US Container Freight Rates’ Drop Will Impact Supply Chain Balance of Power

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US importers, especially SMBs and consumers, should benefit as the SHIFEX index shows a continued drop in container spot rates as shipping demand weakens. This drop should shift some power away from the carriers. However, before popping open the champaign, spot rates are still far higher than pre-COVID-19. Meanwhile, carriers working on contracted rates continue increasing their profit forecasts for 2022. How? They secured expensive contracts in 2021 when carrier capacity was stretched to the limit, and shippers rushed to restock inventories. Now, shippers are trying to renegotiate contracts to save money. So, what can the supply chain expect?

Spot vs. contracted rates

What is this tug of war between spot and contract rates? A spot rate is a one-off charge for transporting shipments by air or sea freight. The rates are usually valid for one load and fluctuate daily according to market conditions – be it a holiday season, politics, oil prices, or general supply and demand. So, your freight cost can go up or down at the exact time of your shipment. But, just like trying to book a flight ticket alone, prices keep changing, and there are no guarantees.

On the other hand, a contracted rate is a freight rate negotiated with a carrier for your shipment according to your volume requirements. Usually, more volume means a better rate. In addition, the rate is secured for an agreed time, making it more stable cost-wise than the unpredictable spot market.

Rate of the fall

According to Shipping and Freight Resource, freight spot rates began to dip in March 2022 and by June had dropped to their lowest levels since April 2021. Moreover, the figures are now lower than long-term rates, which Bloomberg says is the first time this has happened since April 2020. So, according to the SHIFEX index (by Shifl), shipping a 40-foot container in September 2022 from China to Long Beach and LA on the West Coast costs around $4,900 – a 72% drop year-on-year from a whopping $17,500.

On the East Coast water route from China to NY, in September 2022, rates for a 40-foot container dropped 54% year-on-year from $19,500 to $8,900. According to Shabsie Levy, Shifl CEO and Founder, rates may continue to fall. However, they are still three times higher than pre-pandemic rates. Levy says the speed of the decline indicates that the market is “returning to some semblance of the new normal.”

Many carriers are not flinching. On the contrary, they remain convinced that they are in the driver’s seat, with contract rates still 60% higher than in 2021, thanks to their multi-year contracts fixed well into 2023. However, is this reality – will the situation prevail?

Why the decline?

To answer that question, we must examine the reasons behind the price drops. First, there is a slowdown in the US economy and consumer demand compared to the start of 2022. Throughout most of 2021, massive delivery delays and inventory shortages plagued retailers and manufacturers. This situation made them more than willing to pay record-breaking contract rates to secure space on containers before the peak 2022 Fall and Winter shipping seasons. According to Norway-based firm Xeneta, long-term shipping rates for goods per container from China to the Us West Coast nearly tripled to $7,981 from June 2021 to June 2022.

The entire supply chain felt the impact of these prices, and ultimately end consumers were left disappointed by the lack of inventory and anticipated holiday discounts.

Given these factors, Levy maintains that the continued drop in spot market rates will force carriers to renegotiate their long-term contract rates. Why? Because some of their customers have built-in rider clauses connected to spot rates. At the same time, other customers might abandon contracted rates and move to the spot market to cash in on the downward rate slide.

The drop in shipping costs also implies that inflation in the freight sector will hopefully stabilize after two years of increases. However, even if they are higher than before the pandemic scrambled global supply chains, the trend favors importers.

Economic factors

As mentioned, the US economy is showing mixed signals. On the one hand, the US Department of Commerce reports that in May, imports of consumer goods dropped by around $1.5 billion, mainly of expensive items like TVs and furniture. Yet, container import volumes remained strong while congestion at East Coast ports increased. The National Retail Federation, on the other hand, expects import volumes to drop compared to August-November 2021.

The trucking industry is also facing softening demand. As a result, trucking spot rates are dropping along with freight rates. According to DAT Freight & Analytics, trucking spot rates dropped 22% in H1 2022 – with May marking the first time in two years since they fell below contract rates. By June, average contract rates for dry van trucking, the most commonly used method to move a load, was $2.93 per mile, 17 cents more than $2.76 per mile on the spot market.

However, while DAT Chief Scientist Chris Caplice expects contract rates to drop this year as spot rates drop, shippers will not gain if diesel prices don’t come down. Currently, carriers are hitting shippers with fuel surcharges of around 80 cents per mile, crushing out any cost benefits from decreasing rates.

Who benefits most?

So, who wins in this freight rate turnaround? Xeneta Chief Analyst Peter Sand says the smaller shippers don’t have access to the contract market. Also, the more prominent clients of container services will win as some mix spot-market coverage with contracted volumes on those trades not essential for their business.
As far as who loses? Besides carriers forced to lower rates, Sand says freight forwarders selling on the spot lose as they purchased container space from a carrier at a fixed and more expensive rate.

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