Macro Analysis /

Falling shipping rates to ease inflation pressures

  • Container shipping costs nearing pre-pandemic levels

  • Supply chains are finally normalising

  • Conditions for international trade remain challenging

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
26 October 2022
Published byETM Analytics

Container shipping costs nearing pre-pandemic levels

Manufacturers are mentioning freight costs much less now than they were a year ago, which is a good sign of easing inflation. This has to do with shipping delays and bottlenecks easing, transit times shortening, and freight costs, although still elevated to pre-pandemic history, coming off highs reached last year.

Regarding inflation, fuel and freight costs have been the two key drivers, and they have moderated in recent weeks. Now that the shipping market is operating as its supposed to, together with the decline in imports, the case for persistent inflation is starting to fall away.

Multiple chartering indices have reported steep drops in container freight rates recently. The Baltic Dry Index, widely used as a proxy for global shipping rates, has collapsed towards pre-pandemic levels and may have further to drop. While a floor has not yet been reached, businesses are finally seeing a reduction in supply chain costs, which will ultimately filter through to consumers with a bit of a lag and help to bring down general inflation.

Figures from the Baltic Dry Index shows that global shipping rates plunged more than 62% from May's highs to August’s lows. While these freight rates appear to have found some support from their lows, in recent months, they are trading below the exponential trendline, with prices now closer to pre-pandemic levels.

Factors such as red-hot inflation and soaring energy prices, monetary policy normalisation, China’s strict zero-Covid rules, and retailers and the bigger shippers adopting a more cautious outlook on demand are pushing down spot shipping rates, especially on the trans-Pacific Asia-to-US-west-coast route.

Yet even as imports from Asia into the US are falling, retailers are struggling with excess inventory, much of which was built up earlier in the year when ports were clogged and estimated delivery times soared. This reflects the expectation of weaker trade volumes which may signal the start of a recession. Another aspect contributing to the index's decline is that the supply of container ships has normalised.

Supply chains are finally normalising

After two years of shipping snarls, the tide appears to be turning. Faced with significant macroeconomic headwinds, container trade has faltered while container port congestion has decreased. Global supply chain pressures continued to decline through September, which has filtered through to October, making it six months of easing supply chain pressures. According to the Global Supply Chain Pressure Index (GSCPI), the September decrease was broad-based, and the year-to-date movements of the GSCPI indicate that global supply chain pressures are beginning to return to historical levels.

Ultimately, the war in Ukraine, following the destruction caused by the Covid-19 pandemic on supply chains, is driving a logistical shift, being characterised by more ‘friendshoring’, which could become a more considerable consideration in trade in the future.

There are other signs of normalising activity across shipping lines. Shippers are now generally able to work without lengthy shipping delays. The China to US west coast shipping time is now down to 83 days, compared with 112 days from January to mid-February, for example. Lower sea freight rates, seen with the Shanghai shipping exchange bulk freight index per forty-foot equivalent unit (FEU), will benefit China’s export-oriented companies in the fourth quarter, which can be a crucial driver of demand in the global market.

Bottom line

Overall, conditions for international trade remain challenging, with global demand at a relatively low point for the year. The lower shipping rates can aid importing nations to ease the burden on logistics expenditures, cut goods’ costs in many parts of the world as freight rates represent a large part of total costs, reduce current account deficits and blowouts on trade-reliant currencies. As such, widespread inflationary pressures will moderate, helping to prevent major and developing market central banks from moving interest rates into restrictive territory and causing a more severe global recession. With the gradual recovery of consumer confidence, the shipping market demand will likely pick up again early next year, which will help further improve the overall market supply and demand conditions.