Freight rates on the primary ocean trade channels are sinking during a time typically identified as the peak season in the industry after cargo owners reportedly shipped their holiday goods early and inflation dented consumer demands.

The cost incurred to ship a 40-foot container to the West Coast in the US from China is now about $5,400 per box, a drop of 60% from January 2022, per Freightos Baltic Index.

Each container shipped to Europe from Asia now costs $9,000, which is about 42% lower than observed early in 2022. At the same time, above pre-pandemic levels, the rate for both routes peaked at over $20,000 in September 2021.

Market conditions have made a sharp reversal from earlier in the pandemic. Freight rates jumped almost 10-fold during the previous year owing to port backlogs, surges in cargo, and supply chain disruptions. As a result, importers were found scrambling for space on the box ships. Retailers like Walmart -1.10%▼ chartered personal vessels to overcome the bottlenecks in 2021.

In 2022, Walmart and other major retailers ended up with excess inventory after they almost raced to import their goods earlier than usual, anticipating delays in shipping and demand that did not eventually materialize.

Manufacturers, too, moved goods earlier than usual. Some popular apparel majors like Gap GPS 0.32%▲ and toy makers like Hasbro, HAS -0.67%▼ have reported spring surges in their inventory levels that typically are observed when the holidays are closer.

Regarding spot rates, the party is officially over, mentioned Jonathan Roach, a container shipping analyst associated with a London-based firm named Braemar. The backdrop of a possible global recession, enhanced by surging energy prices and rapid inflation, is driving down the market. The COVID-19 pandemic boom in demand for consumer products has calmed, and spending on travel, leisure, and services has reportedly made its revival since 2021.

Shipping rates are set to further ease for the remainder of the year and in 2023, per shipowners and analysts. A series of new vessels will hit the water over the next two years, with net fleet growth expected to be over 9% in 2023 and 2024. Comparatively, per Braemar, container volume growth will marginally be negative next year and could rise about 2% in 2024.

The Chief Executive of Best Buy Co. BBY, Corie Barry, mentioned during an earnings call held on last Tuesday that cost pressures related to freight transportation are easing.

She added that the electronics retailer, whose sales have been shrinking, is finding it relatively easier to find freight space on trucks and ships.

This is a non-peak season as, for the first time, volumes that moved in the second half are noticeably lower than what moved during the first, clarified Peter Sand, the chief analyst at Xeneta, a maritime-data provider. He added that there are a lot of uncertainties given the ongoing war in Ukraine coupled with the massive global economic downturn.

Spot-market container shipping rates have dropped so rapidly that Xeneta highlighted in one of its reports in August that the prices have now come closer to long-term contract prices. These typically would come at a discount and even be below contract rates in some markets. Even major importers like Walmart move cargo via long-term contracts instead of paying for spot prices.

The ten largest liners have been enjoying bumper profits for the last two years. Recent quarterly earnings at Maersk MAERSK.B -0.27%▼ A/S were seen to be $8.59 billion, surpassing what it usually makes in a year. But many firms have warned about the weakening market conditions in the current year’s second half.

We ought to pay attention to the impact of inflation on consumer behaviour and demands, said China Cosco Shipping Corp., a firm that operates the fourth largest box ship fleet in the world. The industry’s supply side will likely encounter a unique situation with the changes in new vessels’ delivery.

Shipping analysts and executives have said that they do not expect freight rates to return to what was prevalent in the pre-pandemic levels. Part of the reason would be higher fuel costs. In 2019, the average price to send a container across the Pacific to the West Coast in the US was about $1,500.

Some ocean carriers are also investing billions in new and advanced technologies and fuels to reduce carbon emissions substantially. The additional cost of cleaner shipping will not go away. Instead, Roach said it would be a crucial factor in elevating rates in the long term.

References: Live Mint, The Wall Street Journal