Charleston, SC, USA – August 25, 2021: Peony, a 366 meter container ship owned by COSCO Shipping and flagged in Hong Kong, sails in the Port of Charleston.
In February 2022, it was not uncommon for importers to sign annual (or longer) freight contracts. Two years of supply chain disruptions and delays will get there. Large importers like Amazon.com and Walmart, in particular, valued predictability and reliability.
Their margins were generous enough to justify throwing their cards on the table for more insurance. The liners held all the leverage and it is real leverage given that the top five operators control about three quarters of the container capacity.
Yet, barely five months later, the companies are rushing to renegotiate these agreements. Consumer demand has changed drastically and is currently creeping up. Many freight specialists point out that the lower rates show up first in spot markets, complementing lower rates in longer-term contracts. Now, a reduction in transport costs is good news in many ways for retailers and manufacturers alike. But shippers are still paying far more than they did pre-Covid.
The general environment is now changing in favor of importers. Flexport, a San Francisco-based freight forwarder, noted that more shippers are forgoing contract rates and heading to the spot market in a bid to secure lower rates. Between June 2021 and June 2022, long-term rates from China to the US Pacific Rim nearly tripled. In March 2022, short-term rates had started to decline and in June they fell below long-term rates.
In May of this year, imports of consumer goods fell by about $1.5 billion. According to the Commerce Department, Americans have drastically reduced their large annual purchases such as televisions and furniture. To make matters worse, trucking is also experiencing a slowdown in demand. Yet, interestingly, truck rates have come down primarily due to the shift from the spot market to longer-term contract rates. Trucking spot rates fell 22% in the first half of the year. The most commonly used type of trucking, the dry van, recorded an average contract rate in June of $2.93 per mile. It was 17 cents more than the rate to move a charge in the spot market.
Contract rates will likely continue to decline as spot rates fall. However, shippers will only benefit if the price of diesel also falls. It doesn’t matter if you get a $2 an hour raise if inflation is costing you $4.