Consumer sentiment towards retail has been consistently falling over the last few months on account of rising inflation, even as prices of everyday commodities climb. Major retailers like Walmart, Target, and Amazon have indicated inventory overstocking, which could see them cutting down their imports to improve inventory turnaround times.
With demand cooling from both the consumer and retailer segments, it is little surprise that ocean freight spot rates between China and N.America are seeing new lows this year.
Ocean container spot rates continue to decline
“Ocean freight spot rates are continuing to drop fast. The SHIFEX index shows China to the US West Coast has gone below $7,000 per FEU while China to the US East Coast is moving downwards to below $9,000 per FEU. Consumer retail expenditure seems to be at a tipping point, inevitably reducing total volumes getting ashore. We expect this to push prices further down in the future,” said Shabsie Levy, the CEO and founder of Shifl.
The ocean freight rates are intrinsically connected to the retail industry as it makes up over half of all imports into the country. While global container lines have tried measures like blanking sailings and removing capacity from the market, falling retail demand has pulled down ocean spot freight rates and continues to do so.
“This drop in freight rates will go a long way in helping combat the rising inflation. The issue of increased freight rates and inflation has been a major topic of discussion in the US markets including the efforts by the US Government and Congress who have been actively involved in trying to curb ocean freight prices including the recent passing of the Ocean Shipping Reform Act of 2022 (OSRA22), aimed at lowering the costs of everyday items and putting brakes on the high inflation rates,” said Levy.
This aside, the growth of new import orders has also slowed down, which points to an extended period of volumes staying lower than expected. While it was anticipated that order numbers into China would pour in at high volumes with the loosening of restrictions in Shanghai, it was not to be, as it received a lukewarm response from shippers.
With orders taking about a couple of months to be serviced from order to delivery, a fall in the number of orders indicates lower import volumes making their way into the US in the short term.
“While long-term ocean freight prices remain higher than spot ocean freight prices, the situation may not last long. When shippers realize spot prices continue to cascade, they could look to renegotiate their contracts with container lines. With import orders not staying strong in the middle of June — a regular high season and the Chinese adamance to hold on to COVID-zero measures can result in uncertainty in import flows, negatively impacting freight prices over the course of this year.” said Levy.
Samsung, the seventh-largest importer into the US, has reduced its planned inventory order by half for July. The second-largest US importer, Target, announced its intentions to cut its inventory orders because of its ballooning inventory.
Even as several major importers with bloated inventories feel the pinch of storage costs and slower inventory turns, the container volumes per order also witness a decline.
Increase in cargo lead times
Vessel queues have drastically fallen across the ports of Los Angeles and Long Beach, with ship numbers dropping to 25 — a far cry from the historical high of 109 ships in January ‘22 while the queues have been increasing on the East Coast.
While the ports of LA and LB have been reporting historically high volumes, rapidly falling vessel queue numbers reflect cooling retail import demand.
The sheer number of disruptions to production in China due to the country’s strict COVID zero restrictions is another cause for a fall in Chinese volumes reaching the US. Restrictions saw Chinese production epicenters Shenzhen and Shanghai suffer for several months, lowering output that led to fewer import volumes.
The increasing traffic to the East Coast inevitably led to increasing cargo lead times as vessel queues increased across the port of New York. The cargo lead times have risen from roughly 51 days in January 2022 to 56 days in May 2022.
Data from Shifl also reflects the position on the ground in terms of cargo lead times. Wall Street Journal is reporting that “One culprit for the inventory piling up at many retailers is long lead times that are getting even longer.
Factory closures, shipping delays, port backlogs and other supply-chain bottlenecks wrought by the Covid-19 pandemic are prompting chains from Target Corp. to Gap Inc. to start designing new products and placing orders with overseas factories further in advance, making it harder to match supply with demand.”
“Our data indicate that the hike in interest rates by the Fed is another blow to consumerism, as other industries, including services and real estate, see a hit in fortunes. Mortgage rates going up significantly from last year can result in slowing house construction starts, further reducing related retail spending,” said Levy.
“The U.S. distribution system is stuffed with stuff. Business inventories in April were up nearly 18% from a year ago. Inventories at non-auto retailers were up 20%. One merchant after another — Target, Walmart, Costco, even mighty Amazon — has reported disappointing earnings and is marking down excess merchandise like crazy.
Merchant wholesalers — a category that includes companies that import everything from washing machines to smartphones for sale in the United States — show much the same trend.” wrote Economist Marc Levinson on his LinkedIn.
“The reason for the excess inventory? Simply enough, consumers have stopped spending with abandon. As shopping habits revert to pre-pandemic norms, inflation decimates buying power, and home sales stall, the demand for consumer goods is stalling as well.” added Levinson, echoing what Shifl has been saying previously in support of the dropping ocean spot freight rates.
Disclaimer: The insights in this report are based on Shifl’s own freight data drawn from the significant volume of shipments handled by Shifl.
About Shifl: Shifl is bringing the supply chain into the future with technology and innovation that brings a huge array of real-life benefits to its customers. If you are an importer looking to bring your business into today’s digital age, be more in control, and pay less overall — Shifl is for you. Shifl is headquartered in New York and maintains a presence in China, India, Vietnam, Malaysia, Bangladesh, Georgia, Dominican Republic and The Philippines. To learn more, visit https://shifl.com.