Global Logistics - Fortnightly Recap

In the midst of packing for a house move, wrapping up the cricket season, and navigating end-of-financial-year responsibilities at work, time has been a scarce resource for focusing on this report. However, recognizing that things are only likely to get busier, I wanted to take a moment to share a few thoughts on the subject.

In my previous report, I highlighted the industry's exuberance over increasing ocean freight rates, cautioning that this trend would be short-lived due to the market's excess capacity and stagnating demand. The August figures validate this perspective, revealing a month-over-month decrease of 2% in ocean rates. Liner companies were unable to sustain the earlier rate increases, underscoring the volatility inherent in the current market dynamics.

We have begun receiving rates for September, revealing a significant downward adjustment in freight costs on the Asia/Mediterranean and Europe trade lanes, further corroborating my earlier assessment that the uptick in rates would be short-lived due to market dynamics such as excess capacity and sluggish demand growth.

However, a noteworthy exception has been the rates on the Transpacific route, where rates are holding up largely attributable to operational challenges at the Panama Canal, a critical artery for global trade. Last month, non-booked vessels experienced an alarming increase in wait times—ranging from 44% to 59%—primarily due to unprecedented drought conditions. The drought led to limitations on the number of daily transits and imposed restrictions on ship drafts, thereby affecting overall maritime traffic. According to Reuters, the ship backlog has shown signs of improvement, decreasing to 117 vessels as of last Friday from a high of over 160 vessels in early August.

On a somewhat positive note, the Panama Canal's condition has seen incremental improvement over the past two months, with a slight uptick in rainfall contributing to stabilizing the canal’s water levels. While this has not led to an immediate resolution of the bottleneck, it may signal the beginning of a trend toward normalization.

According to last Thursday's data from Drewry, the composite World Container Index witnessed a 1.6% decrease, settling at $1,739.59 per 40-foot container for the week. Specific trade showed downward rate adjustments: Freight rates between Shanghai and Rotterdam fell by 4%, the Rotterdam to Shanghai route experienced a 3% reduction, Rates for New York to Rotterdam dipped by 2%.

As illustrated in the above chart, a distinct divergence in rates between the Transpacific and Asia-to-Europe trade lanes has become increasingly evident. It is important to note that October marks the onset of the Golden Week holiday in China, a period traditionally characterized by reduced operational activity. Historically, carriers and operators have leveraged the first week of September as a last opportunity to implement rate increases before this slowdown. However, this year, such an increase did not materialize, reinforcing the ongoing market dynamics of rate instability and competitive pressures.

With regard to the backhaul segments, there is little variation to report, as rates have consistently maintained lower levels.

According to a recent analysis from Morgan Stanley, demand-side prospects for container shipping appear limited due to declining indicators in China's export sector. Specifically, China's Export New Order Purchasing Managers' Index (PMI) registered a drop to 46.3 in July 2023, continuing to linger below the threshold of 50 and thereby signaling a contractionary environment. In this context, Morgan Stanley forecasts a deceleration in global trade growth to 1.7% year-over-year in 2023, compared to the 6.4% growth observed in 2022. Given these factors, the likelihood of the market successfully absorbing a 6-9% increase in effective container shipping supply during the 2023-2024 period is deemed low.

The year-to-date (YTD) performance in the container shipping sector presents a mixed picture. While a limited number of carriers and operators have reported satisfactory results, the broader landscape remains lackluster. Most industry analysts concur that we have yet to see the bottoming out of earnings for the majority of these carriers. This situation raises legitimate questions about the appetite of investors to further commit capital to an industry that is notoriously cyclical with short-lived profitability phases.

The Baltic Dry experienced its second consecutive weekly decline last Friday, pressured by weakening rates for capesize and panamax vessels. The index—incorporating capesize, panamax, and supramax vessel rates—decreased by 21 points, or 1.9%, settling at 1,065, marking its lowest point in over five weeks. On a weekly basis, the index declined by 1.4%.

As we approach the final quarter of the year, it is increasingly evident that both the dry bulk and container shipping markets are poised to continue facing downward pressure. This challenging environment can be primarily attributed to a global slowdown in demand, affecting both sectors.

As per BofA, In August, air freight rates experienced a 4% decline, a reflection of persistently soft demand. Meanwhile, the industry saw an 11% year-on-year increase in capacity in July, largely due to the resurgence of belly capacity. Notably, Western Global Airlines, a U.S.-based air cargo carrier with a fleet of 11 aircraft, filed for Chapter 11 bankruptcy in August. The carrier's financial difficulties were exacerbated by a sluggish rebound in Chinese activities and the return of belly capacity to the market. This bankruptcy raises the specter of further rationalization of air capacity, as additional small operators may also face insolvency risks.

Headlines for the week

• Oil rises to highest in over seven months on supply worries
• Talks to avert strike called as Chevron Australia LNG workers reject deal
• Two cargo vessels have left a port near Odesa, Ukraine's deputy prime minister said on Friday - the third and fourth to transit from deep-water Ukrainian ports through the Black Sea since Russia withdrew from a safe-passage deal for grain ships.
• Philippines curbs rice prices as inflation worry mounts
• Peru's Minsur to invest at least $2 bln as it expands copper, tin operations
• Metals extended this week’s gains after Beijing delivered a boost for China’s property sector, while a private survey pointed to a pick-up in the country’s manufacturing sector.
• Russian President Vladimir Putin will hold talks with Turkey's Tayyip Erdogan on Monday in the Black Sea resort of Sochi as Ankara and the United Nations seek to revive a Ukraine grain export deal that helped ease a global food crisis.

On to other news....

As any gains from this month’s FAK rate increases disappear and rates fall, major container lines are still considering adding more tonnage to an already over-supplied market. (Container lines may be eyeing even more new tonnage)

There’s good news and bad news in the lead article in this week’s report from Alphaliner, the leading container publication from brokers BRS. First, the good news. Analysing Q2 results for the nine global carriers who publish their earnings before interest and tax (EBIT) shows that volumes bottomed out in the first quarter. (Carrier operating margins fall into single digits for first time in 3 years)

China’s manufacturing activity turned in another soft performance in August, contracting for a fifth straight month, and adding to the view that the world’s second-largest economy is struggling to reignite growth. But while the economic data has been weak, China’s imports of most major commodities have been largely unaffected, and arrivals of key resources such as crude oil, iron ore and coal appear to have accelerated in August. (China’s PMI stays sluggish, but commodity imports are still robust)

Demand remains low with minimal growth while global capacity has increased by 12% year on year, said DHL Global Forwarding in its Air Freight – State of the Industry report for August. (Capacity up but demand remains depressed, says DHL)

DHL Express, the world’s leading international express delivery service provider, has relaunched its international Same Day Service for customers in the UK with emergency delivery needs or with items that cannot be sent through the Express network. (DHL Express relaunches international same day service)

The Upply x Ti x IRU European road freight rates index for Europe shows that the Contract Rate Index is down 0.2 points quarter on quarter, although it remains up 2.8 points year on year. Meanwhile, the Spot Rate Index is down 3.5 points quarter on quarter and down 7.5 points year on year. (European Road Freight Rate Benchmark Q2 2023: spot rates drop below contract rates for first time in 6 years)

The Russian invasion of Ukraine is turning Kiyv’s relationship with its neighboring European countries into a rollercoaster. One of the most evident examples is Poland. Over the past few days, the country asked to extend a ban on Ukrainian grain imports and, at the same time, signed a document with Ukraine to increase imports and exports via rail. (The complicated relationship between Poland and Ukraine)

The economic slowdown, which began in 2022 is still in progress and the first half container traffic results of the world's leading ports provides fresh confirmation of this. Chinese ports are virtually the only ones to show positive results, even though the country's economic recovery, following its abandonment of its Zero-Covid policy, was less strong than it had hoped. European ports, meanwhile, are struggling and the fall in traffic at US ports has been even more severe. (World port traffic driven down by economic slowdown)

US Census data shows that Mexico has surpassed China as the US' major trading partner during the course of this year. (Mexico overtakes China as biggest US trading partner)

China's BYD has joined the world's 10 biggest car companies by sales for the first time, surpassing Mercedes-Benz Group and BMW in a sign of how electric vehicles are reshaping the auto industry. (China's BYD breaks into world's top 10 automakers with EV push)

Manufacturing’s shift away from China is being driven by factors including rising labour costs, the trade war with the US and concerns about China's political and economic stability. Yet many companies who want to move will find it “borderline impossible”, warns Michael Farlekas, CEO of e2open. (Moving manufacturing from China 'impossible for many')

China remains embedded in U.S. supply chains even as American firms have taken steps to reduce direct imports from the country, according to a paper presented at the Federal Reserve Bank of Kansas City’s annual Jackson Hole conference August 26.(China Remains Embedded in U.S. Supply Chains: Jackson Hole Paper)

Transport and storage companies reported lower turnover than many other sectors last month, but July’s figures could be “masking future problems” for businesses as the logistics sector is poised for an uptick in costs. (‘Gloomy’ logistics sector results suggest delayed bounceback and price hikes ahead)

According to the EY MENA M&A Insights H1 2023 update, the MENA region witnessed a total of 318 merger and acquisition (M&A) deals amounting to US$43.8 billion. The GCC region accounted for the majority of deals, 254, valued at US$42.5 billion.(MENA M&A Activity in H1 2023 Reaches 318 Deals Valued at US$43.8 Billion)

The International Longshore and Warehouse Union said its members have ratified a new, six-year contract covering dockworkers at West Coast ports, ending more than a year of uncertainty for importers and exporters at some of the nation’s busiest gateways for ocean shipping.(Dockworkers Ratify Labor Deal at West Coast Ports)

The Dutch government is toning down its plan to cut flights at Amsterdam’s Schiphol airport, following a consultation process on the hotly contested move.(Dutch Government Tones Down Schiphol Airport Capacity Cut)

Given the staggering pace of generative AI development, it’s no wonder that so many executives are tempted by the possibilities of AI, concerned about finding and retaining qualified workers, and humbled by recent market corrections or missed analyst expectations. They envision a future of work without nearly as many people as today. But this is a miscalculation. Leaders, understandably concerned about missing out on the next wave of technology, are unwittingly making risky bets on their companies’ futures. Here are steps every leader should take to prepare for an uncertain world where generative AI and human workforces coexist but will evolve in ways that are unknowable. (How to Prepare for a GenAI Future You Can’t Predict)

The last league cricket game of the season for my son has come to a curtain-closing, wicket-shattering end, which sadly also tolls the bell for my regular Saturday rendezvous with G&Ts. But just as you thought I'd transition from cricket dad to couch potato, the plot thickens! Next Sunday (10th September), it's not just any match—it's the British Sri Lankans versus the Club Commoners, and yours truly will be donning the cricket whites to captain the Lankan team for the first time in 2023. Picture it: It's like the United Nations, but with more appeals for LBWs than resolutions. Hopefully, I'll be able to get out of bed on Monday for my work flight at 5 AM :)