icon16 Nov, 2022

Ocean Freight Rates Continue to Drop. What Does it Mean?

Ocean freight rates have experienced huge drops over the past couple of months. In September, container rates on ocean liners from China to the US West Coast had dropped 72% from January’s rates, and those kinds of exponential ocean freight rate drops are being seen across most shipping lanes around the globe. What’s happening that we’re seeing these huge drops and what will it mean? Read on for NEWL’s take on the situation. 

Why are Ocean Freight Rates Dropping So Quickly? 

As is ever the case, there’s no one reason why ocean freight rates are dropping off. The supply chain is a complicated organism, and most significant swings in the market are multi-faceted. Here are some of the factors playing into the plummeting ocean freight rates we’re seeing now. 

Consumer Demand is Showing Signs of Easing 

Despite dips in the economy throughout 2021 and 2022, consumers hadn’t quite gotten the memo. Consumer demand was still going strong despite the shrinking economy. Now? There are some signs that demand is slowing. High inflation and the downturn in demand are signs that a recession looms on the horizon.

 

We also must consider that consumer demand has been erratic over the past couple of years. Companies struggled to predict what their target audience would do, and consumers have often acted against how traditional economics would have predicted over the past several years.

 

This has led to companies acting more conservatively when it comes to ordering. It looks like consumer demand is slowing, and many companies have been burned by over-ordering in the past couple of years. Companies are acting accordingly. 

Excess Inventory Means Fewer Orders 

About that over-ordering. 

 

During the height of the Covid-19 pandemic, companies took a lot of hits due to the inability to get their hands on inventory. Many large companies took steps to increase inventory to cushion themselves against supply chain issues so they could continue to serve their customers and their shareholders as demand for consumer goods raged.

 

Now? Those large companies like Nike and Walmart have found themselves with an excess of inventory. They don’t need more stock, and many companies don’t have anywhere to put more stock if they did get it in. Warehousing space is in short supply, so companies are struggling to find places to put the inventory coming in as it is. 

The Supply Chain is More Stable 

As the pandemic-induced supply chain snarls untangle and consumer demand drops off, some of the pressure on our complicated supply chains is lifting. Lower levels of consumer demand also mean less freight moving, taking additional strain off the supply chain and allowing shippers, carriers, and 3PLs to get caught up.

 

It’s important to note that, though global supply chain pressures are easing, they’re still there. Geopolitical events, continued threats from Covid-19, and weather-related issues leave the supply chain vulnerable to many of the same issues we’ve seen over the past couple of years. 

What Do These Dropping Ocean Freight Rates Mean for the Supply Chain? 

Sailings Will Continue to Cancel 

Ocean shippers have been canceling sailings to try to level off the supply (container space on cargo ships) with the demand to turn rates around. Reports show that up to 1.5 million in TEU capacity was blanked over a 12-week period in the Asia-US West Coast shipping lane over the summer. Other lanes are seeing cancellations, as well.

 

Cutting out sailings to level off demand hasn’t had an immediate effect on the rate slide. The continued rate slide combined with demand still being suppressed means that ocean carriers will likely continue to cancel sailings. These blanked sailings could eventually make it difficult for companies to get their products imported in a timely manner. 

Port Congestion May Ease in Some Ports 

Port congestion has still been a real issue in a lot of ports, including both Vancouver and Montreal. As fewer ships come in, ports will be better able to manage the backlog.

 

However, fewer sailings and fewer ships coming into ports in North America and the world over are not and have not been a magic pill for the port congestion crisis. Many ports are still seeing long wait times despite the volume reductions. 

Overall Freight Costs are Down 

The decrease in consumer demand doesn’t just affect ocean freight rates; it affects shipping rates in general. Companies are getting some much-needed respite from high freight costs. Over the course of 2022, freight prices, especially ocean freight prices, have dropped steadily as capacity across the board has loosened. 

Companies Expect This to Last Through the New Year 

Continued high levels of inflation and ongoing geopolitical issues mean that these low freight rates aren’t likely to change in the very near future. While we typically see peak shipping season in the 3rd quarter, it appears that this year’s peak fell in the 2nd quarter. Even a strong holiday shopping season isn’t likely to turn things around drastically as retailers planned to avoid supply issues through their peak sales season. 

Reduced Demand Means Companies Need to be Cost-Conscious 

Though freight costs may not be hitting companies as hard presently, reduced consumer demand combined with unpredictable consumer behavior is making its own impact. Companies still need to be conscious of their supply chain spending since it’s an area where they may be able to reduce to cut overall costs. Careful inventory management may make the difference between sinking and swimming as retail sales face hardships.

 

With the freight market pendulum swinging in favor of shippers right now, it’s a perfect time to negotiate favorable rates, build strong relationships and loyalty with a core group of carriers, and work to improve customer satisfaction through improved transportation and logistics level of service.

 

Do you need a strong 3PL partner to help you make the most of the shipper-friendly freight market? Reach out to our team at NEWL to learn more about our service offerings.