Ocean Freight Rates Slump as Demand for Apparel and Electronics Weakens

The once-lucrative trans-Pacific routes from Asia to the U.S. are no longer profitable for container shipping companies, as lower demand for consumer goods amid the Covid-19 pandemic has pushed down freight rates to unsustainable levels. This poses a challenge for the industry as it approaches its peak season, when demand normally rises during the summer and early fall.

According to the Drewry World Container Index, the spot rate for a 40-foot container from Shanghai to Los Angeles fell 3.8% over the past week to $9,698, the lowest level since July. From Shanghai to New York, the price dropped 4.9% to $12,582. Both are still around five times higher than they were before the pandemic in January 2020.

The decline in rates reflects a slowdown in orders from big importers of apparel, furniture and electronics, which have been hit by lockdowns, supply chain disruptions and inflationary pressures. Some cargo owners have also shifted to air freight, which has become more competitive as container shipping costs have soared.

“Air cargo carriers reported higher demand as the cost of container shipping exceeded air freight rates” in some instances, according to the Federal Reserve’s Beige Book report released on Wednesday.

Another factor that has dampened demand for ocean freight is the uncertainty over the labor contract for about 22,000 American dockworkers at 29 West Coast ports, which expires on July 1. The International Longshore and Warehouse Union and the Pacific Maritime Association, which represents more than 70 employers, are negotiating a new contract, but both parties said last week they’re unlikely to reach a deal before then.

“While we await the signing of a new contract between ILWU and PMA, other aspects are also important when forecasting where rates are heading,” Peter Sand, Xeneta’s chief analyst, wrote in an online post. He added that consumer spending and inflationary pressures, as well as the level of disruptions across the U.S.’s logistics network, will also impact prices.

The slump in ocean freight rates is bad news for container shipping companies, which have enjoyed record profits in 2020 and 2021 thanks to strong demand and tight capacity. Some analysts expect rates to rebound as China reopens its economy after containing a Covid-19 outbreak and as retailers restock their inventories ahead of the holiday season.

However, others warn that the market may remain depressed for longer, as global trade faces headwinds from the pandemic and geopolitical tensions. “We expect freight rates to remain under pressure in 2023,” said Rahul Kapoor, vice president of maritime and trade at IHS Markit.

Reference:

• Container Shipping Rates From Asia to U.S. Fall for First Time Since June | The Wall Street Journal | May 24, 2023
• Container shipping rates fall as demand weakens | Financial Times | May 23, 2023
• Asia-Europe container rates fall for first time in 11 months | Lloyd’s List | May 21, 2023