Some ocean freight rates are collapsing, but true rate relief is still a long way off

Prices in the most volatile segment of ocean shipping are collapsing, industry experts said, but major retailers like Wal-Mart and Home Depot shouldn’t expect relief until spring contract renegotiation season.

Spot rates, which cover 10% to 40% of ocean container shipments and are a leading indicator of the industry’s health, are in freefall as a recession looms and a pandemic-fuelled US import bubble shrinks.

The cost of sending a container from Asia to the United States in the demand-sensitive spot market has fallen more than 80% from its September peak above $20,000 for a 40-foot container, according to freight booking platform Freightos.

Containers stacked on the ship and dock side

Stacked containers are seen as they unload their cargo at the Port of Los Angeles in Los Angeles, California, US November 22, 2021. REUTERS/Mike Blake (Reuters Photo)

Major carriers such as Mediterranean Shipping Co (MSC) and A.P. Moller-Maersk also expect to deliver hundreds of new container ships, raising the stakes as carriers already have more vessels than they need to handle shrinking demand.

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ribbon protection else they change change %
wmt Wal-Mart Corporation 144.95 -1.83 -1.25%
HD HOME DEPOT INC. 317.81 +0.28 +0.09%
AMKBY AP MØLLER-MRSK A/S 11.15 -0.07 -0.62%

“There is a sense of recovery time in the market after the COVID years, when carriers have been in absolute control,” said Peter Sand, senior analyst at air and sea freight rate benchmarking platform Xeneta.

However, experts said big customers like Walmart, Home Depot and wouldn’t necessarily impose the terms during contract talks that usually happen in May.

Ship stacked with containers

A container ship is seen at the Port of Los Angeles in Los Angeles, California, US on November 22, 2021. REUTERS/Mike Blake (Reuters Photo)

This is in part because shippers who move thousands of containers each year want predictable rates.

ribbon protection else they change change %
AMZN AMAZON.COM INC. 87.36 +1.28 +1.49%

Shipping expert John McCown said that big shippers are “entering the buying season…they want to know the cost of shipping. They’re not interested in playing the (spot) market” by shopping for low rates.

At the same time, Maersk and other carriers have told investors they will continue to prop up fares by canceling flights to match shrinking demand. They also scrap small and old “rust buckets” to reduce capacity.

Experts said this means shoppers will suffer higher prices for a little longer.

“The American consumer should not expect that this will lead to massive price easing. This is not going to happen,” said Jason Miller, assistant professor of supply chain management at Michigan State University.

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Carriers have raised prices and reaped record profits during the pandemic freight surge due to the sharp rise in demand for freight services. Many carriers have prioritized loads with higher spot rates and encountered containers from overcrowded vessels, which has led to greater use of the spot market.

However, this trend started to shift towards the end of last year due to a decrease in the import of retail items such as furniture, appliances and apparel.

Container shipping company Ocean Network Express CEO Jeremy Nixon said in December that short-term spot rates have “fallen.”

Port of Los Angeles

SAN PEDRO, CALIFORNIA – JANUARY 19: An aerial view of containers and cargo ships at the Port of Los Angeles on January 19, 2022 in San Pedro, California. ((Photo by Qian Weizhong/VCG via Getty Images)/Getty Images)

Long-term contract prices, meanwhile, ended 2022, about 20% lower than the pandemic peak of more than $8,000 per container, according to marine consultancy Drewry, which expects contract prices to halve in 2023. That forecast would put prices at around 3,200. dollars, versus the pre-pandemic rate of about $1,500.

Several factors could support long-term contract rates, including disruptions from the coronavirus outbreak in China, the war in Ukraine, and rising labor costs.

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Steve Schulte, vice president of the Blue Diamond Growers almond-growing cooperative, is betting that contract rates will not revisit pre-COVID levels.

“It’s a kind of inflation,” he said. “It never really goes backwards.”

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