02 April 2023 • 8 min read
Outlook on Freight Rate in the Post Pandemic World
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We expect slight corrections in freight rates over the next nine months, after witnessing several months of substantial decrease in prices. This is largely a result of supply outgrowing demand. Vessel and container capacities are on the increase, while the ongoing economic slowdown has dampened demand, leading to a reduction in rates.
In the last few months, freight rates have decreased substantially from their record highs of 2021- 2022. Cogoport expects rates to drop by 15% to 20% in 2023 as compared to 2022. During March 2023, freight rates for Asia – North America West Coast trade fell by 8%, for Asia – North America East coast trade by 10% and for Asia-Europe trade by 17%, as compared to February 2023. Global shipping giant Maersk expects global annual container demand to shrink by 2%-4% in 2023. This reduction in demand has led to a decrease in freight prices.
The next few months will see slight corrections in rates as supply continues to outstrip demand. This drop in freight rates is a result of a demand - supply mismatch. Several macroeconomic factors and industry trends are responsible for freight rate reduction in 2023.
Shipping Companies Are Focusing on Increasing Capacity
Years 2021 and 2022 were characterized by capacity pressures. Several carriers have utilised their record-high profits to place orders for new vessels, which are expected to create an oversupply starting Q2 2023 onwards. While new vessels will ease capacity shortages, shipping lines will likely cut freight rates to improve volumes which will benefit exporters. Experts also predict that this trend will continue with large shipping companies focusing aggressively on acquiring new capacity.
Container xChange Cofounder and CEO Christian Roeloffs said in a release, “It doesn’t seem that the capacity restrictions that we have seen in the past two years are due to return, so we’ll just have ample capacity both on the vessel as well as on the container side. With the competitive dynamics in the container shipping and liner industry, I don't expect especially the big players to hold back, and we do expect prices to come down to almost variable costs.” Despite these changes, the industry is expected to remain competitive with smaller players able to maintain a reduction in rates as a result of earlier profits.
Recessionary Tendencies Will Continue to Dampen Demand
The year 2023 is expected to witness a further slowdown in economic activity. The International Monetary Fund (IMF) estimates global economic growth to reduce from 3.2% in 2022 to 2.7% in 2023. A broad-based recession is expected to impact global value chains – from the availability of raw materials to production and transportation. Moreover, the gradual withdrawal of Covid-related stimulus measures will intensify the recessionary impact. This is expected to lead to a further decrease in consumer spending and global demand. However, estimates indicate that global e-commerce will grow. Moreover, lower shipping costs may cause cargo that previously traveled by truck or train to shift to water vessels. Together, these factors may have a slightly moderating impact on demand.
Shipping Industry is Digitizing to Improve Efficiency
Another factor that is likely to affect freight rates is the rise of digital transformations across the freight forwarding industry. Traditional freight forwarders are introducing digital tools to increase transparency and improve communications. Moreover, several digital companies are providing services to organize and coordinate the movement of goods. According to Allied Market Research, the digital freight forwarding industry is expected to grow from $2.92 billion in 2020 to $22.9 billion in 2030.
Automation, especially with the help of technologies like machine learning, is helping ships navigate more accurately and with greater efficiency resulting in better speed and improved overall performance. Moreover, automation reduces human intervention and labour costs, especially for repetitive tasks. Together, these technological changes will lower costs, increase efficiency and utilization of container space, and help lower freight rates.
As companies have grappled with the fallout of having far flung sourcing origins and supply chains that were heavily impacted by Covid-related restrictions, many have adopted measures to diversify sourcing to insulate themselves against global macro-factors. Several companies have adopted re-shoring and friendshoring and moved production closer home to protect themselves from disruptions and delayed deliveries. According to Cichen Shen, the Asia-Pacific editor for the shipping journal Lloyd’s List, this reorientation of trade flows is “creating extra loads into the system,” and may open opportunities for shipping companies. However, alongside this reconfiguration, protectionism is expected to rise with countries implementing measures to reduce imports and boost domestic industries. These measures will impact global trade, and in turn the freight forwarding industry in the future. However, the exact ramifications of these trends will only become clearer in the long-term.
Overall, supply side expansions and demand side contractions will see a lowering of freight to pre-pandemic levels in 2023. However, it is impossible to rule out unexpected events that may disrupt domestic and international supply chains. Considering this, it is more important than ever for businesses to develop agility and flexibility. Supply chain actors would do well to focus on collecting and analyzing data themselves or partnering with companies that can provide them with timely information such that they can be prepared for disruptions and leverage periods of opportunities.
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