Sluggish demand has kept ocean rates low, but disruptions may change the outlook, such as the Panama Canal drought, labour strikes on the U.S. West Coast, and a technical recession in the Eurozone.
According to Container xChange’s June Forecaster, a further slide in average container prices will be seen in the coming weeks, with no signs of container demand revival.
The sentiment is reflected in a survey that Container xChange recently conducted (in May 2023) with the global freight forwarding community. About 69 percent of respondents (406 sample size) are hopeful of a container demand bounce back this year in 2023. Only 18 percent are hopeful of this revival in the short term (1-3 months).
About half are “guestimating”, without a clear outlook of timeline for container demand bounce back.
Container xChange Peak season demand revival Survey 2023
“The supply-demand imbalance worsens with upcoming vessel deliveries and low scrapping rates. Spot rates are at pre-pandemic levels in most trades, and contract rates are sliding. Coupled with low demand, the industry continues to grapple with overcapacity of containers and vessel capacity,” said Christian Roeloffs, cofounder and CEO, Container xChange. “Now we have labour disruptions and the Panama Canal drought, which in normal circumstances would lead to an uptick in freight rates as they absorb effective capacity, but any significant price effect is now highly doubtful in the current market.”
He added that supply chain reliability will deteriorate again. This could potentially lead to a “pull forward” on orders.
“This in turn will likely ‘flatten out’ any peak season and further decrease the likelihood of a freight rate increase in the second half of 2023.”
No signs of peak season
Container prices generally surge during the preparation for the peak season. So far, these prices have failed to pick up. A study of average container prices on the Container xChange platform indicates a disappointing revival of demand.
New York witnessed the average price of 20-ft dry containers to reach $6,500 in June 2021, which has now crashed by 82 percent to reach $1175 in the first week of June 2023.
Similarly, Long Beach port saw average prices reaching a peak at $4,118 at the beginning of August 2021, which has reduced by 65 percent to reach $1,430 in May 2023.
This persistent fall in average container prices comes at a time when the shipping industry prepares for what is normally peak season.
Container prices expected to fall
The average price trends of subsequent months from 2022 indicate that these prices further declined from July-December at the majority of these ports in that year. If the same trend continues, these prices could further fall.
There are enough and more reasons to be pessimistic. With the peak season coming, the industry sentiment is negative. The industry is waiting for a demand comeback which doesn’t seem anywhere on the horizon.
Bottom of spot freight rates?
“In a highly competitive environment such as container shipping, the minimum offer price tends to gravitate towards the level of variable costs. In the case of container transportation, variable costs have surged by approximately 15 to 25 percent since 2019, depending on the trade lane,” said Roeloffs.
“Consequently, the lower limit of freight rates offered by carriers has also increased by 15-25 per cent. This poses challenges for shippers who now face higher variable costs for transporting cargo. Despite the significant decline in average container rates from 2021-2023, reaching almost 85 per cent reduction, the underlying variable costs remain elevated — which makes a significant additional and sticky decrease in spot freight rates unlikely while contract rates still have room for further depreciation.”
U.S. imports slump
According to the National Retail Federation (NRF), U.S. retail sales are slowing, and U.S. container imports are on track to drop by more than 20 percent in the first half of 2023.
“Both the U.S. and Eurozone markets are experiencing disturbances contributing to a significant loss in consumer confidence, creating a ripple effect. Since the pent-up demand observed in late 2021, the industry is waiting for a ‘demand comeback,’ which seems less likely in the coming peak season. Of course, there will be some demand, but rather subdued,” Roeloffs added.
Eurozone ‘technical’ recession
Inflation can also lead to a significant and wide-ranging impact on the global supply chain.
“Rise in input costs and costs of financing, change in consumer behaviour and changing trade behaviours will lead to a ripple effect on global supply chains, impacting the demand for certain products or industries. Business will need to adapt their production levels, inventory management, and distribution strategies accordingly,” Roeloffs said.
“With consumer demand remaining persistently sluggish for the peak season, sticky inflation levels are poised to exert an additional detrimental effect on demand.”