Late last week, when looking at the latest global container shipping rates we observed what appears to be a peak in rates, noting that there was a "glimmer of hope" for global snarled supply chains.
a glimmer of hope pic.twitter.com/favHWJQHQd— zerohedge (@zerohedge) October 1, 2021
Overnight, Japan's Nikkei picked up on this writing that indeed the cost of shipping between China and the U.S. plunged this week after hitting record highs in early September as the off-season approaches, a power crunch slows Chinese manufacturing and speculators rush to sell their hoarded shipping spots.
Citing an executive with a Shanghai freight company, Nikkei noted that the cost of shipping a 40-foot container from China to the U.S. West Coast dropped nearly half in the previous four days, going from about $15,000 to just over $8,000, while the spot rate for shipping to the East Coast had fallen by more than one-quarter from over $20,000 to less than $15,000.
Of course, we need some context here, and as a reminder, prior to the pandemic, the rate was usually around $1,500, and has since skyrocketed, due to excessive demand and lack of supply: on the demand side, U.S. consumers stuck at home have splurged on durable goods, such as gym equipment and furnishings. However, congestion at ports around the world led to a dearth of containers and speculation by scalpers looking to make a profit from rising prices.
This pushed container rates to record highs, however in the last week of September something finally snapped and the shipping rate on a route between China and the West Coast almost halved. The route is operated by Matson, one of the biggest U.S. container freight companies. Matson said it has nothing to do with the slump in spot shipping rates, and the Oct. 2 long-term rate for shipping a 40-foot container from China to the West Coast it reported to the Shanghai Shipping Exchange was up $200 from a month earlier.
Then there is the difference between spot and long-term rates: an analyst at Tianfeng Securities said that shipping companies often set the long-term rates, but the spot rates quoted by shipping forwarders are the actual market prices determined by supply and demand. Many long-term rates listed on the Shanghai Shipping Exchange for shipping a 40-foot container from China to the U.S. are under $5,000, much lower than the spot rates.
And here comes the bad news: as we first explained over the weekend in "A Dip In Shipping Rates: The End Of The Nightmare, Or Just The Eye Of The Hurricane", the plunge in spot shipping rates, the analyst said, is mainly caused by the imminent off-season and a reduction in manufacturing due to China's ongoing power crunch.
Multiple provinces across China are suspending factory production to ameliorate energy shortages or to meet the central government's energy consumption control targets. As production restrictions began to be implemented, scalpers dumped their hoarded container spots, contributing to the price tumble, the source from the Shanghai shipping company said.
Furthermore, scalpers had to rush to sell off the spots between Oct. 1 and Oct. 7 before the start of the seven-day Chinese National Day holiday, which starts at the beginning of the month and last through Thursday during which virtually no products will be shipped out of China.
In other words, demand is still there, but there is simply no actual production to ship out of China!
Commenting on this sudden reversal, Rabobank's Michael Every put it best:
we now have the first signs of a possible levelling off in insane shipping prices from Asia – but only because the power-cuts being seen in China have led to a shortage of goods. As such, Western importers pay less for shipping…but only because the imports are not available at any price! Recall my zhetons anecdote from 1994 Moscow? Recall what modern economics was all about at the very beginning, with the argument over the relative value of water and diamonds? Guess what has made things that should be common so scarce? Long supply chains, which don’t make sense if energy and shipping costs are high. Also recall that for far longer than modern economics has been with us, the world was all about *mercantilism*, because people understood that if you don’t control trade and money, they control you.
Experts are split on how shipping rates will develop in the near future. A research report by CSC Financial said shipping rates would stay relatively high in the next two weeks as U.S. ports stay congested and the gap between supply and demand remains large. Some are more optimst: the Tianfeng Securities analyst, for example, predicts a decline in shipping rates, as export growth is expected to slow in the fourth quarter, the off-season for ocean freight shipping. To be sure this won't be the first time someone has predicted that shipping rates drop only to be proven wrong almost immediately.
Meanwhile, we - as tends to happen so frequently - are much more pessimistic, and expect that this is indeed just the eye of the hurricane and while spot rates are likely to dip for the next 2 weeks, they will then soar to fresh all time highs as US retailers scramble to save the holiday season with a fresh burst of orders which China will be unable to meet, and which will send shipping rates to new all time highs.