Weaker Demand For China-Based Goods Spells The End Of A Shipping Boom

The cost incurred to ship goods from China has slumped to the lowest level in over two years as the economy all over the world stumbles, dimming prospects for container carriers that reported record profits during the ongoing COVID-19 pandemic.

A 40-foot shipping box from the port of Shanghai — the world’s most significant — to Los Angeles fetched about $3,779 last week. This is the first time since 2020’s September that the spot price was below $4,000 and nearly half the level observed approximately three months back, according to Drewry.

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As the value of China-based exports rose through August, it is expected to continue slowing down. And that is a feature of multiple headwinds hitting developing and developed economies alike, from soaring inflation coupled with a surging dollar to hikes on central bank interest rates and trade disruptions blamed on the ongoing war in Ukraine.

It would justify mentioning that the demand outlook for container shipping and trans-Pacific is receding quickly, said Simon Heaney. He is a senior manager associated with container research at Drewry.

Shipping Costs Slump

The costs to send a container 40 feet from Shanghai to LA have reportedly halved over the last three months.

In what’s generally considered the peak season in seaborne trade, the worldwide demand for goods from China is waning as consumers are cutting back on spending owing to inflation, and there’s a noticeable shift away from the goods toward services.

Factories in the rest of Asia and Europe are scaling back production. The economic slowdown in China has resulted in cutting into import demand, with firms in Europe and Asia seeing weak growth or decline in the number of orders from Chinese majors.

For the world’s shipping lines, it offers relief to packed schedules. Still, it threatens to slow a jaw-dropping run of profitability boosted during the ongoing pandemic by consumer demand more substantial than usual for household commodities.

While it is more evident that 2022’s second quarter will be an earnings peak, any conversations around the bust and return to pre-pandemic earnings levels — or an absence thereof — is premature, mentioned John McCown, founder of Blue Alpha Capital.

Shares of A.P. Moller-Maersk A/S hit the lowest on Friday since March 2021, and Germany’s Hapag-Lloyd AG slumped to the weakest since 2021’s June. Cosco Shipping Holdings Co., the biggest carrier in China, recorded a 17-month low.

Shares of Honolulu-based Matson Inc., a relatively more minor player operating an Asia-to-US service across the Pacific, won half of the record high touched in March 2022.

Just about two years ago, US import demand started rising, reportedly resulting in a queue of cargo vessels off the Southern California coast through 2021 that eventually reached a high of 109 in January this year. On Friday, the line to get into Los Angeles (LA) ports and Long Beach (LB) reportedly had only eight vessels.

US container imports are not falling off, say, a cliff, but gradually they are slowing down to normal levels observed before the ongoing Covid-19.

An Early Peak Season

US container imports have reportedly slowed from the COVID-19-pandemic-led surge witnessed in 2021.

The consistent and steady fall in spot container rates has been pressuring the carriers that have been forced to sign a higher number of long-term deals with their customers as the prices soared into early 2022. For instance, Maersk has recently mentioned that it has approximately 72% of the long-haul volume on contracts.

Walmart, Amazon, and Ikea are some of the firms that have reportedly signed contracts when spot prices hit a near-record level, per Xeneta, an analysis firm. However, as inflation bites the US importers, those in Europe wish to ship fewer commodities from the Asian markets, it reported.

Many carriers’ customers want to re-negotiate for more/better discounts.

Freight forwarders and agents based in Asia have gotten calls from cargo owners recently. They requested to cut down on the shipping costs, with exporters complaining about the unfairness of paying nearly twice as much on contracts as the spot market.

Shipping majors desire exporters to bulk up the volumes, but several refuse to pay to the poor economic outlook.

Economists expect the value of China-based exports to grow 9% in 2022, down from the 13.5% expansion observed during the first eight months of the year and below the 30% jump in 2022. While the exports rose by 7.1% in August 2022 from what was reported a year before, higher prices rather than a boost in the volumes may play a more vital role in boosting the figures.

Earlier Peak

To an extent, the demand softening indicates an earlier-than-typical peak season for the US firms to import the wares. Chinese exports thrive into the second half of the year as firms based in Europe and the US stock up before the holiday; however, this year, there was a significant spike in shipment rates in May through July, which fell back slightly during August.

Unseasonal Spike

Export values came down in August 2022 from the mini spike observed from May to July 2022.

Shanghai’s port has reportedly processed about 8.4% less cargo in August 2022 compared to what was observed a year back, with the number of containers down 3.4%, as the port mentioned earlier in September.

That tracks with the drop in boxes arriving in the US — the number of containers arriving at the US’ busiest — port of LA dropped by the most since the early days of the pandemic in the last month.

With zero capacity to spare six months back, the container lines are currently grappling with cutting down on an excess of it to satisfy demand.

Per a Drewry report released on Friday, 117 744 sailings had been cancelled over October on crucial trade lanes. Approximately 68% of blanked voyages had been scheduled to make transpacific eastbound voyages.

The weakening outlook is not coming from mainland China — Taiwan’s exports were growing at a slow pace for over two years in August 2022, while the South Korean exports reportedly dropped about 8.7% in 20 days earlier this month.

Lee Klaskow, the Bloomberg Intelligence logistics analyst, mentioned that the shipping industry could have the third-best year next year — 2023, but these easy times might not be rolling beyond that given the new ships — ordered during the period of prosperity — that will begin to be officially launched in 2023.

A significant amount of new capacity will be hitting the water in 2023. He mentioned that this is expected to dampen both spots and contractual rates. As we enter 2024, liners may get even worse, with higher supply hitting the water and supply chains normalizing.

References: Bloomberg, Economic Times

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