dollars in new technologies and fuels that will drastically reduce the carbon emissions of their ships. "The extra cost of a clean energy retrofit won't go away, it will be a factor in higher freight rates in the long run."