Port congestion eases significantly! Will a downturn in the container shipping market follow?

Due to reduced demand for consumer goods shipped to the US, coupled with easing port labor shortages, the severe congestion at US West Coast ports during the COVID-19 pandemic is significantly improving. The number of ships waiting to dock has dropped to one-tenth of its peak, and container shipping rates have plummeted, marking the largest drop in history, indicating that global supply chain bottlenecks are finally easing.

According to the Nikkei, the supply and demand for container ships, which surged due to the COVID-19 pandemic, has slowed. As of September, the number of container ships "congested" waiting to unload on the US West Coast has significantly decreased, and freight rates on the US-China route have seen the largest drop in history.

Data from Nomura Research Institute shows that the number of container ships waiting offshore at the ports of Los Angeles and Long Beach has dropped significantly from over 100 at its peak in January to less than 10. Freight rates have also fallen rapidly. In the first week of September, the cost of container shipping from Shanghai to the US West Coast dropped 23% week-on-week to $3959.

According to Nikkei Asia, the US West Coast experienced port congestion starting at the end of 2020 due to the pandemic, which worsened last summer. At that time, shipping goods from Asia to the US West Coast took about 30 days, 2-3 times longer than usual, leading to a surge in freight rates amid global supply chain tensions. Now, with easing port labor shortages and reduced demand for products such as furniture shipped to the US, the number of congested ships has decreased significantly. Currently, the number of container ships waiting offshore at the ports of Los Angeles and Long Beach has dropped to less than 10.

It is noteworthy that the significant decrease in congested ships has also led to a drop in freight rates. According to data from the Shanghai Shipping Exchange, the freight rate for a 40-foot container shipped from Shanghai to the US West Coast in the first week of September was $3959, a 23% decrease week-on-week, exceeding a $1000 drop and marking the largest decrease since statistics began in 2009. However, although container freight rates have fallen significantly, they are still double the pre-pandemic levels.

The latest data shows that on September 9th, the Shanghai port export prices to the US West and East Coast main ports (ocean freight and ocean freight surcharges) were $3484 and $7767 per FEU, respectively, down 12% and 6.6% from the previous period. The US West Coast price hit a new low since August 2020. Based on the July 1st price of $7334, the US West Coast route has fallen by over 50% since the third quarter, which is contrary to the traditional peak season trend.

Considering that some US West Coast routes exceeded $30,000 last year, freight rates on US West Coast routes this year have fallen by 80-90% from last year's high.

The World Container Index (WCI) published by Drewry in the UK has also continued to fall, although the decline is less than the SCFI. Data released on the 8th showed a 5% week-on-week drop to $5378.68 per FEU. This is the 28th consecutive week of decline for the WCI, down 47% compared to the same period in 2021.

Drewry points out that the largest drop was on the Shanghai-Los Angeles route, down 14% or $780 to $4782 per FEU. Although these two indices are still well above historical averages, the continued and accelerating decline has led more people to question whether the container industry is now facing a sharp adjustment, affecting all major long-term contract rates.

HSBC Global Research predicts that spot container rates may fall to pre-pandemic levels, although shipping companies' contract rates should be higher than pre-pandemic levels. However, the end result will be that the profitability of container routes in 2023/24 will be 80% lower than this year's record levels.

In addition, according to data from Clarkson Research in the UK, new orders for container ships in 2021 increased 4.2 times year-on-year, reaching a 14-year high. If demand falls and a large number of ships are put into operation, a downturn in the shipping market could return.

The Federal Reserve Bank of New York announced on September 7 that the Global Supply Chain Pressure Index (GSCPI) fell from 1.75 in July to 1.47 in August 2022, the lowest since January 2021, meaning that supply chain constraints have eased for the fourth consecutive month.

The New York Fed noted that delivery times in all countries have shortened, and the reduction in backlogged orders in the UK has also put significant downward pressure on the index.

The trend of the GSCPI year-to-date shows that although global supply chain pressure continues to decline, it remains at historically high levels.

According to a report by the National Retail Federation (NRF), retail imports in July were 2.18 million TEU, down 0.4% year-on-year. Citing interest rate hikes and inflation, the NRF expects the downward trend in imports to continue until January next year, revising down the year-on-year decrease in imports for August-December to over 3.5% and projecting a 2.6% year-on-year decrease in January next year, marking the first sustained monthly decline since the pandemic.

Shipping industry insiders point out that European ports are facing congestion, and strikes may cause further delays, which will manifest in the coming weeks and months, affecting the efficiency of container shipping. Whether this will drive up freight rates is a matter of concern.