News & Events > Insights

LONG BEACH, November 22 – While the pandemic sent ocean freight costs spiraling as demand for cargo space far exceeded supply, a period of lower rates may be on the way, according to economists at the Federal Reserve Bank of St. Louis. 

“Using estimates of global GDP from the International Monetary Fund as a proxy, we expect global shipping demand growth to cool somewhat in the coming years, from about $103 trillion now to $117trn in 2024,” said economist Jason Dunn.

“Combining these two estimates, we expect excess demand to fall over the next few years with the growth of supply outpacing the growth of demand,” he said, noting that “we would also expect shipping prices to decrease over the next few years.”

Those expectations are also considered likely in China, where representatives of ocean carriers at a recent trade conference drew attention to the falling rates due to declining demand and increasing capacity.

Demand outstripped supply

Co-author Fernando Leibovici of the St. Louis Fed explained the sharp rise in the cost of ocean shipping as a result of demand for shipping outstripping available supply following the outbreak of the Covid-19 pandemic.

He said this demand resulted from “unprecedented fiscal stimulus provided by governments to mitigate the cost of the pandemic, as well as by the relocation of demand from services toward durable goods.”

The rise of this demand took place over “just a few months” while the suppliers of shipping capacity were unable to respond “as quickly” because the shipping fleet was already near “full utilization” and shipyards take “two to four” years to build new containerships.

As a result, there have been two developments in the shipping industry.

Two developments

The first development is an increase of shipping prices, which has allowed shipping companies to “ration” their limited supply across the “massive rise” of demand.

The second development is investment in the construction of new ships, but that “we have yet to see these ordered containerships finish construction and get added to the fleet.”

In the absence of new ships coming online, Dunn and Leibovici expect prices to remain high but add that “as new ships get completed and added to the fleet, it should ease some of these supply pressures, and costs are likely to fall.”

Supply rising through 2024

Given the current order books for containerships and their expected completion dates at shipyards, the two economists expect the supply of vessels to continue rising through 2024.

They say that will lead to a 20% increase in capacity, from about 25 million teu now to roughly 30m teu in 2024.

“An increase of international shipping capacity should eventually increase shipping supply, decrease shipping excess demand and lower shipping prices,” they said. 

Prices decreasing – slowly

They claim this analysis is “pretty intuitive” and explain that the shipping industry reacted to the rise of demand early in the pandemic by raising prices. 

Now, they say, “once the ships ordered are added into the fleet, prices are likely to start returning to pre-pandemic equilibrium levels.”

But they also caution that this process is “likely to take time” because many of the new ships on order from carriers “have yet to be actually delivered to the fleet.” 

The word from China

Earlier this month, the South China Morning Post – citing carriers at a trade fair – reported that ocean shipping rates for goods leaving China are likely to fall next year when new container vessels come online.

It said freight rates have “plunged” by up to 90% in the last year from the “unprecedented highs” they enjoyed during the pandemic, and are expected to stabilize in “the short term”.

More than 200 new container ships are due to be delivered to freight operators in each of coming two years, SCMP reported, saying that vessels with a total capacity of 2.34m teu will be delivered in 2023, and another 2.83m teu will be added in 2024 – nearly five times the 1.1m teu delivered this year.

“The shipping industry is wary of a further drop [in shipping rates],” a conference delegate told SCMP. “Delivery of new vessels will probably exacerbate an overcapacity issue.”

Delivery is the operative word for the presumed fall in rates.

Chart: Global Shipping Demand and Supply, 2007-2022. Sources: IMF, Clarksons Research and authors’ calculations.