Charleston, SC, USA – August 25, 2021: Peony, a 366-meter container vessel owned by COSCO Shipping and flagged to Hong Kong, sails into Charleston Harbor.
Back in February 2022, it was not uncommon for importers to sign yearly (or longer) freight contracts. Two years of supply-chain disruptions and delays will do that. Large importers like Amazon.com and Walmart especially were placing a premium on predictability and reliability.
Their margins were generous enough to justify throwing their cards on the table in a push for more assuredness. Shipping liners held all the leverage and that’s some real leverage considering the top five operators control roughly three-quarters of the container capacity.
Yet, just five months later, companies are in a frenzy to renegotiate those agreements. Consumer demand has shifted dramatically and is currently creeping to a crawl. Many freight specialists point to lower rates appearing first in spot markets, complementing the decrease in longer-term contract rates. Now, a reduction in transport costs is good news in many respects for retailers and manufacturers alike. But, shippers are still paying much more than they did pre-Covid.
The overall environment is now trending in the favor of importers. Flexport, a San Francisco-based freight forwarder, noted that more shippers are foregoing contract rates and moving towards the spot market in a move to secure lower rates. Between June 2021 and June 2022, long-term rates from China to the US Pacific Coast nearly tripled. By March of 2022, the short-term rates had begun to decline and in June they descended below long-term rates.
In May of this year, consumer goods imports plummeted by roughly $1.5 billion. Americans, according to the Commerce Department, have been cutting back big on big yearly purchases such as televisions and furniture. To compound matters, trucking is also witnessing a softening of demand. Yet, interestingly enough, truck rates have been falling mainly due to a shift from the spot market toward contract rates that are longer-term in nature. Spot rates in the trucking sector sunk 22% over the first half of the year. The most commonly used type of trucking, dry van, registered an average contract rate in June of $2.93 per mile. This was 17 cents higher than the rate to move a load on the spot market.
Contract rates will likely continue to decline as spot rates fall. Shippers will benefit, however, only if the price of diesel also falls. It doesn’t matter if you get a $2 per hour raise if inflation is costing you $4.
Credit: Source link