OCEAN FREIGHT
All major portsaround the world continue to strugglewithheavycongestion as peak season cargo keepspouring in. Landsideinfrastructure is by now a full-blownsystemicissuecausinghavoc to supplychainsaround the world. Re-routings to avoidfurtherdelaysManycarriers are nowchoosing to omit the worst-hit ports to stabilizevesselschedules and rotations. From Asia to Europe, the averagedelay is up to 18 days, and in the US, the averageberthingwaiting time in the Port of Los Angeles is between 18-24 days. In the US, the situationhasreached a pointwhere US PresidentJoeBidenhasattempted to intervene, encouragingallportauthorities to look intoanymeasurethat can improve the situation. So far, with little effect. The trans-AtlantictradefromEurope to the US continues to sufferfrom a lack of capacity, which is a logicalconsequence of the heavyportcongestion. Overall, the US is a serious cause of concern as the situation is, on average, somewhat more criticalcompared to some of the other major markets. Subsequently, it is no surprisethatvesselschedulereliability is at an all-time low and, as stated by Sea-Intelligence, 1 the lowestlevelsincemonitoring of thisstarted. The situationimpactsall major trades, and for the samereason, short-termrateshavealsobeensustained at record high levels. SCFIhasdroppedmoderatelyfor 4 consecutive weeksduringOctober and the first part of November, only to increaseagainduring the lastweek. Rate leveloutlookDrewry, a leadingmaritimeconsulting company, announced on 11 November 2021 thattheirWorld Container Indexremainedsteady at USD 9.192,50 per 40 ft container. Thisindexcomprises the average of short-termratesacross 8 major trades, and the currentlevelmarks a 250 % increase vs. the sameperiodlastyear, cementing the inflated rate levels.
The new normal As for long-term rates, we are now seeing the first indications for 2022, including an increased appetite from both carriers and customers to discuss 3-year agreements. This development should be seen in the light of carriers expecting 2022, very much similar to 2021. It also shows that some level of normalization is expected to kick in during 2023, with more capacity coming in. In turn, certainty and reliability today rank higher than ever before on the customer side. For this reason, being able to secure capacity for the long term is increasingly considered a strategic move. The indications are currently that 2- and 3-year rates are locked at lower levels than 12 months rates. It is, however, worth noting that these rate levels are at a high level compared to historic and pre COVID-19 levels. In many cases, these types of agreements come with rigid structures in terms of forecasting and potential penalties on both sides in case commitments are not met. The development right now points to a mid-term where rates will settle at a middle ground, i.e., below current short-term rate levels and conversely above 2019 levels. It is not expected that we, in the coming years, will return to anything that resembles 2019 levels. In short, we are looking at a new normal rather than a return to the normal as we knew it. A few major impacts can alter this picture. At the top of the list sits a so-called “black swan” event, i.e., a major unexpected event with severity to push the underlying fundamentals in a new direction. An example of this could be a financial market collapse similar to the 2008 financial crisis. The impact of IMO 2023 IMO 2023 is another major change to take note of, potentially adding to further concerns on how the coming years will unfold. On 1 January 2023, new carbon reduction targets will be implemented, with carriers scrambling to find ways to meet the new targets. It is in this context very likely that not all carriers, if any, will be fully ready for this, leaving the only option of further slow steaming to meet the targets. This will cut into already scarce capacity as it could be required to add further vessels to each rotation. In a worst-case scenario, this may level out any additional capacity coming in. Long story short, the much-awaited extra capacity may disappear into a black hole. Conclusion Summing up, our assessment is a moderate downwards change in 2022 vs. current rate levels, with the mid/long term signaling a rate middle-ground plateauing at somewhere below current levels but well above historic levels.
AIRFREIGHT
In our latest update, we highlighted the problematic situation of flight restrictions at major airports across Asia following outbreaks of COVID-19. Back then, the only uncertainty was how long this situation would last and how the situation would evolve. In the meantime, we have seen this situation around COVID-19 cases ease, but we are still facing backlogs and rates- and capacity impacts from an increase in volumes overall. The market is, as expected, in a peak-season mode that is adding further pressure on the capacity situation and, in turn, driving up rate levels. Singles day, Black Friday, and Cyber Monday product launches, and not least the traditional Christmas rush, are causing constraints on most of the major trades. Major trade lanes like Asia to the US and Asia to Europe are, as usual, the most impacted ones, having experienced significantly increasing rate levels. Other trade lanes, i.e., Europe-Asia, Europe-US, and Latin America, remain under strong pressure too, however with a lower degree of rate increase impact. During the past weeks and months, the importance of the airport Ground Handling Agents (GHA) has become painfully apparent. COVID-19 cases in GHA teams across most airports have significantly impacted the industry, causing backlogs and bottlenecks to which there is no quick-fix solution. The cocktail of labor and equipment shortage, warehouse congestion, and increasing pick-up/delivery waiting times will continue to cause delays for the foreseeable future. Zooming in on the markets The highest focus is as often before on the Asia export markets. Increasing cargo output and capacity constraints continue to put high pressure on rates and transit times. Passenger flights are only resuming at a very slow pace, and we do not expect a significant effect from this in the short term. In fact, some signs of an increased level of restrictions could cause the suspension of certain flights again. On top of this, and even if countries may announce a reopening on particular routes, airlines will not be able to add flights with immediate effect. Schedule changes and aircraft availability will limit short term-effects, and it may take weeks, if not months, until airlines can adjust schedules. The rates we currently see in the market to and from Asia will remain elevated; however, we assess that the peak has been reached for now. On the Trans-Atlantic trade, we continuously see pressure on capacity as well. Even with travel restrictions lifted to the US, no ketchup effect is in the making. Several airlines have announced an increasing number of flights over the coming weeks and months, but it is expected that it will take time for this to ramp up. Also, worth noting that an increase in passenger travel could have a short-term negative effect, leaving less room for cargo payloads from a total weight perspective.
Future outlook We expect most trades will only experience a moderate development until the end of the year, implying that rates will remain elevated. Looking into next year, we do not assess that the capacity and rate situation will change drastically in 2022. Additional passenger flights will positively impact the capacity side, but as mentioned, the decrease in payload versus pure cargo flights will, as mentioned, negatively balance this effect. However, frequencies and the number of served port-pairs will undergo a positive trend. The current market situation is clearly explained in “Clive Data’s” most recent market update: With a 13% reduced capacity vs. 2019, but a 3% increase in volumes, the global load factor remains high. Especially on the largest trade lanes, we see an even higher impact between supply (available capacity) and demand (transported volumes).
Lastly, a very strong indicator that airfreight rates will continue at an elevated level is the rate differential for ocean freight. AirCargo News on 1 November commented, “On a per kilo basis, the differential between air and ocean rates has imploded from around 13:1 in September 2019 to less than 4:1.”
With such a slim price differential vs. ocean freight, it is our clear assessment that the demand for airfreight will remain red hot, overall sustaining the current market situation. Increasingly we experience customers that are looking into full charters in order to evacuate products from Asia. This is a viable option, albeit also a costly one due to limited aircraft availability.
RAIL FREIGHT
The rail freight market continues to follow suit with the ocean freight developments, and capacity remains scarce. Rate indications suggest a continued strong market on this mode of transport; it is though worth noting that we have seen a moderate rate decrease over the last weeks. Congestion is also easing up slightly with improvement in transit times as a natural result. There is, as we speak, sufficient equipment to meet the demand, and we expect this also the case throughout December; however, it is to be expected that January leading up to Chinese New Year will cause a tightening of the market. Cost and lead-timewise, rail freight remains a strong alternative to both ocean and airfreight. In a continuous effort to respond to the increased demand for rail freight from China to Europe, critical infrastructure is constantly being developed. New border crossing stations connecting China with Kazakhstan and other border points are being built and are undergoing pilots ahead of implementation to increase overall capacity on this route.