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Is the shipping industry headed for a full-blown recession?


                                EMC SHIPPING


Containerized imports to the U.S. have fallen by more than 36% since May 24, and U.S. import demand has fallen off a cliff. In addition, freight rates are also declining. Recently, the Freightos index showed that the container spot freight rate from China to the West of the United States fell by 38% month-on-month to $9,630.


In this regard, JPMorgan transportation and logistics analysts issued a recession warning for the shipping logistics industry. After the report was issued, the capital market responded quickly. From the European market and the US market on June 8 to the Asia-Pacific market on the 9th, the global shipping stocks were bearish and experienced a slump across the board. The line continues to drop slightly.


                                        MSC SHIPPING


In fact, on Tuesday, June 7, the well-known data analysis website Freightwaves pointed out in an article "US import demand is falling sharply" that the latest sea container booking data shows that despite the first five months of 2022 U.S. imports of goods are strong, but import demand is not only softening, but falling sharply. The Freightos index showed container spot rates from China to the West of the United States fell 38% month-on-month to $9,630 as capacity across the Pacific remained relatively stable.


Containerized imports to the U.S. have fallen by more than 36% since May 24, a troubling sign for the U.S. domestic freight market. The U.S. domestic freight market has been benefiting from an unprecedented surge in U.S. containerized imports over the past 18 months. With transit times for these imported containers averaging between 30 and 35 days, the report noted that the first few weeks of July will see weaker volumes at U.S. ports.




U.S. import container volumes are rapidly returning to normal


U.S. retail giant Target warned investors on Tuesday that its profits will take a short-term hit because there is too much inventory and aggressive measures such as reducing unwanted items, canceling orders with suppliers or offering discounts to customers are needed to eliminate excess inventory. And Walmart also issued a performance warning, and the retail giant seems to have "suddenly" began to realize that it had ordered too much inventory.




Inventory rises


If consumers now shift their buying trends from goods to services, those goods-producing companies could be stuck with too much or the wrong stock in an attempt to capture sales, the analysis said. The buildup of U.S. merchandise inventories will inevitably lead to a slowdown in new import orders abroad. In addition, the unabated situation of high inflation has further reduced consumer demand in the United States, so the number of imported containers will further recover to close to 2019 levels.




Imports fell


High inflation has reduced consumer demand in the United States, resulting in a decline in the demand for shipping containers imported to the United States. The retail industry "misjudged the situation" under the shrinking US consumption, resulting in a high excess inventory, and the scramble among peers to clear inventory is bound to lead to a recession in the freight industry. After the decline in consumer demand, the U.S. import demand fell off a cliff, and both volume and price fell.


Judging from the current seaborne prices, the latest issue of the * (June 9) Drewry index continued to show a slight downward trend, and it is expected that the index will decline slowly in the coming weeks. Shanghai-Los Angeles and Shanghai-New York rates fell 1% to $8,613/FEU and $10,722/FEU, respectively. Spot freight rates from Shanghai to Genoa fell 2% or $191 to $11,485/FEU.




According to the FBX index released by the Baltic Shipping Exchange, the shipping price from China/East Asia to the west coast of North America was US$10,076/FEU, down 12% from the previous issue, and the price from China/East Asia to the east coast of North America was US$12,663/FEU, down 13% from the previous issue.




JPMorgan Chase lists several categories of the current shipping market status as follows:


In terms of container freight volumes: Global container traffic increased by 4% in March 2022 compared to 2019, with a 43% increase on the Asia-North America route. Generally speaking, "normal" traffic growth requires a compound annual growth rate of 3-4%, so from this point of view, the global freight industry is weak except for the Asia-US route. And this kind of concentration on one route will exacerbate related infrastructure and labor tensions, causing supply chain congestion. It expects a drop in U.S. cargo volumes to help ease the situation, potentially freeing up about 12% of vessel capacity currently stuck in congestion.


In terms of freight: Looking at the world, all freight indices are down about 20% year-to-date. On the China-US west coast route, although the Shanghai Export Containerized Freight Index (SCFI) was basically the same as at the beginning of the year, the FBX index released by the Baltic Shipping Exchange fell by 31% during the same period. And the key point is that the FBX index has been rising from the beginning of the year to the beginning of May, and the main decline is concentrated in the last month.


On the freight forwarding side: A sharp drop in freight rates in the short term could have a positive impact on the profitability of freight forwarders as they have not shared the cost savings with their customers.


On the fuel side: The difference between high and low sulphur oil prices for marine use has widened considerably in recent weeks and is currently around $360/tonne, compared to close to $120/tonne in early May. This is not good for those fleets with low installation rate of desulfurization equipment, represented by Star Shipping.


JPMorgan concluded that the contraction in consumption "has negatively impacted the industry as a whole, especially those for container shipping, as strong demand from U.S. consumers has been a key factor in the rise in global shipping rates to historic levels since the pandemic. In the face of this situation, JPMorgan analysts issued a recession warning for the freight industry. The analysis pointed out that this not only indicates that freight rates are falling, but also implies that freight rates will further decline as the demand for goods plummets after the United States falls into the recession decline.


In view of the current situation, the transportation demand of Shanghai Port continues to improve. Some media say that container freight rates will be the first to stabilize and rebound? The certainty of resumption of work and production order in Shanghai has brought strong support to the shipping market. With the arrival of the traditional peak season for consumption, the global container supply chain market may further raise market expectations for freight rates.


According to the data released by the Shanghai Shipping Exchange on June 2, the North American route, the transportation demand is generally stable, the supply and demand relationship remains balanced, and the market freight rate is still slightly down. However, the freight rates of other routes are on the rise: the Persian Gulf route, after the traditional "Ramadan", the transportation market is generally improving, and the market freight rates continue to rebound. On the Australia-New Zealand route, the destination market continued to maintain a high level of demand for all kinds of daily necessities, transportation demand continued to improve, and spot booking prices continued to rebound. In the South American route, the transportation demand is generally stable, the supply and demand relationship is good, and the market freight rate is higher.


Regarding the trend of shipping prices in the later period, Liu Xiangdong, deputy director of the Economic Research Department of the China Center for International Economic Exchanges, said that in the short term, the increase in transportation capacity demand will drive up freight prices, but this situation will not last for long. It is expected that shipping prices will gradually fall in the third quarter. It is mainly reflected in two aspects. On the one hand, the newly added shipping capacity due to the tight shipping supply has been put into use. The tight supply of shipping capacity has caused the supply and demand basis of "hard to find a box" no longer exists, and the rise in shipping prices will be under pressure; On the one hand, overseas supply chains are also gradually recovering.



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