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Container freight rates weaken as demand starts to drop

Spot rates on transpacific routes have halved since the end of April
Container freight rates weaken as demand starts to drop

The huge increase in freight costs that began during the early stages of the pandemic is beginning to unwind, with rates for shipping containers from China to the US Pacific coast halving over the past two months. The cost of moving goods around has been one of many inflation drivers of the past year, so the reversal will be a positive shift for consumers if savings are passed down along the supply chain. 

Spot rates for shipping a 40-foot container on this key trade lane have fallen from $15,255 (£12,798) at the end of April to $7,568 by 1 July, according to booking platform Freightos. The Freightos Baltic Index (FBX) – an amalgamation of global spot rates – has fallen by 27 per cent over the same period.

Hefty surcharges that shipping lines were levying on customers to ensure containers were placed on vessels are no longer being applied as demand declines and congestion around key ports eases, Freightos chief marketing officer Eytan Buchman told Investors’ Chronicle.

Rates are sliding at a time of year when they generally increase as the peak shipping season ensues, when importers typically pay up to secure space on vessels ahead of back-to-school and Christmas trading periods. Spot rates are about 9 per cent lower than they should be given typical seasonal patterns – or about 15 per cent lower on transpacific routes, according to Vespucci Maritime chief executive Lars Jensen. This is an indication that importers are “seeing a slowdown in consumer spending”, he said.

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

“With peak season coming in the US, the expectations for retail sales are potentially not so good,” said Erik Devetak, chief product officer at shipping data company Xeneta. “The warehouses are full and we feel that a lot of customers have overstocked.”

A decline in container shipping rates has been expected for some time given the heights they hit, said Jonathan Roach, a container market analyst at Braemar Shipping Services (BMS). The FBX rose eightfold between the onset of the pandemic and the market peak in September last year. Even after its recent decline, it remains about 370 per cent above the 2019 average, Roach said. 

Roach argued that the current weakness was merely the beginning of a correction, with inflation starting to bite and higher fuel bills cutting into disposable household income.

“Consumer confidence in the US and Europe is already on the downward glide path and will continue as we go through to 2023,” Roach added.

The drop-off in Drewry’s World Container Index, which is a composite of both spot and contract rates, has been less stark at about 10 per cent.

“While [spot rates have] been retreating, the latter has been hardening,” Drewry’s container research senior manager Simon Heaney said.

Shipping lines are having to make upwards adjustments to the annual contract rates they charge to account for higher fuel prices, Devetak said.

The spread between spot and contract rates – which once hit around $7,000 on the China to Northern Europe route and more than $10,000 on transpacific routes – is now “almost non-existent”, with spot rates even falling briefly below contract rates between China and South America, he added. Contract rates generally serve as a floor for spot rates as they are meant to incentivise key customers.

The momentum in the marketplace is reflected in the share prices of shipping lines that have enjoyed outsized profits. Shares in AP Moeller-Maersk (DK:MAERSK.B), the world’s most profitable shipping line, have fallen by 32 per cent since the start of the year. Shares in Hapag Lloyd (DE:HLAG) are down 47 per cent since mid-May.