Contain yourself – it’s all about routing.
The Snapshot
- Container rates hit sky-high levels during the past two years.
- The increase was caused by huge consumer demand for ‘things’ as the world sat in lockdown.
- This demand is starting to abate as inflationary pressure takes hold.
- Container rates have fallen but are still historically at high levels.
- If we see a global downturn, we will see freight pricing fall further.
- On the flip side, a global downturn may reduce demand for many of our commodities. Especially the high-value discretionary spending.
The Detail
At EP3, we keep a close eye on freight costs. As an export nation, the freight cost is vital to our competitiveness. Most of our grain exports and fertilizer imports are conducted in bulk; we recently covered bulk costs (see here).
Containers are the other export method, and whilst less important to grains, the cost of containers greatly impacts pulses, meat and fibres.
Let’s look firstly at the overall picture. The chart below shows the freight rates as of Friday for some of the major routes around the world versus the same time one and two years previously.
Container rates have fallen significantly from the same period last year. They remain extremely high compared to two years ago for many major routes.
Let’s delve deeper into the numbers.
In life, all is not equal. The same applies to freight and routing. There is a big difference in freight rates and whether they are into or out of China.
The chart below shows the average cost of containers going to or leaving China. China has always had a premium in the longer term. In the past two years, it has gone into the stratosphere.
This has been due to the demand for trinkets and gizmos from the manufacturing plants in China, as the world struggled through continual lockdowns.
It all comes down to supply and demand. There was a huge demand for movements from China, but less from around the world to China.
So where to from here?
Container rates are still high globally but are showing some downward movement. What is the big driver? Inflation is starting to hit hard around the world, there is the beginning of reduced consumer spending, which causes a fall in demand for the trinkets and gizmos previously mentioned.
The old adage of high prices are the cure for high prices. The freight rates of the past two years are unsustainable, but shipping companies are still making big money at current levels.
If as many predict, as major downturn is on the cards, then we will see container rates fall. This will be beneficial for reducing the cost of our exports. On the flip side, it may reduce the demand for those exports.
‘What is given with one hand, is often taken by the other.’