High retail stock levels cause drastic reduction in new orders

The shipping companies are seeing a slowdown in demand for space for goods leaving China for Europe. High stock levels and the absence of visibility regarding future prospects are paralysing business activity. 

Since the start of July, ocean freight rates on Asia-Europe routes have been falling after a period of strong increases. This is the result of a fall in demand which has several different causes.

Of course, high inflation is starting to weigh on household spending and, by the same token, on consumption levels. But the low level of new orders from the retail sector is also due to high stock levels. At the same time, the absence of visibility regarding the outlook for the economy in the months to come has literally frozen decisions on new orders. Retailers do not want to risk accumulating more stocks, given the high cost and low availability of storage space.

Consumers have not suddenly stopped frequenting physical and digital sales areas. Certainly, they have adapted to the situation and redirected some of their purchasing in other directions, but the problem has been caused above all by the mass of emergency orders placed by the retail sector when the economy recovered more quickly than expected after the first phase of the Covid-19 epidemic. Some retailers now find themselves with huge stocks of merchandise which are not being renewed quickly enough.

Sources : Eurostat and European Central Bank calculations.

Final quarter concerns

The fourth quarter of 2022 is the time to ask questions about the approach to be taken to 2023. A certain number of factors are determining market sentiment during this period.

• Unused stocks are causing unbearable cost and space constraints.
• This unused stock is having a negative impact on leading products, which are running low and not being replaced. Longer transit times are increasing the risk of product shortages and aircraft being called in to provide emergency supplies.
• It is becoming tempting to destroy merchandise to free up space but this practice is now regulated under recently introduced French legislation.
• The current fall in ocean freight rates has not generated additional orders.
• Shippers have sharply reduced the 2023 cargo volume estimates they are using to negotiate their contracts with the shipping companies.
• The time imported containers are spending on the quayside is increasing because of the lack of warehouse space. This is pushing up demurrage and detention fees per container even though there has been a drop in ca rgo volumes.
• Port calls have started to be cancelled. For now, this only concerns sailings up to mid-December but, if demand is low, they could be extended until the Chinese New Year. Quality of service, which had been improving in recent months, would suffer if this happened.
• It is becoming difficult for shippers to respect their contracts and requests for renegotiations are increasing. Overall, the shipping companies are not providing the level of service required and their customers are not respecting their cargo volume commitments.

European statistics show that stock levels increased markedly in 2022. There is a clear connection between these record stock levels and the reduction in new orders for goods from Asia.

Changes in stock levels in the European Union

Source: tradingeconomics.com

The situation is such that shortages of key products cannot be ruled out in the first and second quarters of next year in Europe. The impact of blank sailings will be aggravated by another factor, moreover. The Chinese New Year celebrations, during which production plants will close, starts very early in 2023 - on 22 January. If firm orders are not placed now, they might well not be honoured.

The breakdown in supply chains could, therefore, occur where it was not expected - in the storage depots...