Multiple forces combine to drive down rates

higher freight rates inflation

It can hardly be a surprise that freight rates are continuing to fall from their previously exalted highs. The Oslo-based shipping data company Xeneta has commented this week that its container shipping -rate benchmark index that monitors longer-term contract-rates fell “by 1.1% in September. This is the first drop since January and one of only three declines in the past 21 months”, adding that “it won’t be the last with market fundamentals suggesting the halcyon days of ever-increasing rates for carriers may be drawing to a close”. It should be noted that this index attempts to measure contract-rates, not the more volatile spot market.

There are specific market dynamics behind the fall in rates. Moderation in congestion in and around ports is releasing additional ship and container capacity into the market, amplifying the surplus of supply and driving down rates more violently than the moderation in demand might otherwise suggest. The shipping lines are clearly alive to this, with the major lines blanking services since the summer.

In terms of underlying demand however, inventory levels are also likely to play a disproportionately high level. Large shippers are reporting higher inventory levels than usual, for example this week sports-wear company Nike reported higher stock levels than usual for the time of year, not just in the US but also in markets such as China as well. Of course, high inventory levels also imply that the market for air freight will be weaker.

These trends are only confirmed by the latest indications emerging from China that show export activity is slowing even as the Renminbi falls in value against the US Dollar. Reports in the Chinese press assert that data from the Chinese Customs Ministry show that the year-on-year levels of growth are around half that of last year for the third quarter. The implication is that this slowing will continue.

The pessimism should not be over-done, as the US consumer demand is still just about in positive territory and smaller markets such as Australia are not seeing a recession. Yet what freight markets are confronted with is a mix of underlying and market-specific forces that point to a significant correction in prices generally. The recession experienced by many economies in both the developed and emerging economies is likely to heighten the effects of the changes in the availability of capacity for sea, air but possibly also land freight markets.   


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Source: Transport Intelligence, 4th October 2022

Author: Thomas Cullen