Shipping lines have reached the peak of their pricing power

Nice prices, for now.
Nice prices, for now.
Image: REUTERS/Fabian Bimmer
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Before the pandemic, the world’s largest shipping lines eked out narrow profits in a fiercely competitive industry. Retailers booked and canceled orders with impunity, while shipping firms slashed freight prices to retain their mercurial customers. Then, covid upended global supply chains and reversed that power dynamic virtually overnight.

By the middle of last year, freight capacity was in such short supply that retailers were competing against each other to secure valuable space on container ships for their goods. Shipping lines quickly took advantage of their new leverage to hike prices. By this September, freight rates were 20 times higher than they were at the start of the pandemic, prompting some to accuse the firms of price gouging.

But shipping lines’ market power is finally starting to wane. Ocean freight rates from Asia to North America, after plateauing in September, are starting to drop, according to data from the freight booking platform Freightos. Between Nov. 5 and Nov. 12, prices fell 21%—the largest week-on-week drop since the pandemic began.

The holiday shipping rush for trucks and planes

Freight rates aren’t plateauing because the world’s supply chain problems have been solved. Congestion at ports is worse than ever. It now takes 76 days to move a container from China to the US, up from about 40 days in pre-pandemic times, according to Freightos data.

Instead, prices are softening because it’s already too late to ship goods from Asia to North America in time for the holiday shopping season. If a container isn’t already en route to the US by now, its contents won’t make it to customers before Christmas. (That window closed right around Oct. 11.) As a result, demand for shipping is ebbing.

Now cargo spending is shifting toward trucking fleets and cargo airlines. All the goods shipped before mid-October now need to be hauled away from ports—mostly on trucks. And if US retailers want to import any last-minute shipments from suppliers in China, Malaysia, or Vietnam, they’ll need to put their goods on a plane. (Airlines are scheduling a slew of new flights to accommodate this eleventh-hour Christmas gift airlift.)

The long, slow return to normal ocean freight rates

Shipping lines have passed the peak of their pricing power, but their wildly profitable pandemic run isn’t over yet. Freight rates usually fall once the Christmas shipping window passes in November and December, but they typically pick back up in January as retailers restock their depleted inventories and a new shopping frenzy kicks up before the Lunar New Year. After that, analysts are predicting it could take two years for freight rates to drift back down to their pre-pandemic levels.

In the meantime, shipping lines will continue to rake in unprecedented profits with freight rates that far exceed their operating costs. Hapag-Lloyd, the world’s fifth-largest shipping line, recently posted a $6.7 billion profit for the first three quarters of 2021—more than it made in the previous five years combined. Before the pandemic, the company charged customers about $50 more per container than it spent on shipping costs. Now, that margin has ballooned to $1,100 per container.

Freight prices have a long way to fall before shipping lines go back to barely eking out profits on their voyages. With a bit of time and a lot of cash on their hands, the companies will have to decide how to expand or diversify their businesses before their golden age comes to an end.