Retailers must wait to reap benefits of falling shipping rates, experts say

Spot rates, which are considered a key indicator of the industry's health, are in free fall as recession looms

Shipping containers in Redlands, California. Leading retailers should not expect price relief until the spring contract renegotiation season, industry experts day. Bloomberg
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Prices in the most volatile segment of ocean shipping are collapsing, but top retailers such as Walmart and Home Depot should not expect relief until the spring contract renegotiation season, industry experts said.

Spot rates, which cover anywhere from 10 to 40 per cent of ocean container shipments and are considered a key indicator of the industry's health, are in free fall as recession looms and the pandemic-fuelled US import bubble deflates.

The cost to send a container from Asia to the US on the demand-sensitive spot market has tumbled more than 80 per cent from its September peak of more than $20,000 for a 40-foot container, according to freight booking platform Freightos.

Major carriers such as Mediterranean Shipping Co (MSC) and A.P. Moller-Maersk also are expecting delivery of hundreds of new container vessels, which amplifies risk as carriers already have more ships than they need to handle shrinking demand.

“There is a sense of payback-time in the market after the Covid years, where carriers have been in absolute control,” said Peter Sand, chief analyst at air and ocean freight rate benchmarking platform Xeneta.

Nonetheless, leading customers such as Walmart, Home Depot and Amazon will not necessarily dictate terms during contract talks that typically take place around May, experts said.

This is partly because shipping companies that move thousands of containers every year want predictable pricing.

Big shippers “go into their buying season … wanting to know what their freight is going to cost. They're not interested in playing the [spot] market” by shopping for lower rates, shipping expert John McCown said.

At the same time, Maersk and other carriers told investors they would continue to prop up rates by cancelling voyages to match shrinking demand. They are also scrapping small, old “rust buckets” to cut capacity.

That means consumers will suffer from higher prices for a longer spell, experts said.

“The American consumer should not be expecting that this is going to lead to massive price relief,” said Jason Miller, associate professor of supply chain management at Michigan State University. “That's just not going to happen.”

Carriers raised rates and reaped record profits during the pandemic shipping surge due to a spike in demand for shipping services. Many prioritised loads with higher spot rates and bumped containers from overbooked ships, leading to an increase in the use of the spot market.

However, this trend began to shift towards the end of last year due to a drop in the import of retail goods such as furniture, appliances and apparel.

The chief executive of container shipping company Ocean Network Express, Jeremy Nixon, last month said short-term spot rates were “bottoming out”.

Meanwhile, long-term contract rates finished the year about 20 per cent lower than the pandemic peak of more than $8,000 per container, according to maritime consultancy Drewry, which expects contract rates to halve this year. That forecast would put rates at about $3,200, versus the pre-pandemic rate of about $1,500.

Several factors could support longer-term contract rates, including upheaval from China's Covid outbreak, the war in Ukraine and high labour costs.

Steve Schult, vice president for almond farming co-operative Blue Diamond Growers, believes contract rates will not return to pre-Covid levels.

“It's kind of like inflation,” he said. “It never really goes all the way back down.”

Updated: January 10, 2023, 3:30 AM