Pricing Heat Comes Off Transatlantic Shipping

Some stories are focusing on container shipments out of Asia at what used to be peak season. The Wall Street Journal said this was “the latest sign of the economic whiplash hitting companies as inflation weighs on global trade and consumer spending.”

A year ago, the Journal reported that big companies like Walmart and Home Depot chartered private cargo ships to avoid massive delays in ports. Understandable given how tangled things were. Controlling the course and heading for a port that was less jammed than those in Los Angeles and Long Beach improved chances of getting goods in a timely fashion and closing more business.

Now, there is a twist in all this. To talk of up to half of sailings being canceled to rebalance supply and demand, as CNBC reports—”Freight prices on one key route from Asia to the West Coast are now down more than 80% from last year”—and using that as proof of collapsing demand might be correct. If there is a sudden drop in demand for freight transit, it would seem reasonable to assume that buyer demand for those goods had also fallen.

But the analysis skips over some major data points and assumes that the cancellations and fall of prices are coming down from a normal flow of business.

Pricing is easily checked by looking at the Shanghai Containerized Freight Index, a standard global measurement of shipping costs out of China. The site Container News shows prices with some history. In 2017, the price ranged from about $700 to just under $1,000 per container, while 2018 prices were a low of $650 and a high of $975. Before the pandemic, in 2019, the range was about $715 to maybe $970.

In 2020, the price started at $1,000. By the end of the year, it was over $2,750. Last year, a low of $2,570 and a high of $5,047. This year started with prices at $5,095 and now they’re down to about $1,923.

The Journal referred to another index, the Freightos Baltic Global Average Freight Rate Index. In 2020, that index started at $1,438 a container and ended the year at $3,879. In early 2021, that index broke $4,000 and ended the year at $13,706. This year peaked over $16,400 and now is down to $3141.

Yes, prices are down sharply, and they are still highly elevated by historical standards. What is abnormal is not that prices have dropped but that they are still as high as they are.

The higher pricing came as a function of supply chain problems and shortages. There was great demand for shipping and products and reduced availability of the latter, so shippers—represented by three major groups—sharply increased their prices. And instead of waiting to fill containers, products were shipping as available.

As the Journal story also mentioned, some big companies were sitting on large amounts of inventory. That is likely due to their experience of not having product and so bringing in extra to avoid the risk of being caught short again.

And, yes, inflation is also having an impact on consumer purchases on a global basis. But there are other things going on, like the slow recovery of supply chains. Keep the data in mind, but it’s not time to panic.