Freight Rates Are Starting to Fall as Shipping Demand Wavers

21 July 2022

Freight Rates Are Starting to Fall as Shipping Demand Wavers

High-price freight contracts that were written when carrier capacity was tight and a rush to restock inventories was in full force are losing their shine as slowing demand and a wavering U.S. economy send shipping rates sliding.

Some companies now are renegotiating shipping agreements they struck at the height of the pandemic-driven surge in freight demand or are dipping into the spot market to take advantage of lower rates.

The reduction in transportation costs is good news for manufacturers and retailers after two years of rapidly rising expenses. It also suggests the contribution of the freight sector to inflation is at least leveling off. But shippers note they are still paying several times more than they did before the Covid-19 pandemic snarled supply chains world-wide.

Freight specialists say different forces are driving down rates across ocean shipping and trucking, but softening demand is a common factor. The lower rates are appearing first in spot markets and are helping to bring down longer-term contract rates.

The situation is a sharp turnaround for shippers who at the start of 2022 were willing to pay record-high contract rates to guarantee space on container ships ahead of this year’s fall and winter peak shipping seasons following severe delays and inventory shortages through much of 2021.

One official at a large U.S. importer said it recently reduced by 15% to 20% ocean contract rates signed several months ago. The official expects further reductions later this year. “Things are trending in favor of the importers,” the official said.

San Francisco-based freight forwarder Flexport is seeing more shippers jettison contract rates in favor of lower rates on the spot market, said the company’s director of ocean trade lane management, Nathan Strang.

Long-term rates to ship goods from China to the U.S. West Coast almost tripled between June 2021 and June 2022 to $7,981 per container, according to Xeneta, a Norway-based transportation data and procurement firm. Short-term rates began to fall in March of this year and in June dropped below long-term rates.

Shippers aren’t having it entirely their way. One official at a large importer facing hundreds of thousands of dollars in penalties for not meeting contracted volumes said it is facing pushback from some ocean carriers. “It’s hit or miss,” the official said.

Peter Sand, Xeneta’s chief analyst, said shippers are willing to pay a contract rate slightly above spot price in return for a guarantee their container will be loaded onto a ship. But Mr. Sand said shippers are also trying to ensure they don’t overpay.

The rate decreases are appearing at a time of mixed signals from the U.S. economy.

Consumer goods imports fell by some $1.5 billion by value in May, according to the Commerce Department, as Americans cut back on big-ticket items like furniture and televisions. At the same time, container imports into the U.S. by volume remain strong and congestion at East Coast ports is increasing.

The National Retail Federation in a report released Friday expects import volumes to decline compared with robust year-ago periods from August through November.

Trucking is also seeing a softening of demand. But Chris Caplice, chief scientist at online freight marketplace DAT Solutions LLC, said truck rates are declining largely because of a shift away from the volatile spot market toward longer-term contract rates as truckers see more stability in their routes.

Trucking spot rates fell 22% during the first six months of this year, according to DAT, dipping below the contract rate in May for the first time in two years. By June, the average contract rate for the most commonly used type of trucking, dry van, was $2.93 per mile, 17 cents higher than the $2.76 per mile to move a load on the spot market.

Mr. Caplice expects contract rates to decline this year as spot rates fall, but shippers won’t benefit unless diesel prices also come down. Fuel surcharges are currently costing shippers about 80 cents per mile. “Rates are going down but they are wiped out by fuel surcharges to carriers,” Mr. Caplice said.

Freight specialists note shipping rates remain well above prepandemic levels. The spot rate to ship a container by ocean to the U.S. West Coast from China on July 6 was more than four times higher than the same period in July 2019, according to online freight marketplace Freightos.

Congestion is also helping shipping costs remain high on some routes, such as China to Chicago, which has been plagued by severe delays on U.S. freight rail systems.

Carbochem Inc., an importer of activated carbon used in water treatment and food processing, paid $16,000 per container in June to ship boxes from China to Chicago, said the firm’s president, Gavin Kahn.

Mr. Kahn said the cost is down from a high of $21,000 last year, but three times higher than the rate he paid before the pandemic. ”We need to be looking at probably less than $10,000 to get anywhere close to the levels we were before and be competitive,” he said.

By Paul Berger