The latest ocean container bookings data reveals that despite the strong levels of inbound cargo during the first five months of 2022, import demand is not just softening — it’s dropping off a cliff. Because capacity on the trans-Pacific has remained relatively stable, Drewry’s container spot rates from China to the West Coast have plunged 41% month-over-month to $9,630.
Freight forwarders will enjoy expanding margins on ocean freight, while U.S. trucking carriers and intermodal volume providers may start to see volume risks.
Consumer buying patterns are rapidly normalizing to pre-COVID levels, and U.S. retailers are stuck with too much inventory. Target (NYSE: TGT) shares dropped Tuesday morning after executives said the company would mark down unwanted items, cancel purchase orders and move quickly to get rid of excess inventory.
Container imports bound for the U.S. have dropped over 36% since May 24. (This index measures departing container volumes at the port of origin). This is a troubling sign for domestic U.S. freight markets that have been benefiting from an unprecedented surge of containerized import volumes over the last 18 months. Since ocean transit times for these inbound container volumes have recently been averaging between 30 and 35 days, we will begin seeing the softer volumes show up at U.S. ports in the first couple of weeks of July.
This also puts U.S. containerized imports from all countries of origin down 36% year-over-year, which is a reversion back to the volume levels of the summer of 2020. But what is the cause of the sudden drop in containerized import volumes? Well, there are a few simultaneous factors converging that serve as likely explanations for why volumes are suddenly dropping.
The inventory glut
At the forefront of these reasons is the buildup of inventory here in the U.S. resulting from companies attempting to both replenish inventories that were largely depleted in 2021, but also from these companies wanting to keep enough inventory on hand in case of any further disruptions that may occur. Consecutive rounds of COVID lockdowns in China only exacerbated those fears, but after the war between Russia and Ukraine broke out more than 100 days ago, the geopolitical risks seem to only be escalating, and for better or for worse, companies decided that they would rather have the inventory safely here in the U.S. than risk having it abroad should there be a sudden surge in consumer demand.
So, if consumers are now shifting buying trends from goods to services, those goods-producing companies may get stuck with too much inventory or the wrong inventory in order to try to capture sales. This buildup of inventory will inevitably lead to a slowdown in new import orders abroad and thus will only add to the demand destruction we are seeing for containerized imports into the U.S. Just Tuesday Target announced an “aggressive” inventory reduction plan led by canceling orders and marking down even more inventory.
The chart above, displaying rising inventories, and the chart below, displaying falling imports, reveal that retailers are upside down after the last surge of freight to hit the United States’ shores and are throttling down freight velocity in their networks.
The consumer is getting crushed
Conditions for the consumer seem to be getting worse and worse as inflation takes hold and prices get more and more expensive. Just this week, AAA reported a new record high for gasoline prices at $4.51 per gallon on its national index.
Some economists speculate that with the Fed beginning to raise rates and draw down its balance sheet, we may be experiencing “peak inflation.” However, even if inflationary pressures begin to eas
