A sudden "cold wave" is sweeping through the global shipping market. The days of container shortages and skyrocketing freight rates seem like yesterday's story, replaced now by a dramatically different landscape. Shipping prices have fallen off a cliff, with freight forwarders slashing rates to compete for customers. While this appears to offer cost-saving opportunities for cross-border sellers, significant risks lurk beneath the surface of these bargain prices.
Shipping Market Fever Breaks: Rates Drop Over 70%
The third quarter, traditionally peak season for global container shipping as merchants stock up for major consumption events like the World Cup, Thanksgiving, and Christmas, has instead brought an unprecedented chill to the market.
From Q4 2021 through Q2 2022, spot shipping rates had soared to eight times their Q2 2021 levels, creating a "container shortage" crisis. However, this boom proved short-lived, with rates beginning their steady decline from late Q2 2022.
The Shanghai Containerized Freight Index (SCFI) recently dropped to 1229.9 points. For example, the average rate for a 40-foot container from Shanghai to Los Angeles plunged from $11,197 in late January to $2,262 in the first week of November - a staggering 70% decline marking a two-year low.
Key Factors Behind the Shipping Price Collapse
Industry experts identify several primary drivers behind this dramatic downturn:
- Early Stockpiling by Shippers: Burned by last year's exorbitant rates, many shippers began stockpiling months in advance to avoid repeating the experience. Major retailers like Walmart led this trend, shipping goods early to ensure stable supply chains.
- Declining Order Demand: Global inflation has severely impacted consumer purchasing power, with demand falling far below expectations. The U.S. inventory-to-sales ratio has reached multi-decade highs as retailers sit on mountains of unsold goods.
- Inventory Glut: With weak demand, retailers face severe overstocking issues, forcing them to slash orders from overseas suppliers. Walmart alone canceled nearly $1 billion in orders during August.
Shipping companies have responded to the downturn by canceling sailings to address overcapacity. Data from maritime consultancy Drewry shows that across major trade routes, carriers canceled 122 of 750 scheduled sailings (16%) during a recent five-week period. The three major shipping alliances accounted for 101 of these cancellations.
With freight volumes shrinking rapidly, port congestion has eased significantly. The Marine Exchange of Southern California reports no container ships currently waiting at anchor, with backlogged vessels now in single digits.
Industry analysts predict the container shipping market may return to "normalization" by Q3 2023.
Hidden Risks in Bargain Rates: Strategies for Cross-Border Sellers
As freight forwarders engage in cutthroat competition with below-cost pricing, cross-border sellers must remain vigilant about potential pitfalls:
- Service Quality Compromises: Cost-cutting may lead to delayed deliveries, damaged goods, or customs clearance issues.
- Hidden Fees: Some forwarders lure clients with low initial quotes only to add unexpected charges later.
- Legal Risks: Unscrupulous operators may engage in illegal activities like smuggling or false declarations.
To navigate these challenges, cross-border sellers should consider these precautions:
- Partner only with reputable, established freight forwarders with proven track records.
- Verify each forwarder's typical cargo types - those handling sensitive or infringing goods may increase your customs risk.
- Obtain multiple quotes and compare service quality, transit times, and total costs.
- Clearly communicate delivery timelines and require confirmation of schedule adherence.
- Ship goods in multiple batches rather than single large shipments to mitigate risk.
- Implement robust shipment tracking to monitor transit status and address issues promptly.
Profit Growth Not Guaranteed: Risk Awareness Essential
While lower shipping costs reduce expenses, declining consumer demand means cross-border sellers shouldn't assume automatic profit increases. With bargain-rate forwarders posing additional risks, businesses must strengthen their risk management capabilities to thrive in this volatile market environment.