Firms happy about lower shipping costs could soon be fretting about sluggish sales
Companies shipping their products out of China are likely to see lower shipping costs contribute favorably to their bottom lines this year (at least once any long-term contracts come to an end). Likewise, they are likely to find booking a container much easier than last year, even on short notice. Companies will not need to plan way ahead just to scramble for anything that is available.
Unfortunately, because lower shipping costs are being driven by demand-side factors rather than supply-side factors, China’s goods sales to the rest of the world are likely to come under pressure. Exporters (and the companies serving them) that set ambitious financial goals for 2023 may want to take another look at their targets, or at least build more flexibility into their projections.
This imperative is not limited to companies that manufacture in China. It will also impact MNCs that serve supply chains running through China. Factories in East and Southeast Asian countries should take note.
Overview
- Empty containers have been piling up at some of China’s major ports since the beginning of this year. In some cases, the pileups have become so large that containers had to be moved to nearby ports.
- China has also seen an increase in “blank sailings,” where ships bypass ports because there is not enough cargo to pick up.
- Meanwhile, the cost of shipping has fallen tremendously. On February 17 this year, it cost US$ 1,238 to ship a standard 40-foot container from eastern China to the US’s west coast, steeply down from a peak of more than US$ 20,000 in early September 2022.
Our View
Behind the fall of both containers in use and the shipping price is a decline in demand for goods. Global demand has plunged for at least two reasons: rising inflation and a pivot to services.
Surging inflation has triggered a severe cost-of-living crisis around the world, including in major Western economies. This has caused a slump in demand for goods that is directly impacting exports from China, the factory of the world.
This trend has been exacerbated by the fact that people in many countries that have emerged from the pandemic are now spending more on services, such as restaurants, pubs, travel, and entertainment. Naturally, much less is now being spent on goods, as compared to the pandemic days.
Both these trends are likely to continue throughout 2023. We expect inflation globally will remain high, fueling the cost-of-living crisis. And households will continue to allocate a substantial portion of their spending to services.
China’s exports, consequently, are unlikely to see a robust recovery this year and will not make a substantial contribution to the country’s economic rebound. Instead, The country’s recovery is more likely to be driven by internal forces, such as domestic demand.
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