Container freight rates from Asia to the U.S. continue to decline. Rates have fallen to levels that seemed unimaginable only a year ago. The average spot rate to move a container from China to Los Angeles in December 2021 was $15,000. The cost to move that same container today is $1,500. The carriers, who declared that rate wars were a thing of the past, seem powerless to stop the rapid rate decline.

Carriers fully understood that $15,000 rate levels would not be sustainable. No one, especially the carriers, could have predicted how quickly the rates would deteriorate in the Asia to U.S. market. To make matters worse, carriers could have a bigger problem on their hands moving into 2023. Capacity is scheduled to grow at 11% while demand is only scheduled to grow 2%. Unless the carriers suddenly become more disciplined, it is hard to envision rates rebounding in 2023 considering the additional capacity that will be available to shippers.

The last significant rate war in the Asia to U.S. market took place in 2016. The containership industry suffered significant losses which triggered the decision by Hanjin Shipping to file bankruptcy. Several other carriers were financially on the brink and were forced to merge operations in order to avoid the same fate as Hanjin Shipping.

Carrier executives have publicly acknowledged that ocean rates will remain depressed for the remainder of 2022 as well as the first quarter of 2023. They have stopped short of saying that a rate war is imminent. Carriers believe the capacity management tools available to them are more than sufficient to prevent another disaster that hit the containership industry in 2016.

While capacity management tools are an option for the carriers, these tools have done little to halt the rapid reduction of current freight rates. Carriers eliminated 2.5 million TEU in capacity by canceling sailings during the fourth quarter of 2022. Because demand plummeted at the same time, this action had virtually no impact on rates. The decline in rates has actually accelerated as the shipping industry approaches the end of the year.

Carriers have enjoyed 100% of the leverage over shippers since the beginning of the pandemic. The leverage slowly started to erode this past summer. After 30 straight months of facing record high freight rates and space limitations, shippers have regained the majority of the leverage. Asia to U.S. West Coast rates remain at their lowest levels since the end of 2016.

Now that the leverage has shifted, some shippers will undoubtedly consider punishing those carriers that abandoned them when they needed them the most. While this is a natural reaction, it is not the best strategy moving forward. If rates reach unprofitable levels, carriers will have no choice but to employ tactics that will stop the decline and drive rates up. If this scenario plays out, the best strategy is to have as many carrier options in your portfolio as possible.

This year should serve as a reminder to shippers how quickly freight rates and space availability can change the shipping industry. While shippers should relish the lower freight rates, they should also remain cautious about abrupt changes the carriers could implement to swing the pendulum back in their direction.