Yesterday, in "US Import Demand Is Dropping Off A Cliff", we noted that Freightwaves (best known for sparking a crash in freight stocks at the end of March when the company's CEO said that a "freight recession is imminent") warned 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" or 36% in just the past few weeks…
… as retailers (ahem Target and Walmart) "suddenly" realize they have over-ordered way too much inventory, and noted that as a result, "Drewry’s container spot rates from China to the West Coast have plunged 41% month-over-month to $9,630." While there is much more in the full note, the gist was simple: shipping rates are sliding and are set to fall further as demand for cargo evaporates with the US sliding into recession.
We bring this up because this morning JPMorgan also brought it up, with the bank's European Transport and Logistics analyst Samuel Bland writing that a note titled "Freight Markets" (available to pro subscribers in the usual place), in which he draws attention to the FreightWaves article which he says "suggests that US import volumes of containers have fallen sharply in recent weeks. We see a similar thing in weekly data from LA and Long Beach ports." Some details excerpted from the JPM note:
- For context. March 2022 container volume vs the 2019 level was 4% higher globally and 43% higher on the Asia – North America lane in particular. "Normal" volume growth might be 3-4% CAGR, such that globally volume is quite weak, but very strong on Asia-US in particular. This focusing on demand on one lane, straining infrastructure and labor availability has driven up supply chain congestion. Presumably, lower US volume would help to unwind this, freeing up to c.12% of ship capacity currently stuck in congestion.
- Freight rates. Freight rates show a mixed pattern depending on which index is used. On a global basis, all the indices are down c.20% YTD, and by closer to 25% on a bunker-neutral basis. On the China-US West Coast lane in particular, SCFI is flat YTD, whereas the equivalent Freightos index is down 31% YTD. Importantly, the Freightos decline has all happened in the last month, with the indexed having been up YTD until early May.
- Freight forwarder exposure. It is important to remember that sharply falling freight rates can be positive for freight forwarder profitability in the short run. This is driven by forwarders not passing on all the saving to customers in the near term.
- Bunker costs. We’d also highlight that the spread between low and high sulphur bunker fuel has widened sharply in recent weeks, to around $360 / tonne currently, up from nearer $120 / tonne in early May. This is most negative for those container lines with a high level of spot exposure and low level of scrubber fittings, both of which point to ZIM
JPM concludes that since the strength of the US consumer has been a key ingredient in the level of freight rate increase seen since COVID, "this is negative for the sector generally, particularly container shippers and particularly ZIM."
The market's reaction was quick, and just as FreightWaves crashed truckers two months ago, this time they demolishes shipping stocks which tumbled Wednesday: the Russell 3000 Index Marine Transportation Subsector dropped 4.8% for its biggest decline in a month, with all 15 members of the index were down Wednesday. Among the components, Eagle Bulk Shipping plummeted as much as 12%, its biggest intraday decline in a month, to lead a drop among index members Other notable decliners include Matson -9.3%, Genco Shipping & Trading -8.3%, Costamare -7.4%, Safe Bulkers -6.9%.
The news of a looming shipping recession quickly spread around the globe. In Europe, shares in major shipping companies including Maersk, Hapag-Lloyd and Kuehne & Nagel fell, on both the JPM note and also after Nordnet Bank economist Per Hansen noted similar concerns about lower freight rates as the container shipping market normalizes and about the impact of a possible recession in the US. Maersk dropped as much as 8.3%, the most intraday in a month, while Hapag-Lloyd falls as much as 8.3% and Kuehne & Nagel drops 4.4%
A similar dumpfest was observed in Asia too, with shipping stocks in Japan and South Korea following their global peers lower following the JPMorgan reference to the FreightWaves article:
- Japan’s Mitsui OSK -7%, Kawasaki Kisen -7.6%, Nippon Yusen -6.7%
- South Korea shipping companies: HMM -3.8%, Korea Line -2.1%, Pan Ocean -3%
- Taiwan’s Evergreen Marine -3.1%, Yang Ming Marine -2.3%, Wan Hai Lines -3.1%
- Hong Kong-listed Cosco Shipping -6.7%, Orient Overseas -7%, Pacific Basin -5.5%, SITC International -6%
- China’s Cosco Shipping Holdings -4.6%, Cosco Shipping Energy -3.4%, China Merchants Energy Shipping -3.1%, Ningbo Marine -1.1%
And while shipping is certainly one of the most leading recessionary indicators, and a recession most certainly is looming, what we find fascinating is just how little work the "market" had done on shipping stocks: after all, all Freightwaves – and by extension JPM – did was to look at the latest shipping rates and volumes, data that is available to every Bloomberg terminal subscriber. And yet, not a single one appeared to have pulled it up… until today. Which begs the question: does anyone even remember how to do simple fundamental analysis any more?