Easing supply chain disruptions drag down shipping rates

As the immediate aftershocks of the COVID-19 pandemic and the war in Ukraine on global trade gradually subside, signs are growing that the finely tuned system of ocean shipping is getting out of the crisis mode.

The massive disruptions to global supply chains, caused mainly by COVID lockdowns in China and having found a vivid expression in ship backlogs at ports, are showing signs of easing. Seabound shipping is ready to assume its overwhelming importance of carrying 90% of all transportation across the world.

Freight rates drop to pre-pandemic levels
In Germany, the shipping chaos has been brought under control also because of a bargaining deal struck between dock workers and port authorities that ended a disruptive strike this fall.

Martin Kröger, chief executive of the German Shipowners’ Association (VDR), says the situation has eased “almost back to normal.”

“The backlogs of ships along European coasts have been overcome,” he told DW, adding that shipping capacity wasn’t so tight anymore as at the end of last year. Another piece of good news, he said, was that ocean freight rates are falling significantly. “Shipping conditions are similar to what they were before the pandemic.”

German business daily Handelsblatt has published data showing that shipping rates have come down to pre-pandemic levels, with a 20-foot container from China to Northern Europe, for example, now costing $1,479 (€1,420) on average, compared with around $8,000 at the beginning of 2022. Shipping a container from Shanghai to the US West Coast “is even cheaper than in 2019,” the newspaper reported.

Supply chain hell
Vincent Stamer from the Kiel Institute for the World Economy explains that a surge in demand and so-called frontloading by importers had led to the previous supply bottlenecks.

“During the pandemic, consumers in Europe and North America massively bought consumer electronics devices, furniture and sports apparel, causing importers to hastily fill their inventories to meet the demand,” he told DW. However, the boom is now subsiding and demand for such goods is dropping, he added.

With the US hovering on the brink of a recession, and growth in Europe already falling off the cliff, the prospects for further economic expansion are indeed dramatically reversing. “Fears of rising inflation and an economic downturn are weighing on the demand for goods,” Stamer said, driving down the “need for shipping space and the level of freight rates” at the same time.

Good news for inflation-plagued consumers?
Stamer also thinks the fall in global shipping rates will trickle down to consumer prices as goods manufacturers previously had to spend “a tenth of each dollar earned” on transportation and logistics. “Therefore, an easing of freight rates will lower the costs for companies and, finally, also consumer prices.”

But Martin Kröger disagrees, saying shipping costs make up only a “very tiny amount” of the shelve prices to be paid by consumers. He even thinks that freight rates are not going to fall any further, as additional expenditures for shippers caused, for example, by higher environmental standards would cost “a lot of money.”

“Stringent new CO2 regulation imposed by the EU and aimed at gradually introducing less polluting fuels in shipping will increase our costs because they are much more expensive than the conventional fossil fuels we currently use,” he said.

Cost wave building
Kröger expects the new environmental standards on fuels to hit global shipping rates “as early as next year.” Industry pundits are expecting “an elevated demand for tonnage,” he said, as companies would “lower the speed of their ships to bring down their emissions.”

For the medium term, industry representatives like the German VDR expect a change in shipping companies’ investment policies, including ordering smaller ships with less tonnage to meet emissions targets. All of this would drive up shipping rates, Kröger says.

Transportation ‘pork cycle’
In economics, the term “pork cycle” describes the phenomenon of cyclical fluctuations of supply and prices in livestock markets. It was first observed in 1925 in pig markets in the US when prices were high enticing pork breeders to boost their investments. Eventually, the market became saturated, leading to a decline in prices. Production is thus decreased and again prices increase.

Kiel institute’s Stamer is convinced that shipping companies are now seeing “the beginning of a pork cycle” in which nobody can currently say exactly when demand for tonnage will match supply.

The VDR industry group sees German shipowners “on the right way” with their strategy to upgrade their ships to the newest environmental standards. But Stamer has his doubts and points to some dangerous pitfalls for the industry. New investment in less polluting ships would “increase transport capacity thus exerting downward pressure on freight rates,” he said. As a result, German shippers “cannot expect the huge profits of the past to continue into the future.”

While the jury is still out on the industry’s future investment in capacity, VDR is hoping for the good times to last a little longer, even though the exorbitant margins of the past year are definitely over, it admits. Making a good profit though is “essential,” VDR’s Kröger said, for the industry to be able to “afford all the required climate-saving technologies needed to meet the emission reduction targets.”
Source: Deutsche Welle