The cost of maritime transport falls due to the lower demand for goods

The storm begins to abate.

Thomas Osborne
Thomas Osborne
03 September 2022 Saturday 17:46
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The cost of maritime transport falls due to the lower demand for goods

The storm begins to abate. It is still early to say if the sun has returned, but it seems that we have left the worst behind.

Meteorological metaphors aside, maritime transport prices have been falling for months in a row. After reaching unprecedented heights with increases of up to ten times compared to the historical average due to the collapse of supply chains due to covid, freight rates are progressively returning to normal.

The Baltic Dry Index, a benchmark average index that measures the cost of bulk transport, is already at pre-pandemic levels. The Drewry Composite Index, which measures the cost of 40-foot container ships, has been down for 27 weeks. In recent days it has already fallen 43% compared to the same week last year: it is trading at just over $5,000, when a year ago it was close to $10,000. As for the Freightos Baltic Index, another tool that measures container rates, it is at a 16-month low, 52% below the maximum.

With the confinement due to the coronavirus in 2020, trade flows were altered, containers were poorly distributed and the massive demand for goods with the boom in electronic commerce pushed rates through the roof. Little by little, the anomaly has been redirected.

Josh Brazil, Vice President of Supply Chain Insights, comments to this newspaper: "congestion in supply chains has improved a lot since the beginning of 2022. This is mainly due to the improvement of the covid situation in much of the world, which causes consumers to shift their purchases from goods to services. Global inflation is also causing consumers to buy fewer goods, giving some relief to the capacity of supply chains.”

Behind the good news there is always the other side of the coin: trade is usually a good indicator of the situation. When you slow down, discount or anticipate the arrival of the next recession.

In any case, according to the operators, this drop in rates is being uneven. To begin with, the Baltic Index refers to bulk cargo, but container ships have added storage costs that are slower to reduce. To give you an idea, the prices of this type of boat are still four times higher than before the covid.

Also, some sea routes remain highly congested. “It's true, prices have dropped, but the transport service is still just as bad. In the world, 38% of the ships still do not arrive on time and many of them continue to skip the scheduled stops”, says Jordi Espin, general secretary of Transprime and executive of the European Shipper's Council.

There are also geographical differences: the ships that travel the transpacific area have reduced their travel times by 48% so far this year and their prices have dropped markedly. On the other hand, on routes between Asia and Europe, loading times still exceed 46 days, when before covid it was 29 and rates are reduced more slowly.

One explanation is that in the United States there has been pressure to investigate possible monopolistic practices of shipping companies, while in Europe the Commission, more lax, will review its regulatory framework by 2024: here, European shipping companies and the different interest groups take the opportunity to defend their businesses, even in a down economic environment. "Symptoms of recession have pushed prices down, but these European companies still operate as a de facto oligopoly," says Espin.

The future is uncertain. “Shippers will continue to use cancellations as a tool to keep freight rates high, so it is unlikely that prices will continue to fall and will soon reach a bottom,” they say from Supply Chain Insights. Not forgetting geopolitical issues. “The tension between Taiwan and China could exacerbate supply chain problems in the Taiwan Strait, in a territory with the largest and busiest port complexes in the world. The domino effect of a conflict would be enormous, worse than the crisis in Ukraine”, they conclude.