There were more signs of inventory surpluses and a resulting slowing in orders by major retailers suggesting a decrease in demand in late June, cargo marketplace Frieghtos reported. Average ocean transit times so far in June have dropped nearly 25 percent since the start of the year. Inventory of certain retail goods such as furniture and electronics has increased as consumers shift spending to services or to the inflated costs of necessities, or both.
A recent survey of freightos.com marketplace users shows that SMB importers are experiencing these trends too: More than half of respondents report they’ve placed peak season orders early in the hopes of building inventory. Two-thirds said they are already experiencing a decrease in demand, with 84 percent of those attributing that dip to inflation.
Minimal port congestion in Shanghai shows there’s still no sign of a surge of pent-up demand many expected to follow the city’s reopening. Port congestion has also continued to improve at LA/Long Beach in the last two months, with fewer than 20 ships waiting for a berth currently, as a near record number of containers were processed in May.
Freightos.com data for end-to-end ocean shipments from China to the U.S. confirm this improvement showing average transit times so far in June have dropped nearly 25 percent since the start of the year – level with a year ago, though still significantly higher than pre-pandemic norms.
The reduction in congestion is likely helping to keep more capacity in rotation and, though the signs of growing inventories and dropping demand don’t easily jive with still-strong volume projections, transpacific container rates are still falling (moderately) at a time they were already beginning to climb last year: Asia – U.S. West Coast rates have fallen 17 percent so far in June, while rates climbed 11percent in June 2021.
Key insights:
- A survey of SMB importers on the Freightos.com marketplace reflect recent reports of growing retail inventories and dipping demand:
- More than half of respondents report they’ve placed peak season orders early in the hopes of building inventory.
- Two-thirds said they are already experiencing a decrease in demand, with 84 percent of those attributing that dip to inflation.
- Congestion continues to ease at LA/Long Beach, with Freightos.com China – U.S. ocean transit times down 25 percent since the start of the year, and level with a year ago.
- Transpacific ocean rates have fallen so far this month, though in June 2021 they were climbing with the start of peak season. Whatever the driver – relative improvements in container flows, volumes still to come as Shanghai rebounds, or a decrease in underlying demand – for now spot rates for many shippers are beneath contract rates. This trend could add some more instability at a time that many carriers and shippers might prefer better reliability.
Asia-U.S. rates:
- Asia-U.S. West Coast prices (FBX01 Daily) dipped 3 percent to $8,934/FEU. This rate is just 1 percent higher than the same time last year.
- Asia-U.S. East Coast prices (FBX03 Daily) fell 1 percent to $11,589/FEU, and are 16 percent higher than rates for this week last year.
Whatever the underlying driver of more readily-available space and falling rates – relative improvements in container flows, volumes still to come as Shanghai rebounds, or a decrease in underlying demand – for now spot rates for many shippers both on the transpacific and to Europe are beneath contract rates. Ocean contracts are notorious for not being honored during market swings. New forms of enforceable or index-linked contracts are working to solve the problem. But in the short term some carriers are reportedly looking to penalize contracted shippers who no-show in favor of savings on the spot market – another wrinkle that could add some instability at a time that many carriers and shippers might prefer better reliability.
While some measures record a drop in orders for U.S.-bound imports in April and May, enough arriving and backlogged containers were still processed in April to put volumes 5 percent higher than last year. May and June volumes are projected to be even higher than April, 7.5 percent greater than in 2021 and tied for the third highest monthly volumes on record, with July and August not far behind.
The recent dip in orders almost certainly reflects the lull in manufacturing while Shanghai was shut down. But the long anticipated shift in consumer spending from goods to services as the pandemic fades seems to have surfaced in the last couple months as well, and could also mean that part of the dip was due to a decrease in underlying demand.
Major retailers like Target and Walmart report carrying too much inventory of certain goods like furniture and electronics. Target is canceling new orders and working to shed inventory. A shift to services together with inflated prices for necessities is driving some of that overstock. But some spending is moving to increases in demand for other types of goods like apparel.
Many observers have expected a surge in volumes out of China as Shanghai reboots. But if the net underlying demand actually deteriorated during the lockdown, or enough importers had already pulled orders forward, then there may be no surge in the short term and less chaos and pressure on rates during peak season when compared to last year’s peak.
On the other hand, the volume projections for the summer remain higher than last year and well above pre-pandemic levels. Port congestion is still a problem, and any significant increase in traffic could mean an increase in delays and prices as capacity is stuck waiting in line.
Same goes for container rates. On the one hand, transpacific rates have plummeted during the lockdown. Asia – U.S. West Coast rates fell another 11 percent this week and are down nearly 40 percent since late March, and trans-Pac air cargo rates fell 38 percent in May to less than $9/kg too. If dropping consumer demand is the main driver then we should expect rates to keep falling. But on the other hand, analysis of the freight futures market suggests prices aren’t set to decrease much more in the near term, should climb later in peak season, and should remain elevated into next year. Contract rates remain elevated too.
What to make of all this?
Inventory gluts and shifts in consumer spending are clearly new developments and concrete signs that inflation and the wane of the pandemic in the west are starting to change the market. On the other hand, there is still likely enough demand and congestion to increase delays and ocean rates as Shanghai reopens and peak season progresses, though perhaps not to the extremes seen last year. Taken together, this mix of sometimes competing indications may signal the start of a gradual return to a new normal.
