Falling Freight Rates for Shippers Importing Goods

Can you hear that voice that sounds suspiciously like Chicken Little? “Freight rates are falling! Freight rates are falling!”

For shippers, those words are like music to their ears. And as often happens when we start talking freight rates… It’s Miller time! No, I’m not talking about cracking some cold ones in celebration or ocean freight carriers drinking to forget the news. As our regular readers might have noticed, Miller time in Universal Cargo’s blog means taking a look at a FreightWaves article written by Greg Miller.

Really astute Universal Cargo blog readers may even know that when we’re looking at Miller’s articles in FreightWaves, there’s a good chance we’ll be looking at specifics data about freight rates. And we’ll get there. But let’s start with the overview.

International Shipping’s peak season seems to be fizzling out. Miller reports in FreightWaves:

… Spot rates are sliding into loss-making territory [for carriers].

Rates “continue to lose ground, bending under the pressure of insufficient demand and growing overcapacity,” said Alphaliner this week.

According to Linerlytica, “Container market sentiment continues to deteriorate, with freight rates still slipping and little prospect for a rate rebound in October despite carriers’ efforts to contain capacity availability through blanked [canceled] sailings.”

Tricky Situation for Carriers Could Mean Tricky Time for Shippers

Now the sky isn’t exactly falling for ocean freight carriers (I don’t know why I’m obsessed with Chicken Little today). After raking in billions upon billions during the shipping boom caused largely by reactionary policy to the pandemic, carriers can absorb some periods of unhealthy freight rates.

However, there was an incredibly high amount of ship ordering that carriers did while money was flowing. All the new capacity hitting the water during a now economically uncertain time period has set carriers up for a challenge of managing supply and demand to keep freight rates healthy. Additionally, U.S. shipping code changes seem to have carriers in the cross-hairs. You can find out the details about that in our ongoing series Decoding OSRA (the Ocean Shipping Reform Act of 2022).

That’s not all good news for shippers.

High levels of blanked (cancelled) sailings is one of carriers’ top strategies for battling their supply/demand problem, as mentioned during the Miller time above. That means unpredictability for shippers when it comes to goods delivery. There can be costly delays and fees associated with unpredictable sailing schedules. For exporters, who haven’t seen freight rates come down in the same way importers have, all the blank sailings have been particularly costly.

Whenever possible, carriers will introduce GRIs in their attempts to get freight rates moving in an upward direction. And carriers will definitely do anything within their power to pass any extra costs they face because of law changes on to shippers. Often, increased regulation in an industry results in increased prices for consumers. There could be a much more volatile period for freight rates on the way than we’ve seen in a while. Traditionally, freight rates are already quite volatile.

Freight Rate Data on Imports from Asia

Really, when we’re talking about falling freight rates, the main focus is on spot rates for imports from Asia. Miller gathers and shares data showing not only falling freight rates on imports to the U.S. but also to Europe. While our focus, obviously, is on freight rates for shipping goods to the U.S., knowing that rates are falling elsewhere increases the odds of more extreme reaction from carriers in battling to bring shipping prices back up. This gives shippers all the more reason to expect high levels of blank sailings to continue and implementations of GRIs (general rate increases) from carriers whenever possible.

But let’s get to the specific data. What exactly is happening with freight rates? That’s right, it’s back to the Miller time:

The Freightos Baltic Daily Index (FBX) spot assessment for the Asia-North America West Coast lane has fallen 16% over the past month, to $1,712 per forty-foot equivalent unit as of Thursday. The FBX Asia-North America East Coast assessment is down 13% over the past month, to $2,662 per FEU.

…

The WCI’s Shanghai-Los Angeles assessments have declined 11% since Aug. 17, to $2,104 per FEU for the week ending Thursday. The WCI Shanghai-New York index dropped 18% over the same period, to $2,900 per FEU.

Freight Rates Still in Black for Carriers

Freight rates, despite all their recent falling, are actually still in the black for carriers. Unless carriers’ contracts with BCOs (beneficial cargo owners) are locked in at unprofitable levels, freight rates are in the black as long as spot rates are above those long-term contract rates. Generally, carriers will not lock into contracts low enough to be loss-making with the shippers who are large enough to deal directly with them.

There would need to be drastic market condition changes to make contracts shift into loss-making territory. But that’s not impossible either.

Most of the time, it’s really only when spot rates fall below contract rates that carriers risk suffering losses. And there have been years in the not-too-distant past when carriers suffered losses measured not only in millions but in billions.

For example, 2016 saw more than $10B in losses from the top ocean freight carriers. Obviously, carriers don’t want to go back to a time like that. Thus, carriers are very leery of spot rates dropping below contract rates, and when they get close, carriers start talking about unprofitable and loss-making freight rates.

As we go back to Miller time, you’ll see that freight rates have fallen close to contract levels, but they are still above them. Therefore, carriers, while in danger of falling into the red margins, are still lingering in the black. Here’s the Miller time:

Ocean carriers saw some green shoots in July and August as trans-Pacific spot levels rebounded to above annual contract rates. Carrier executives said they did not lock in loss-making rates in their annual contract negotiations, implying that if spot rates exceeded contract rates, the spot business was back in the black.

But the premium of spot rates to contract rates in the Asia-East Coast trade has collapsed over the past month, according to data from Xeneta.

Xeneta data shows that average short-term (spot) rates in the Asia-East Coast trade were an impressive $580 per FEU higher than average long-term (contract) rates on Aug. 15.

No longer. Short-term rates were just $77 per FEU higher than long-term rates as of Thursday. (The spot-to-contract premium is still material in the Asia-West Coast lane, at $283 per FEU.)

Carriers do have something to worry about as spot rates have dropped so close to contract rates. If they keep falling, rates will move into the red for them. If peak season is truly finished early with the economic outlook still not being great, falling demand will keep putting greater and greater downward pressure on freight rates. With more capacity still hitting the waters, freight rates do indeed appear to be heading into the loss-making territory for carriers. But they’re not fully in it yet.

How Are Latest Peak Season Predictions Holding Up?

In answering your questions about Peak Season 2023, I wrote about international shipping expert opinions predicting a small surge in freight rates at the beginning of September, as carriers were hitting the market with a new round of GRIs, that carriers wouldn’t be able to maintain through the month.

Those predictions didn’t turn out too badly. I doubted we would see a major freight rate tumble before Halloween, mainly because of carriers’ ability to manipulate capacity (supply) through large numbers of blank sailings. However, carriers haven’t been as successful with their blank sailings efforts in fighting falling freight rates as I expected.

On the other hand, I did say, “If September volumes drop and the peak season fizzles out, freight rates will decline quickly from the carriers’ early September GRIs.” That looks like what we’re seeing. “If volumes stay close,” I continued, “carriers have a decent chance at maintaining healthy freight rates.”

When I wrote those words at the end of August, I saw no reason to believe there would be a surge in demand in September or October. Nothing has changed my mind since then. That meant it would be unlikely to see freight rates increase like they did in July and August. It will be interesting to see official volume numbers for September when they come out. I saw a decrease between 5% and 6% in Universal Cargo’s projected shipment numbers in September from August. I use Universal Cargo’s numbers as a barometer for the industry, so I expected some decrease from August to September. But it looks like there may have been a larger-than-I-expected cargo volume decline between the months because of how much freight rates declined.

Freight rates are bordering on unhealthy for carriers, so cargo volumes don’t appear to be holding up. That does give opportunity for shippers still looking to import goods a chance at pretty good freight rates right now.