Container shippers are enjoying relief from the sky-high container rates of the pandemic. Shipping volume has reduced, and congestion has eased, especially at L.A./Long Beach, all from American consumers keeping their wallets in their pockets more. China to West Coast U.S. rates are now at pre-pandemic levels. The long-asked question of the past several years of container rates returning to normal has been answered, the answer is now. But that brings the question, will the rates level now, or will they continue to drop? After all, some spot rates in select lanes have been bumping up. Is that a forecast of broader pricing increases?
Some are forecasting an increase in import volume, but even with an April report ‘bump’ in traffic, I am not buying a volume recovery unless it is sustainable, and someone will have to tell me why it is. Do I have the answer? Nope, but like many, I have a good guess and ask why will container rates level and trend back upward? The building blocks of rate increases are higher consumer spending resulting in higher container volume, and diminished ocean carrier capacity. Currently we have none of those three building blocks in the bank.
Consumer spending may level or even rise to an extent, thus supporting leveling or raising of container rates, right? Unfortunately, that is a mirage. Inflation, higher interest rates, and changes in how Americans spend their money take away the thunder of American consumerism’s impact on TEU volume. Higher spending on housing, services, higher interest rates, health care services, and utilities do not get 20-foot containers stuffed with goods bound for U.S. ports.
For ocean carriers, using just OOCL and Evergreen as our test cases, according to FreightWaves, they are still in good shape. While revenues have been falling since quarter three of 2022, they are still above the fourth quarter of 2019, but not by much. There is one lingering ‘but’ that should be considered; ‘BUT’ many ocean carriers ordered new vessels and added capacity during the pandemic economic orgy. While some capacity can be made to vanish by ending leases and sending older vessels to be scrapped, many new-built vessels are now being delivered. If carrier revenues are nearing 2019 levels, TEU volume trending to pre-pandemic numbers, but ocean carrier capacity is inflated above pre-pandemic levels, rates have little reason to stabilize or get upward pressure. It wouldn’t take much of a headwind for ocean container rates to continue to fall a little further and I believe those head winds will be there.
If I am right, and even a broken clock is right twice a day, there are two things to watch. The first is an actual increase in U.S. consumer spending on goods or possible continued declines. That will be the driver. Of course, the overall economic conditions and outlook have a big fat finger on the scale of what the American public will do, but some of our behavior is unexplainable. Not many forecast the downright buying frenzy triggered by the pandemic and how long it would last. Also, this is the same American public that started movements to swallow dry cinnamon, eat wildly hot peppers on YouTube, pop Tide Pods into our mouths, and created the concept that storming Area 51 was somehow a good idea. Who knows what the American public will do? While we Americans are average compared to the rest of the world, we truly excel at creating social and economic stampedes once an idea gets inertia on social media. Millions of us poured ice water over our heads, for crying out loud.
The number ‘two’ of the two things I am curious about relates to the ocean carriers. What will the ocean carriers do if consumerism continues to shrink and shipping volumes follow the same path on a global level? Even with older vessel demolitions, ocean carriers will have more capacity than in 2019 and fewer TEU’s to put in that vessel capacity. Since creating ocean carrier alliances circa 2017, ocean carriers have shown good discipline in pricing, working together, and sharing vessels. Before 2017 carriers operated independently as competitors. Do you know what else has not happened since before 2017? We have not had a brutal recession on a global scale. The ocean carrier alliances have never been tested under the harsh realities of a stiff downturn. Carriers have shown good discipline so far, however, allegiance to vessel sharing and working together may be tested when some alliance members run thin on operating revenue.
Of course, consumers may come back to the table and fend off shrinking container cargo volumes or carriers may somehow get away with price-fixing. If that is the case, then my guess is not correct. If I am wrong, I will cheerfully refund any fees I charged you for reading this article.