Global freight markets ‘begin to normalise’

posted on 12th September 2022
Global freight markets ‘begin to normalise’

But supply chains and logistics services will remain disrupted and with elevated freight rates for the foreseeable future, while companies are also seeking greater diversification of sourcing locations – especially alternatives to China, reports Will Waters

Global freight and logistics markets are beginning to normalise after two frenetic and traumatic years, but will remain disrupted and with elevated freight rates for the foreseeable future, senior logistics executives believe. And in the meantime, a global supply chain redesign and realignment is underway, with companies seeking greater diversification of their global sourcing locations – especially those with a presence in China.
In a wide-ranging market update discussion this summer, executives at US-headquartered SEKO Logistics said market demand had eased somewhat since around May, and capacity had become easier to find – but there was little likelihood of a return to pre-pandemic freight rates for the time being, particularly not for ocean freight rates.
Chief growth officer Brian Bourke said global supply chains continue to face challenges including the impact of the war in Ukraine, lockdowns in various markets, inflation, and intense competition for staff in many parts of the world. And overall market volumes are down somewhat compared with this time last year, especially for US imports of certain products ¬– such as outdoor leisure goods.

Slack season returns
After two relentless years, “slack season is now back. But compared to previous years prior to the pandemic, trade is still strong and volumes are still high,” Bourke noted.
Indeed, figures from IATA confirm that while global air cargo demand for the first half-year was 4.3% below 2021 levels, compared to pre-Covid levels in 2019, first-half 2022 demand was up 2.2%, measured in cargo tonne-kilometers (CTKs).
Certain sectors also remain more resilient – such as high tech, aerospace, and retail segments such as healthcare and beauty products. And demand on certain trades, for example from China, remains elevated.
“We do expect a peak season, albeit a very muted peak season,” said Bourke.
And although overall ocean freight demand is below its levels last year and several months ago, congestion levels at many ports – particularly in the US – are still significant and expected to remain so for some time.
Nevertheless, pressure to shift cargo stuck in congested ocean supply chains to air freight has significantly eased, for the time being.
On the air freight side, global available cargo tonne-kilometers (ACTKs) rose by 6.7%, YoY, in June, continuing to increase as airlines resumed summer passenger flight operations, although it remains down somewhat compared with pre-Covid levels. Bourke expects passenger bellyhold capacity to reduce again after the summer, “and the relative demand is going to continue to be a challenge for capacity for air freight”.
And on the ocean freight side, SEKO expects capacity will remain relatively tight in the third and fourth quarters of this year (Q3 and Q4), with some vessel capacity being returned to other trades, or vessels going into servicing and maintenance.

Advice to clients
“Ocean will remain a challenge from a capacity standpoint, and bottlenecks will remain. Rates are not going to go down to pre-2019 levels. How we advise our clients is ultimately not to expect rate levels to revert to pre-pandemic levels any time in the medium-, short-, or long-term. And that’s important for shippers to take into consideration as they start to think about next year’s budgets already,” he highlighted.
Ocean and air freight rates are, nevertheless, expected to be lower in the coming months and next year than in late 2020 and 2021, although costs in other areas are still rising.
“I think we can all see that the trends for warehousing, fulfilment, labour, those are all continuing to trend upwards,” Bourke highlighted. “Companies and shippers, and especially ecommerce brands and retailers, need to plan accordingly.”

Rising inventory levels and cancelled orders
Akhil Nair, SEKO’s Hong Kong-based VP for global carrier management and ocean strategy, said that the market had been expecting one of two scenarios after the April and May lockdown in Shanghai ended: either manufacturing activity would ramp up and the trucking congestion at origin would relieve itself and retailers would put in a lot of orders. Or, alternatively, due to climbing inventory levels, the retailers would push back and cancel orders.
But it broadly resulted in the second scenario. “So, we expect a muted peak, but nowhere close to what we have seen in either the second half of 2020 or all of 2021,” Nair noted.
“I guess we’re returning to some form of normal, but with continued elevated freight rates. While there has been a decline recently, I don’t believe that we are going to go back to pre-Covid freight rate levels. Different labour issues and congestion at various parts of the world are definitely going to continue to impact supply chains, particularly ocean.”
Figures from WorldACD for the second half of July show a worldwide air freight rate increase of 10%, compared with the same period last year, despite a chargeable weight decline of 7% and a capacity increase of 5%, as higher fuel surcharges continue to inflate overall air cargo prices relative to their levels last year. But that +10% rate differential compared with last year continues to diminish, down from +19% in late June.
According to SEKO’s global senior VP for e-commerce, David Emerson, one demand pattern on the rise is “more requests for in-country or in-region fulfilment, as a carry-over from the continued expense of cross-border parcels and the lack of capacity”. This is a trend SEKO expects to continue, “as long as rate levels are as elevated as they are for the line haul”.
Although some e-commerce markets are subdued, Emerson says demand “is still massively high for us”.

Labour shortages
Bourke said restrictions on labour are being seen across the transport industry in general, and not just in one mode of transport or geography.
“It is a growing problem – whether it’s recruiting for warehouse workers, for drivers, for clerical workers,” said Bourke. “And the restriction on available labour is one of the two primary constraints impacting the movement of goods today.”
He said many companies are offering bonuses to attract and retain staff – for example, to cover during peak periods. Companies like SEKO were having “to ensure that our peak plans include additional surcharges to maintain labour levels to accommodate for increases in activity to make sure that we have the staff on hand to handle the volume”.

Unpredictable market
Steen Christensen, chief operating officer – international – said the ability for logistics companies to anticipate and predict future market conditions is more difficult than it was pre-pandemic. He believes there is “a general wish in the market that rates would not go back to where they were in 2018/19”, but ocean freight rates “would probably land somewhere at double or triple what we saw back then. But certainly not back to the $20,000 container rate.”
Christensen continued: “I think long term, there’s no reason to believe demand will slump and that we will continue to see a pressure for capacity.”
He caveats his predictions by acknowledging “the extreme unpredictability of everything that’s going on in the world. But if I were to be a guessing person, that’s what I would say at this point.”
As was the case prior to the pandemic, the market is likely to see a hybrid of contract rates and floating volumes for cargo owners. That includes “some customers who never managed to get secured capacity on long-term contracts during contract season and are floating”. But even some of the large retailers that had secured capacity appear to have kept some volumes within their portfolio to float with the market. “It might work in their benefit, currently, if they have a floating volume to reduce the average blended cost,” Nair noted.

Normalisation of demand
While it varies from market to market, one apparent trend is a switch in demand from home-related goods to services, as people are less confined to their homes.
“I would call it a normalisation of the demand curve,” observed Nair. “Inventory-to-sales ratios are expected to increase, and I think the latest prediction is that we’re heading back up closer to 2019-2020, early (pre-Covid) 2020 levels, in the short term.
“That just means that we are normalising; and some capacity on the ocean side will be repurposed – either to other trades, or some of the older vessels will go in for dry docking and retrofitting to be compliant with the IMO 2023 regulations coming out. So, supply will balance demand, in my view, and rates will not see a complete decline.”
Nair said ocean freight carriers are still struggling to rebuild on-time performance levels, describing most recent cancelled sailings as “operating blanks” to correct schedule disruption rather than “structural blanks” to adjust capacity to softer demand. But he also expects ocean freight carriers and alliances to be able to respond to signs of lower demand, with blank sailings continuing to be a feature of the market.

Alternative sourcing locations
In the last three to four years, there has been lots of talk about customers seeking alternative production markets to China, and there has been some evidence of this happening, to a limited extent.
“There is diversification in sourcing, which is one of the reasons we have invested in markets like Vietnam, and other places in Southeast Asia,” said Bourke. “But we can’t decouple from China entirely.”
Nair noted: “There has been a lot of effort from retailers to try and switch sourcing.” Vietnam, for example, has grown at an unprecedented rate, from a relatively small base.
“But in the grand scheme of things, the simple scale and ability for other countries to handle a similar volume throughput to what’s coming out of China does not exist today. There are multiple challenges: infrastructure, roads, trucking capabilities, various impacts – and just sheer manufacturing scale in these countries cannot keep up or match the economies of what China can do.
“That being said, there is a steady shift of semi-manufacturing. The intra-Asia trade is a good indicator of what’s happening with that. Raw materials are still coming out of China and moving to these other markets and then they are being assembled or completed by manufacturing in countries like Vietnam and then exported to the US.”
He continued: “This started in response to the tariffs that were put on China; but most retailers are maintaining this hedge and strategy. It’s either Vietnam, or there’s some aspects in Mexico, in Europe. Near shoring overall is a trend that is increasing, but not enough to decouple today from China.”

Short versus long-term capacity
One common resolution by cargo owners in the height of the pandemic was to increase supply chain resilience in various ways, including greater use of longer-term contracts that provide greater guarantees, stability, and predictability of capacity and pricing. But as capacity becomes more available and affordable again, are we seeing any shift back towards short-termism?
“It depends on the mode,” said Bourke. “Clients are very much still open to longer-term fulfilment and warehousing contracts than they would have been, to create a sense of stability, and they are looking to outsource more to offset or mitigate against risk in that regard – especially for those companies that had to shut down their operations because they were not essential businesses.
“But whether it is domestic trucking, parcel, air or ocean freight, it is still a tale of near-term urgency versus long-term importance, where there are still some conversations around long-term contracts; it’s more the important not the urgent for some of our clients.”
Nair noted: “There is definitely interest. There was a sense of urgency from retailers and BCOs, especially, to secure capacity for the longer term. As short-term rates have reduced, obviously it is of interest. But I think a lot of retailers, at least on the US side, have learnt from the past and they would prefer to maintain their secure capacity as long as they can, without breaking open contracts.
“But it is early days. If the decline continues further, you never know.”

Peak preparations
With the normally busy third and fourth quarter peak seasons approaching, what should smart shippers be doing, even if this year’s peak is less daunting than the last two?
“Nobody is as cornered as they were, for example last year, being forced to make bold decisions with not as much information as they would like,” observed Bourke. “But since the start of the pandemic, we’ve been advising clients to make bold decisions early, because that always ended up coming to their benefit if they did take action, if they did make those bookings, secure that capacity when they had a chance.
“Now there is a bit of time for rethinking and strategising around supply chains and sourcing strategies. I think now those bold decisions are around how you think about inventory, how do you calculate inventory carrying costs, how do you get products closer to your customers in a more effective way, how do you think about growing into new markets.
“These are the things we are now helping our clients with. So, it’s no longer now about the hierarchy of needs – it’s about how we help our clients grow.”
“Clients are now being given some time to think about the impacts of the last two years and how they can do things differently to create that resiliency and agility and flexibility in their supply chains to be competitive going forward.”
But Christensen added: “Just because capacity is a little easier right now, don’t expect that to continue. There will be situations where capacity will become constrained again.”