Period : 1st May 2022– 30th Jun 2022
Date : 8th July 2022
Researcher : Esther Low
Source : Freightos Baltic Index https://fbx.freightos.com/freight-index/
Global Average Rates of Ocean Freight
Global container freight rates have continued to ease in May 22 and June 22. The highest reported freight rates were in Sep-21 where freight rates hit $11,109. The easing of freight rates is mainly contributed by the slow down in pent up spending and demand as the world returns to normal. Lockdowns and labor shortages are also no longer a bottleneck to supply chain. Although freight rates have subsided since April 22 it is still likely to remain this elevated as compared to pre-Covid times as most supply constraints cannot be resolved overnight. For example port congestions, backlogs of supplies and seasonal high demand periods will continue to maintain upwards pressure on freight rates.
Ocean Freight Rates for Far East Region
(China/East Asia ↔ North Europe)
Ocean freight rates for routes East Asia/China to North Europe have maintained at about $10,500 throughout May and Jun 22.
Meanwhile rates for return route from North Europe to China/East Asia is down 43% from $1,158 in Jan 22 to $662 end Jun 22. The average freight rate for this route is $866.
Ocean Freight Rates for Pacific Region
(China/East Asia ↔ North America East Coast)
Freight rate for the China/East Asia route to North America east coast also experienced a significant decline from $16,705 to $11,599 (a 31% drop) from Jan 22 to June 22.
For the return route North America East Coast to China/East Asia, latest freight rate has started rebounding since early June 22. Freight rates was $790 at the start of the month and is now at $829, a 5.4% increase.
Impact of geopolitics, uncontrolled inflation and economic recession on freight rates
The first half of 2022 has rife with political and economic instability. In the east, China’s property market woes are likely to worsen this year due to oversupply of properties and lack of demand. Property prices have remained flat and sales and investments are falling. Despite the housing market being one of the economic pillars to the second largest economy in the world, governmental crackdowns due to excessive borrowings in property developers have weakened this industry.
The slowdown in China’s housing market is showing up in their shipping data. Before government clampdowns, the rapid property building has spurred demand for construction commodities such as steel, copper, cement, limestone, gravel and sand. According to CNBC, the exports of furniture, home decorations and home appliances from rest of the world to China has also reduced.
Meanwhile bordering to China, Russia’s attack of Ukraine will likely stifle trade and logistics in the Black Sea and Europe region. This is particularly concerning for countries relying on Russia and Ukraine for grains given the leading role both countries play in producing agrifoods. Due to the dangers of sailing in and out of the Black Sea region, shipping distances and costs would increase along with transit times. According to the UNCTAD (UN Conference on Trade and Development) the fewer grain shipments over longer distances (countries seeking alternative origins of grains such as US, South America, Canada or Australia) will lead to high food prices in the European region.
As supply chains face a massive bullwhip effect from a combination of COVID economy, Russia Ukraine war economy and massive inventory levels, a slowdown in consumer spending due to inflation and fears of economic recession will also have a massive impact on freight demand. For supply chain, a consumer pullback now would spell trouble as manufacturers who have ramped up production to meet demand will now be stuck with high inventory and cancellations of orders. As a result this would mean a pull back on quantity of containers per shipment. In the US, big retailers like Walmart and Target have reported too much inventory and these retailers are known to be one of the many big importers of containerized freight. Just between the two retailers, they import nearly 1.7 million TEUs in 2021 alone, representing 7% of US total container imports.
The Purchasing Managers’ Index (PMI) is an indicator of economic trends in manufacturing and service sectors. It summarizes the market conditions viewed by purchasing managers on whether they should expand, contract or remain the same for purchasing orders. For the USA PMI, upon the announcement of higher inflation, hike in interest rates to control inflation and fears of recession we see a sharp drop from 60 to 52 indicating a more conservative outlook for purchasing decisions.
The conservative revision of America’s PMI would mean countries who rely on trade and exports to USA will experience a slowdown. As USA often import goods from countries in Asia such as Malaysia, Singapore, Thailand, Philippines, Vietnam and China, we can expect to see total TEU imports drop in shipping data. This could potentially lead to marginally lower freight rates due to lesser bookings for vessels sailing Asia -> America.
All in all, the events of the first half of 2022 all seem to paint a weaker freight rate market for the second half of 2022 due to uncontrolled inflation and global recession fears. Meanwhile political instability in the Black Sea region even if resolved within the year will not translate to a complete return to normal for supply chain within the region due to immense damage in port facilities in Ukraine. This would continue to put upwards pressure on freight rates in the European region.