The latest sea container bookings data shows that despite strong levels of U.S. inbound cargo in the first five months of 2022, import demand is not only weakening but falling off a cliff.
As trans-Pacific shipping capacity remains relatively stable, Freightos’s container spot price from China to the US West Coast plummeted 38% month-on-month to $9,630.
While freight forwarders will enjoy expanding ocean freight profits, U.S. trucking companies and intermodal providers may begin to see volume declines.
Compared with May 24, the number of containers shipped to the United States fell by more than 36%. It’s a troubling sign for the U.S. domestic freight market, which has benefited from an unprecedented surge in container imports over the past 18 months.
With ocean transit times for these inbound containers recently averaging between 30 and 35 days, the first few weeks of July will begin to see a decline in container volumes at U.S. ports.
This has also caused U.S. container imports from all other countries to decline, returning to summer 2020 volume levels.
U.S. import demand plummets
The most direct reason is the backlog of inventories in the United States. Consumer buying patterns are quickly normalizing to pre-pandemic levels, and U.S. retailers are being saddled with too much inventory.
And Target shares fell after executives said it would discount excess inventory, cancel purchase orders and move quickly to get rid of excess inventory.
At the same time, they also want to keep enough inventory to deal with possible further logistics disruptions.
China’s successive rounds of epidemic blockades have exacerbated these concerns, but after the outbreak of the Russia-Ukraine conflict more than 100 days ago, geopolitical risks seem likely to escalate; therefore, companies have decided, for better or worse, to rather hold ready inventories. Nor do they want to face the risk of a sudden surge in consumer demand while the goods are abroad.
Analysts say the accumulation of U.S. goods inventories will inevitably lead to a slowdown in new import orders from abroad. Furthermore, it is a fait accompli that inflation affects the allocation of consumer spending.
Some economists speculate that consumers may be experiencing “peak inflation” as the Federal Reserve begins to raise interest rates and shrink its balance sheet.
The latest Beige Book of Economic Conditions released by the Federal Reserve showed that most regions reported that prices were rising at a “strong” rate, and only 3 regions said that the price increase trend was “slowing down.”
Faced with the pressure of rising prices, nearly half of the regions reported that companies were able to pass on high costs to consumers; some regions pointed out that they were subject to “customer resistance”, such as “reducing purchases or replacing them with cheaper brands.” and other phenomena.
Chen Jiali, a macro researcher at Everbright Securities, pointed out in an interview that U.S. consumption is still resilient, but the personal savings rate has dropped to 4.4% in April, the lowest level since August 2009. This means that in the context of high inflation, residents’ expenditures grow faster than their incomes, forcing residents to withdraw their early savings.
The accumulation of inventories and the peak of US inflation will inevitably lead to a slowdown in new import orders, thereby increasing the damage to US container import demand.
New contract freight rates on the U.S. line are expected to drop by 40% next year
If bookings continue to be weak, freight rates on this trade route are expected to fall further.
Analysts at S&P Global Market Intelligence said container freight rates could fall to an average of $6,000-$7,000 per 40-foot equivalent unit (FEU), which would hurt traders and merchants struggling with high inflation due to high freight and fuel costs. Consumers breathed a sigh of relief.
The report said a pullback in rates, currently in the range of $9,000-$10,000 per FEU, would stem from reduced port congestion at Chinese ports as COVID-19 restrictions ease, a key downside risk in the second half of the year, particularly in the third quarter. More than after the peak season arrives.
Taiwan research institutions pointed out that the supply and demand of the container shipping market tend to be balanced, and it is difficult for freight rates to rise sharply, which suppresses the market outlook of Evergreen (2603). Although the new capacity and fuel mix are beneficial to support profits, industry freight rates will fall back next year. The long-term contract exchange price will have room for a downward trend, ending the positive view in the past two years and downgrading the rating to “neutral”. The target price has almost halved from 180 yuan to 109 yuan.
Overall, the good times of 20-40% surge in freight rates during the traditional peak seasons in the second half of 2020 and the second half of 2021 are difficult to repeat. It is expected that when the traditional peak shipping season arrives in the third quarter, freight rates will only slowly increase by a single digit quarterly. However, the increase is not as good as expected; with the arrival of the relatively off-season in the fourth quarter, demand has decreased, and freight rates are expected to drop by double digits quarter-to-quarter.
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