Supply Constraints, Shipping Costs and Container Competition

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Supply Constraints, Shipping Costs and Container Competition

Last week we provided a detailed note on a multi-lateral trade agreement covering the East Pacific, the RCEP (read here). One week on, we examine some unusual trade-related shipping patterns that have developed. Demand shifts have created distortions in freight pricing, while related data confirm vigorous seasonal US spending activity. Regrettably, this has some short-term negative consequences for US food exports.

We explain what we believe is causing pattern shifts and reveal what we infer from the information unfolding.

Cause and Effect

US retailers have commenced stocking up for Thanksgiving and Christmas, preparing for the busiest retail period in the annual calendar. Retailers are also replenishing inventories depleted by COVID lockdowns. As a result of these developments, demand for shipping containers carrying Asian imports to the US, east to west, has exploded over the last few months.

However, in a strange twist, agricultural goods traversing the Pacific in the opposite direction, from west to east, have fallen sharply. We examine how one is affecting the other.

US consumer goods imported from Asian countries tend to have a higher market value than food products. In terms of bang for your buck small, high-value consumer goods such as electronics, toys and clothing tend to produce higher freight values than lower-value items such as agricultural goods and food and beverages.

The interplay, like all supply and demand fluctuations, are having an impact on the price of container freight rates. Graph 1 displays the cost of shipping containers from China to the West Coast of the United States, represented by the purple line and the left-hand axis. For reference, we have included the prices of container freight from the West Coast to China, represented by the green line and right-hand axis, which hints at the scale of consumer demand in the US.

As graph 1 depicts, container freight rates from China to the US West Coast have risen by 50% since July 1st to stand at over $4000 per container. By contrast, costs for shipping goods to China from the US West Coast are much lower at $518 per box and have been constrained to that level for over three months.

Graph 1: Container freight prices

Source: Bloomberg, data as of 19.11.2020

US Food Exports To China

Falling demand for staples like food doesn’t seem incredibly intuitive. After all we need to eat. However, the present experience of US agricultural exporters, depicted by one critical US product soybeans, is daunting. Exports have collapsed.

Graph 2: Weekly Percentage Change in US Soybean Exports

Source: US Department of Agriculture, data as of 12.11.2020

Weekly sales of US soybeans to foreign markets have steadily fallen from the beginning of October until the middle of November. The largest weekly fall of -27%, occurred during the week ending October 22nd, before falling by smaller percentages of between 4-6% during the subsequent three weeks. Other products have witnessed similar weekly declines, with beef exports falling by 30% during a portion of the timeframe analysed and Corn by 63%.

The reason for the sharp falloff in exports is not as straightforward as you might assume. What we are witnessing is US exporters competing for container space in a highly unusual pandemic setting. An acute shortage of vital container space to carry US exports products across the Pacific has developed because shipping firms are sending containers back to Asia as quickly as possible. Usually, when goods are deposited in one direction, ships are loaded back up with goods for the return leg. Instead of waiting, ships are turning around and returning to Asia with empty containers. Cancellations are widespread, leaving agricultural goods effectively locked out of foreign markets.

Graph 3 below displays this effect neatly by depicting the number of empty containers leaving the Ports of Los Angeles and Long Beach. The chart shows a steady climb during the summer months as US cities began to exit COVID lockdowns, continuing to rise through the autumn, reaching over 600,000 during October.

Graph 3: Number of Empty Shipping Containers leaving the US West Coast

Source: Port of Los Angeles and Long Beach, data as at October 31st, 2020.

Outlook and Inferences

For the moment, it is unlikely the phenomenon of large container cost disparities will disappear. Still, the distortions are seasonal and cyclical, so they should subside after this demand surge plays out.

Shipments of food-related products will resume afterwards, especially to China, because of phase 1 trade deal commitments negotiated by Trump.

The US import surge is reflective of stored up consumer demand implying the economic outlook is much more promising than feared and reported by the media. Encouraging vaccine news continues to roll in, which should ultimately bolster demand and the broader economic recovery.


Global Markets