What are the implications for Chinese products and companies behind the “plummeting” global shipping rates?

The saying “golden September, silver October” once held true across the global shipping industry as well. Yet this year, during the traditional peak season, the shipping market has been hit by wave after wave of headwinds. Freight rates on major shipping routes have plummeted in a precipitous drop. Container‑shipping analysts note that, driven by soaring energy prices and rising inflation, the specter of a global economic recession is weighing on the sector—and this downward trend could very well persist into next year. What implications will these developments have for Chinese products and Chinese companies?

Can Chinese Christmas goods be delivered to Europe on time?

Data released on the 9th by the Shanghai Shipping Exchange showed that the Shanghai Export Container Composite Freight Index stood at 2,562.12 points, down 10% from the previous period and marking the 13th consecutive weekly decline. Among the 35 weekly reports issued by the exchange this year, prices have fallen in 30 weeks.

According to data from the Baltic Exchange, in January this year, the spot rate for a 40-foot container on the China–U.S. West Coast route was around USD 10,000; by August, it had fallen to approximately USD 4,000—a plunge of 60%. Compared with last year’s peak average of USD 20,000, the decline exceeds 80%. Meanwhile, the Southeast Asia–Thailand/Vietnam route has experienced significant market volatility; amid a substantial shortfall in cargo demand, weekly rates dropped by 37.1%, driving spot‑rate bookings sharply lower and even giving rise to isolated instances of zero or negative freight rates.

According to data from Freight Waves, a supply-chain platform, it is now rare to see hundreds of vessels lined up at major global ports such as Los Angeles, Long Beach, and Rotterdam, waiting to berth. As of August 29 this year, the Port of Los Angeles was handling 50,176 containers, compared with 90,397 in late November last year. On that same day, only eight container ships were anchored offshore awaiting berthing near Southern California ports, whereas at the same time last year, the figure stood at 48.

As the Christmas season draws nearer, many traders are growing concerned about whether Chinese‑made holiday goods can be delivered on time. Hamburg‑based trader You Dan says that before the pandemic, he traveled to Yiwu and other Chinese cities each year to source Christmas decorations, toys, bicycles, and other festive items. In the past two years, however, business was severely disrupted by the pandemic and supply‑chain disruptions. This year, maritime shipping between China and Europe has improved, with freight rates falling—good news for traders. The downside is the euro’s depreciation, which has pushed up prices. Fortunately, China has not experienced the same level of inflation seen in Europe and the United States.

“Although Europeans’ consumer sentiment remains subdued due to high inflation, Christmas is still celebrated, and demand for Chinese goods remains strong,” said You Dan. He added that Chinese products continue to enjoy significant advantages across key metrics such as price, variety, and quality. Despite survey findings indicating that more than two-thirds of German companies anticipate delivery disruptions in December, he nonetheless believes that, given current shipping conditions, the situation will be better than last year.

From abnormally high to normal

What has caused the sharp plunge in shipping rates? Ding Chun, a professor at the Institute of World Economy at Fudan University’s School of Economics, explains that persistently high inflation in Europe and the United States, coupled with geopolitical tensions, an energy crisis, and the ongoing pandemic, has led to a substantial contraction in shipping demand—this is the primary driver behind the global collapse in ocean freight rates. Ding Chun notes that while the current plunge merely brings last year’s abnormally high rates back to more normal levels, “it nonetheless signals the end of the era of sky-high shipping costs.”

Kang Shuchun, CEO of China International Shipping Network, said that an imbalance between supply and demand has sent ocean freight rates plummeting. During the pandemic, supply chain disruptions led to shortages of certain goods in some countries, triggering “stockpiling frenzies” in many nations and driving last year’s shipping costs to exorbitant levels. This year, amid significant global inflationary pressures and declining demand, coupled with the inability of markets to absorb previously hoarded inventories, importers in Europe and North America have reduced or even canceled their orders, causing a “order drought” to spread worldwide.

In August this year, Walmart announced it was canceling orders worth several billion dollars; shortly thereafter, another retailer, Target, said it had canceled orders totaling more than $1.5 billion. Kang Shuchun noted that, as the front line of the logistics chain, these retailers are particularly sensitive to market trends. Their widespread order cancellations signal a contraction in both purchasing power and consumer spending across Europe and North America.

Xu Kai, Chief Information Officer at the Shanghai International Shipping Research Center, stated that port and shipping big data show that in the third quarter of last year, approximately 30% of global container vessels were at anchor; by the same period this year, that share had declined to around 26%, indicating an improvement in global shipping capacity. On the other hand, demand for transport capacity from global merchandise trade has weakened, making a decline in freight rates inevitable.

Moreover, the launch of a large number of new vessels by major shipping companies has further widened the gap between supply and demand. According to Kang Shuchun, last year’s exceptionally high freight rates enabled many shipping firms to post record profits, prompting some large carriers to reinvest their earnings in building new ships. Even before the pandemic, global shipping capacity had already exceeded cargo volumes. Citing energy and shipping consultancy Braemar, The Wall Street Journal reports that a wave of new ship deliveries is expected over the next two years, with the fleet’s net growth rate projected to exceed 9% in both 2023 and 2024. Meanwhile, container‑cargo volumes are set to turn negative year over year as early as 2023, which will further exacerbate the imbalance between global shipping capacity and actual demand.

Chinese enterprises should avoid internal price wars.

The Wall Street Journal believes that, amid numerous uncertainties in the international political and economic landscape, shipping rates are likely to decline further over the remainder of this year and into next year. Kang Shuchun noted that although freight rates have plummeted recently, they remain slightly above pre-pandemic levels. Taking into account factors such as persistently high global inflation, soaring oil prices, and rising consumer prices, current rate levels can be considered within a reasonable range. However, given the current global economic environment, a downward trend in shipping rates is virtually certain; yet it remains difficult to predict precisely how far they will fall or when they might bottom out.

Xu Kai believes that last year’s exorbitantly high ocean freight rates were an anomaly, while this year’s precipitous plunge is even more unusual—likely the result of shipping companies’ overreaction to shifting market conditions. This year, many liner operators have commissioned new container vessels, resulting in ample spare capacity, yet global demand for ocean freight bookings has been contracting. To maintain vessel load factors, carriers have sought to leverage freight rates to stimulate demand. However, the underlying cause of weak market demand is a decline in trade activity; resorting to price cuts will not generate new demand and may instead trigger cutthroat competition, disrupting the orderly functioning of the shipping market.

“The moderate decline in international shipping rates is reasonable, but a sustained plunge would hinder the healthy development of the entire market,” says Xu Kai. He believes that freight rates are unlikely to fall further and stabilize below 2019 levels; returning to a level slightly above or close to 2019 would be a more rational range. Xu Kai notes that at the beginning of the year, many shippers entered into long-term contract rates with ocean carriers to avoid another shortage of available containers. However, spot rates have now fallen far below those contracted prices. If domestic shipping companies blindly follow suit with price cuts, it will not only harm shippers’ interests and undermine long-term partnerships, but such reductions are unlikely to boost transport demand. “Rather than engaging in a price war,” he adds, “it’s better to enhance service quality or develop new offerings such as express shipping and consolidated‑freight logistics.”

Xu Kai also stated that the situation this year—when export companies struggled to secure even a single container—will certainly not recur. However, this does not necessarily signal improved profitability for the manufacturing sector. Among the key factors affecting corporate earnings, shipping costs account for a very small share, typically less than 1% of the value of containerized goods. For domestic exporters, Xu Kai believes that what matters most is the international competitiveness and sales volume of their products. Meanwhile, with economic downturns in Europe and the United States and mounting inflation, coupled with the lingering effects of last year’s over‑booking, declining purchasing power is likely to persist for some time. “To address these challenges,” Xu Kai said, “first, we must strengthen regional integration, enhance China’s cross‑border supply chain and logistics management capabilities, and unblock bottlenecks along the supply chain. Second, we need to cultivate more outstanding Chinese‑owned multinational enterprises and brands, bolstering the design, innovation, and R&D capacities of manufacturing firms. Only then can China shed its label as merely the ‘world’s factory’ and promote high‑quality ‘Made in China’ products that attract greater international consumer demand.”

Source: Global Times