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Shipping costs drop as demand for goods from Asia slumps

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The cost of transporting goods from China has fallen to its lowest level in more than two years as the global economy stumbles, clouding the outlook for container carriers which have made record profits during the pandemic.

A 40ft shipping box from the world’s largest port of Shanghai to Los Angeles fetched $3,779 last week, the first time the spot price was below $4,000 since September 2020 and half the level three months ago, according to maritime research consultancy Drewry.

While the value of Chinese exports increased further in August, it is expected to continue to slow. It’s a symptom of the headwinds hitting developed and developing economies, from soaring inflation and a soaring dollar to central bank interest rate hikes and trade disruptions blamed on the war of Russia in Ukraine.

“It’s fair to say that the demand outlook for transpacific and container shipping in general is rapidly receding,” said Simon Heaney, senior director of container research at Drewry.

In what is usually the peak season for maritime trade, global demand for Chinese goods is on the contrary declining as consumers cut back on spending due to inflation and shift away from goods in favor of services.

Factories in Europe and the rest of Asia are also reducing production. China’s economic slowdown is also reducing import demand, with companies in Asia and Europe seeing weaker growth or lower orders from Chinese companies.

For the world’s shipping lines, it takes some relief from their busy sailing schedules, while threatening to slow a blistering profitability driven during the pandemic by stronger-than-normal consumer demand for household items.

“While it is more clear that the second quarter of 2022 will be a peak in earnings, I think any discussion of the collapse and return to pre-pandemic earnings levels – or lack thereof – is premature,” said John McCown, an industry veteran and founder of Blue Alpha Capital.

On Friday, shares of Copenhagen-based AP Moller-Maersk hit their lowest since March 2021, and Germany’s Hapag-Lloyd fell to the lowest since June last year. Cosco Shipping Holdings, China’s largest carrier, hit a 17-month low. Shares of Honolulu-based Matson, a smaller player that operated an Asia-U.S. express service across the Pacific, are worth about half the record they set in March.

About two years ago, import demand from the United States began to increase, causing a queue of freighters off the coast of southern California until 2021, which eventually peaked at 109 in January of this year. On Friday, the line to enter the ports of Los Angeles and Long Beach had eight ships.

US container imports are not falling off a cliff, but they are slowing to more normal levels seen before Covid-19.

A container ship docked at the Port of Oakland in California.  Getty Images

Steadily falling container spot rates are putting pressure on carriers who have been pushing to sign longer-term contracts with their customers as these prices soared in early 2022. Maersk, for example, recently said that he held around 72% of his contracts long-term. transport volume on contracts.

Walmart, Amazon.com and Ikea were among the companies that signed deals when spot prices were at near record highs, according to analytics firm Xeneta, but as inflation bites, importers in the states States and Europe want to ship less goods from Asia, he said. .

Many carrier customers want to renegotiate discounts.

Agents and freight forwarders in Asia have recently received calls from freight owners asking to reduce their shipping costs, with some exporters complaining of the unfairness of paying almost twice as much on contracts as on the spot market. Shipping companies want exporters to increase their volumes, but many are refusing to do so due to the weaker economic outlook.

“We surveyed customers and 50% of them successfully negotiated lower rates on fixed-term contracts,” said Peter Sand, chief analyst at Xeneta.

“Lower freight rates are due to lower demand globally, and port congestion has eased, allowing for more efficient vessel operations.”

Economists predict the value of China’s exports will rise 9% this year, down from the 13.5% expansion in the first eight months of the year and well below the 30% jump in l ‘last year.

While exports rose 7.1% in August from a year earlier, higher prices rather than increased volumes could play a bigger role in pushing the numbers higher. According to an estimate by the Macquarie Group, around half of the overall export growth in July was the result of price effects.

Some of the weaker demand reflects an earlier than usual peak season for U.S. businesses to import their goods. Historically, Chinese exports have risen sharply in the second half of the year, with US and European companies stocking up ahead of the holiday season, but this year there has been a surge in shipments in May. and in July, which then fell slightly in August. .

The port of Shanghai handled 8.4% less cargo in August compared to a year earlier, with the number of containers down 3.4%, the port said this month. This follows the drop in boxes arriving in the US – the number of containers arriving at the busiest US port of Los Angeles last month fell the most since the early days of the Covid-19 pandemic.

With no available capacity just six months ago, container lines are now scrambling to reduce excess capacity to meet demand. According to a report by Drewry on Friday, 117 of 744 crossings were canceled over the next month on major trade routes, and about 68% of those masked trips were to be eastbound trans-Pacific journeys.

The weakening outlook doesn’t just come from mainland China – Taiwan’s exports grew at the slowest pace in more than two years in August, while South Korea’s exports fell 8.7% over the past two years. first 20 days of this month.

Bloomberg Intelligence logistics analyst Lee Klaskow said the shipping industry could still have its third-best year in 2023, but the good times may not continue beyond that given all the new ships – ordered during this period of prosperity – which will begin to be launched. Next year.

Updated: September 27, 2022, 3:30 a.m.