By Atthur Chen      Photo：Pixabay

In 2021, the global shortage of equipment, space caused sky high freight. On popular routes between China and the United States, the freight rate of containers once climbed to US$20,000 per 40-footer, and the freight was even same as the value of a single container. In 2022, the sky-high freight rate has gradually declined, and the US West freight rate drops from about US$13,000 before February to US$7,000. The Shanghai export container freight index has also dropped from a high level down more than 17% during the year. Unlike last year, when it was barely to get equipment and space, the current routes can book available space about a week in advance, which is all attributable to the sharp drop in the demand for US imports of merchandise.

Due to a large backlog of inventory, major department stores in the United States were forced to launch a "discount war" to stimulate purchasing desire, but the amount of inventory as high as 10 billion dollars still makes merchants in panic. The volume of in & out containers in the US has plunged by more than 30% recently, hitting an 18-month low. Consumers are not only paying for high prices, but also increase their savings, preparing for a less optimistic economic outlook. This is related to the FED start of the bank interest rate hike cycle, which puts pressure on U.S. investment and consumption, but global trade costs and inflation will further rise is more worthy of attention. According to the latest data released by large US retailers recently, Costco's inventory as of May 8 was as high as 17.623 billion US dollars, an annual increase of 26%. Inventory at Macy's was up 17% from last year, and the number of Walmart fulfillment centers was up 32%. The chairman of a high-end furniture manufacturer in North America admitted that the inventory in the United States is way too high, and furniture customers have reduced purchases by more than 40%. Other company executives said they will get rid of inventory through discounts and promotions, canceling overseas purchase orders, etc.

The most direct reason for the above phenomenon is the high level of inflation. Some U.S. economists have long speculated that consumers will experience an “inflation peak” immediately after the Federal Reserve starts its interest rate hike cycle. U.S. consumption remains somewhat resilient for now, but the personal savings rate has fallen to 4.4 percent in April, the lowest level since August 2009. It means that in the context of high inflation, household spending grows faster than income, which results in residents being forced to withdraw their early savings. According to the latest data released by the Federal Reserve, the price level growth rate in most parts of the United States is "robust". The producer price index (PPI) has grown faster than the consumer price index (CPI), and nearly half of the companies were able to pass on high costs to consumers; however, half of the companies pointed out that they were "resisted by customers", such as "reducing purchases, or using Cheaper brand replacement" etc.

Not only did the US inflation level not fall substantially, but secondary inflation has also been confirmed. The trend of U.S. inflation has begun to shift from the push of commodity prices to the “wage-price” spiral. The employment market demand is still strong, and the rise in wages will push up the second round of U.S. inflation. At the same time, the U.S. economic growth in the first quarter was less than expected, and the recovery of the real economy slowed down. From the demand side, under the pressure of high inflation, private consumption confidence has continued to decline. With the peak of energy use in the summer and the rise in prices not peaking in the short term, it may be difficult for US consumer confidence to quickly recover. Since May 24, container imports to the U.S. have fallen by more than 36%, and U.S. demand for imports from countries around the world has shrunk. Risks of a U.S. recession are rising, and the overall economic outlook is conservative. The economic recession has brought about variables in the shipping market. In addition, factors such as global port congestion, the Russian-Ukrainian war, and inflation may weaken the demand side in Europe and the United States. The cost of raw materials, transportation and logistics is still high, and manufacturers tend to be conservative in preparing materials and production.

At present, the consumer market has a strong hesitated mood, and the shipping price will gradually fall. On June 24, the Shanghai Shipping Container Freight Index (SCFI) for the latest week released by the Shanghai Stock Exchange has shown signs of falling from a high level. But the index is still at an all-time high of 4216.13 points. It stayed below 1,000 for most of the decade between its release and pre-pandemic. On June 24, the freight rates exported from Shanghai Port to the US West and US East base markets were US$7,378/FEU and US$9,804/FEU, respectively, down 1.5% and 2.7% from the previous issue. For the first time since July 30, 2021, the freight rate per 40-foot container of the Eastern United States fell below the US$10,000. In terms of European routes, the freight rate of Shanghai Port to the European base port market was US$5,766/TEU, down 0.5% from the previous issue; the freight rate of Shanghai Port to the Mediterranean base port market was US$6,425/TEU, down 1.0% from the previous issue.

The market is in a delicate state right now, with buyers and sellers waiting. Shipping companies are waiting for the volume of goods to rise, and cargo owners are waiting for the freight rate to continue to drop. Now the contract price signed by the owner is very high. They will consider whether to break the contract, but they are worried that once the contracts is broken, they will not be able to get the space from the shipping companies in the peak season. If the market has not fully recovered by the end of July, the two sides will make a decision, and the shipping companies may make capacity adjustments to adapt to the new market changes. The prevailing view in the shipping industry is that the special opportunities brought by the pandemic to shipping have gradually disappeared. Over the past two years, congestion in the supply chain has resulted in significantly longer transit times, not only related to delays by sea, but also inland congestion and delays. The bigger the problem in the supply chain, the bigger the need for ocean freight. Some in the shipping industry describe the phenomenon as a "structural boom" in the shipping industry. It is speculated from this that once the phased problems caused by the pandemic are over, some of the demand will naturally "disappear", and the shipping industry may face the challenge of oversupply of capacity.

Therefore, to face on successive declines in freight rates, shipping companies choose to continue the strategy of "blank sailing and hopping ports" to stabilize market freight rates. According to the latest information from Drewry, the three major alliances will cancel a total of 48 sailings in the next five weeks, including 23 cancellations by 2M, 19 cancellations by The Alliance, and 6 cancellations by Ocean Alliance. The vast majority of this will occur on eastbound trans-Pacific routes, primarily to the US West Coast. During the 27th to 30th  week period, there were 760 scheduled voyages on major routes such as trans-Pacific, trans-Atlantic, Asia to Northern Europe and the Mediterranean, of which 86 were cancelled, and 66% of the cancelled sailings will be on transpacific eastbound routes, mainly to the west of the US.

Quoting Maersk's forecast,  the unique opportunities brought by the pandemic to container shipping industry have gradually disappeared after August, and there will be a "long whip effect" of shrinking demand and increasing supply, which will impact container shipping. The factors that led to the container shipping boom may soon reverse sharply after the pandemic is over. The speed is going to be pretty quick, with a reversal probably not expected until August or later.

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