Shipping costs falling, but still at a high level

The end of the peak season and an oversupply of container liners are pulling down freight charges.

The cost of shipping goods from China has been on a downward trend since it peaked in August. But although freight indexes indicate a steady decline, rates are not likely to fall to 2009 levels.

The China Containerized Freight Index hit a composite high of 1214.7 on Aug. 27, but slid steadily afterward, falling to 1202.59 on Sept. 3. As of Oct. 22, the composite index stood at 1132.08. Nonetheless, the CCFI is still 18 percent higher year on year.

The Howe Robinson Container Index shows a similar trend. The HRCI almost reached 750 in mid-September, up nearly 120 percent from 340 the previous year. Rates have been falling since, although not as fast as the CCFI. As of Oct. 20, the HRCI was at 704.40, down 22.90 points from the previous week but still more than 100 percent higher year on year.

With the peak shipping season now over, demand for containers is expected to taper off for the rest of the year. October has generally been the peak shipping month, when orders for the holiday season are sent out. The shortage in container space early this year prompted many buyers to request for earlier delivery dates to avoid any possible bottlenecks.

But while projections point to a continued decline in shipping rates through December, costs are not likely to fall as steeply as they did in 2009.

Richard Li, transport sector researcher at Guojin Securities, said excess capacity is another reason for declining rates. Container companies brought more liners into operation for the peak shipping season. Now that demand has waned, the resulting oversupply is likely to pull costs down.

Liu Bin, a professor at the World Economic Research Institute of Dalian Maritime University said projections for shipping costs depend on oil prices, international trade situation, and supply and demand. For China, the last criterion is the main factor.

Li agrees. In this quarter, he said the worst-case scenario for container companies is for prices to go down to the breakeven level, which is about $2,000 per TEU for US and European routes. He also believes liners are likely to withdraw capacity before prices can hit that level to slow the decline. But if retail sales during the Christmas season do not go well and inventories remain high, shipping costs for the first few months of 2011 may stay at a low level.

High shipping costs have had little impact on China's export manufacturers. Buyers generally shoulder such fees so fluctuation in container rates has no effect on suppliers' pricing schemes or bottom lines. Liang Zhibin, a shipping broker based in Shenzhen, Guangdong province, said 70 to 80 percent of contracts are paid by importers.

Shenzhen YLI Electric Locking Equipment Co. Ltd does not think its customers will be dissuaded by the high cost of shipping, even if they have to shoulder the fees. The company said buyers usually take such expenses into consideration when they negotiate with suppliers and are unlikely to reduce orders because of shipping costs alone. This is especially since shipping charges account for a small percentage of a client's budget.

But according to Richforth Ltd, high shipping costs have made it more challenging to negotiate FOB prices with buyers.

Even exporters that have to shoulder shipping costs are not overly affected. Amanda Wang, a foreign trade merchandiser at a PV company in Ningbo, Zhejiang province, said most contracts indicate shipping fees are on the buyers' account. Some clients, however, require the factory to bear the expense. In such instances, shipping costs contribute 1 to 3 percent to total outlay of suppliers offering CIF for routes to the US and Europe.