While there has been a significant improvement in the availability of containers, exporters have concurred that ocean freight rates have fallen by up to 15%, providing interim relief to importers and exporters. The volume growth in exports may be miniscule since global inventory is high and key rates in world markets are ever increasing.
Premium freight agreements written when carrier capacity was tight are losing their shine as there is a slowdown in demand and a slash in shipping rates. Most organizations are renegotiating shipping contracts they signed at the peak of the pandemic-driven surge in freight demand are reducing their cost to leverage lower costs.
The decrease in transportation costs is great news for both manufacturers and retailers after two years of rising expenses. Shippers have observed that they continue to pay several times more than they did before the pandemic.
Multiple factors are contributing to this decline across trucking and ocean shipping but an ease in demand is a common factor. The decreased costs are appearing first in spot markets and are aiding in lowering long-term contract rates.
According to the Global Container Freight Index from Freightos, the global average cost has reached >US$11,000 in September 2021 after holding steady at around US$1,500 per 40-foot container until June 2020. Costs were even higher for routes like China/East Asia to the US West and East coasts, around US$14-15,000 per container at their peak to US$20,000 if buying at spot freight rates.
One official at a large U.S. importer noted that things are trending in favour of the importers and cited that it recently reduced its charges by 15% to 20% ocean contract rates signed a few months ago, expecting further reductions in the months to come.
San Francisco-based freight forwarder Flexport is witnessing more shippers jettison contract rates on the spot market in favour of lower rates.
Imports of consumer goods have acutely fallen by some $1.5 billion by value in May while container imports into the U.S. remain strong by volume with rising congestion at East Coast ports.
A recent webinar from the Journal of Commerce emphasized on the current state of supply chain, primarily focusing on demand and ocean freight shipping.
Here are the key takeaways:
- Major importers are again witnessing an increase in freight costs and the pressure on the consumer will gradually increase.
- It is discussed that ocean freight costs will significantly decline in early 2023.
- Consumers may pull back in early 2023.
- Tariff waiver will not necessarily bring down costs.
- ‘Just-in-time’ buying has become ‘just-in-case’. Importers are adding more to their inventories than before and Just-in-time’ buying has become ‘just-in-case’.
- Demand for shipping space is high and so is the falling consumer demand.
Amidst ease of global supply chain disruptions, freight rates for Indian exporters and importers have fallen after a sharp rise. According to Elchemy, freight rates for a 20-foot container in July were 20-30% lower across their route to and from India, freight costs in the U.S. have come down by about 20-30% from their peak last year. Rates for the U.A.E. have improved by 20-25% from the peak during the first quarter.
One of the major challenges is that the costs continue to fluctuate every single day and needs to be reevaluated till the time the payment is made after booking of the container is confirmed. The decline in ocean freight rates reflects the global correction in shipping and container costs.
How to protect against volatile shipping costs?
It is advisable for shippers to sign longer-term contracts with shipowners to overcome issues of volatile cost and availability. Businesses shipping regularly may be able to negotiate a longer-term contract with freight forwarders due to the amounts of cargo involved.
Businesses have also been diversifying their sourcing strategies to focus on reshoring rather than having suppliers in East and Southeast Asia. Companies achieving this can benefit from shorter lead times, reduced shipping costs, and lesser dependence on China.
Companies may decide to buy components in bulk to keep them as inventory and avoid the need to ship frequently. Paranoid with high shipping rates? Reach out to Elchemy for a cost-effective solution when considering sourcing from India and other low-cost regions of Asia.
