Airfreight rate relief for shippers, or are things going to 'turn nasty'?
21 March 2023
With air freight rates settling below peak-Covid levels, and the Baltic Air Freight Index slipping 1.5% last week, the market has been anticipating a second-half recovery.
However, according to one analyst, this is mere wishful thinking – a continuation of a weak market could impact contracts, according to Ti’s Air Freight Rate Tracker report, published yesterday.
Noting that shippers were moving back to ocean, the report explains: “In light of this uncertainty, freight forwarders will be hesitant to sign long-term contracts, and even withdraw from longer fixed-rate agreements with cargo airlines. With the massive pressure on cost savings following record high logistics spend over last year, shippers should finally see some relief in the short-term and benefit from lower rates, compared with the year before.”
But shippers may see more longer-term relief.
The theory has been that, once inventory begins to be re-stocked in the second half, the air freight market might rebound.
“In both electronics and retail, inventory levels have increased over the past several quarters. As demand weakens, US and European factories and retailers are still sitting on too much inventory,” noted Ti. “Inventory overhang in major destination markets, especially the US, is putting the brakes on new factory orders and companies remain focused on inventory reduction, causing headwinds for the air freight market in the short-term.
“Also, with less supply chain disruptions globally and delivery times decreasing, factories and retailers have less need to hold high inventory levels. In addition to this, the increase in the cost of working capital is also prompting factories and retailers to improve the efficiency of their inventory management.
“Looking ahead, inventory levels will probably need restocking at the end of Q2 and Q3, providing a much-needed boost to the air freight market.”
However, Niall van de Wouw, head of airfreight at Xeneta, said there were other factors at play, arguing: “I think there will be a longer, nastier period than people think.
“The US is struggling to slow down its economy, so interest rates are going up and up. Lots of people are interested in de-stocking, thinking volumes will go up. But that’s more hopeful than confident.
“There are a lot of signals; interest rates hikes and inflation. If there is de-stocking in Q3, plus a slowdown in the economy, that may have a net-zero effect on air freight.”
Mr van de Wouw also wondered whether there might be economic “ripples” from the downfall of Silicon Valley Bank, adding: “People are hopeful for H2, but we’ll see.”
Ti added that the “sharp appreciation of the US dollar is having a significant impact on air freight, as most of the airlines’ costs are denominated in dollars. The US strong dollar is thus putting new pressure on airlines’ balance sheets, on top of high inflation and jet fuel prices.”
Bruce Chan, Stifel logistics analyst writing for the Baltic Exchange, pointed out that much of the premium on airfreight rates at the moment was fuel-related.
“The 40% and 33% premium of today’s rates on Hong Kong (BAI 32) and Shanghai (BAI 82) to North America, respectively, versus February 2019, is probably mostly due to fuel, given that Jet A is approximately 50% higher today than it was four years ago.”
While the overall Baltic Air Freight Index fell, TAC Index said the exception last week was China. The outbound Shanghai index surged 6.5%, up to both Europe and the US.
“Sources said that last week had started strongly, as the market continued to rebound from the Chinese New Year lull, but sentiment dampened amid rumours of capacity shifting from Europe to transpac routes,” it said.
Elsewhere, prices were down from all other major outbound locations, it added.
By: Alex Lennane