The cost of shipping from China to the United States has collapsed precipitously over the past few months, and is now back below pre-COVID levels. Which is a great thing if we’re worried about tangled supply chains and the inflationary effect of the high cost of shipping. But the reason the cost of shipping has fallen so fast does create a whole other reason to be concerned.
Orders coming into China are drying up. CNBC’s Supply Chain Heat Map suggest U.S. manufacturing orders to China are down 40%. And shipping firm HLS expect demand for shipping containers to fall another 2.5% in 2023, just as another 5-6% of shipping capacity comes online. So expect more supply and less demand to come.
This appears to be an “inventory correction”. Many American companies struggled to get materials in 2020 and 2021, so abandoned their ‘just in time’ philosophies and built up significant inventory in warehouses (aka safety stock). Now that supply chains are normalising and the economy is slowing down, these companies don’t need to order more from China until they sell through their safety stock first. As a result, October saw U.S. imports from Asia hit their lowest level in 20 months.
Now, CNBC report that many Chinese factories will be shutting two weeks earlier than expected for Chinese Lunar New Year. This decline in orders and shutting factories early comes just at the wrong time for the Chinese economy, as it looks to regain some composure and return to growth as it loosens its COVID zero policy.
It’s not all bad news though. Surprisingly Europe’s trade to the United States is booming. Across Europe, exports to the US are up ~20% in 2022 and in Germany alone, exports to the U.S. were up almost 50% between September 2021 and 2022.
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