Editor's Note: This story is part of a weekly analysis of the logistics industry's latest statistics. See an overview in our data hub.
- Freight rates from China to both coasts in the U.S. fell over the course of June, suggesting supply and demand are regaining balance after a year of overcapacity and various shocks to the market, according to data from the Freightos International Freight Index (FIFI).
- Not all ports have reported import data from May, but early figures suggest a spike in loaded inbound container volumes to the U.S. The top three California ports saw import increases of 10% or higher, while East Coast ports benefited from the first calls of post-panamax ships.
- The index also shows spot rates have been on a steady decline since February and now lie around the same levels as rates seen last June. Rates began to spike last September, as Hanjin's bankruptcy combined with peak season and industry consolidation to reduce the available supply.
A rise in demand, coupled with a decrease in supply (through more efficient ship utilization), would typically raise rates, so the fact spot rates have been consistently declining since February support what analysts have been saying for a while; that the ocean freight industry has been suffering from a severe market imbalance.
A look at year-over-year trends in spot rates, per FIFI, are a case in point. As of the first week of January, spot rates were up 158% compared to the previous year. Since then, rates have fallen nearly 40% to $1,262 per 40 foot container as of June 19. Today, rates are 16% below the levels recorded this week last year.
The massive fluctuations can be explained by a few major events. First, the spike in freight rates that began in September can be tied to Hanjin Shipping's declaration of bankruptcy, which suddenly idled countless ships and containers near ports for months. The industry took a while to recover from the disruption.
But the event highlighted another hard truth: The industry was suffering from a self-inflicted excess of capacity, due to an arms race between the top shipping companies for larger vessels, which led to high debt-to-equity ratios and staggeringly low shipping rates. In other words, the year-over-year gap in January was due not just to markedly high rates in 2017, but also extremely low rates in 2016. This, in turn, affected various shipping lines' solvencies.
Widespread industry consolidation was the third shock, peaking in April 2017 with the launch of new alliances. In the long-run, the move is expected to keep rates more stable due to a more efficient utilization of vessels, but in the short-term caused a rate spike in May due to unexpected delays, as the industry adapted to distinct shipping routes and limited container availability.
In terms of supply, then, various contrasting forces were at play affecting rates over the past year. Hanjin's bankruptcy and new alliance shocks forced rates up, while the more structural issues of overcapacity and industry consolidation kept them down. Demand for imports from China, as measured in the first chart and below, has risen consistently over the past decade, acting as another force to deflate rates.
Clearly, deflationary forces are winning out. But, even then, the trends represent good news for shipping lines. The supply and demand gap is steadily being corrected, and this is projected to help keep lines afloat (and even profit) this year. Maersk Line projects it will record a $1 billion rise in profits in 2017. What would have been an outrageous forecast a year ago now appears feasible. In fact, one analyst is saying Maersk will double that forecast to gain up to $2 billion more profits this year.