Is Asia export recovery underway?

Could we be seeing the start of a prolonged upturn in Asian exports? Well, for starters, growing evidence suggests improvements enjoyed by air cargo markets in Q4 2024 might not run out of steam in December.

WorldACD reported that global air cargo demand in the fourth quarter period has been stronger than tonnages in the equivalent period last year. At the same time, a 27 November market update from TAC Index noted that the recent firmer tone in global air freight markets is continuing.

According to TAC Index, unlike 2022, when there was little or no peak season, this year has seen rates rising steadily since September – boosted by strong e-commerce business and various disruptions to capacity ranging from wars to earthquakes and volcanoes to recent record snowfall in Anchorage.

Indeed, the overall Baltic Air Freight Index rose a further 3.3 percent in the week to 27 November, taking the gain for the month to a 12.2 percent increase, and cutting the year-on-year decline to a 17.2 percent decrease. The global rise continued to be led by rates out of China, with the index of outbound routes from Hong Kong up by 1.4 percent in the week, and trans-Pacific rates moving ahead of where they were at the same point of 2022.

Outbound Shanghai rates were even stronger, with a gain of 8.3 percent week-on-week, with higher rates to Europe and the U.S., putting it ahead year-on-year by 9.7 percent, according to TAC Index.

“As e-commerce remains a strong driver of growth, the market is gradually recovering, albeit slowly. Air cargo capacity is starting to increase, and in particular, we’re seeing airlines from Asia Pacific leading the growth in air cargo demand with a 4.2 percent year-on-year increase,” said Niki Frank, CEO, DHL Global Forwarding Asia Pacific.

Building on a strong e-commerce demand en route to 2024

The latest volume data from airlines confirms that traffic from Asia has improved a lot in the fourth quarter. In results released in late November, the Association of Asia Pacific Airlines (AAPA) said member carriers saw a 3.2 percent year-on-year increase in international air cargo demand measured in freight tonne kilometers during October. Capacity was up 8.9 percent over the same period.

“The region’s airlines posted a second consecutive month of growth in international air cargo demand in October, ahead of major promotional retail sales periods such as Singles Day, supporting higher volumes of e-commerce shipments going into the year-end festive season,” said Subhas Menon, AAPA Director General at the end of November.

The November edition of DHL’s Air Freight State of the Industry also noted that while air cargo demand remains steady, with easing inflation expected to boost customer spending, high prices continue to hinder business confidence. As such, it remains uncertain if the increase in exports will last beyond Chinese New Year.

Analysis from Nomura expects bullish exports beyond Chinese New Year, a key seasonal waypoint for air cargo due to factory closures that tend to boost short-term demand. The analyst’s leading index of Asia ex-Japan’s aggregate exports consists of nine forward-looking components and has a three-month lead time. Following a strong rebound to 86.9 in November, the index rose further to 87.8 in December, driven by improved import demand from China and a further pick-up in tech-related indicators in line with Nomura’s conviction that there will be a “pronounced chip recovery over the next several months.

According to Nomura, the rising index signals that Asia’s export cycle is on the mend. The analyst predicts that looking ahead, they expect Asia’s export growth recovery to sustain through H1 2024, supported by higher inventory demand for chips and a firmer pick-up in memory prices. However, as they also forecast a U.S. recession starting in Q3 2024, whether Asia’s export recovery can sustain into H2 2024 is less certain.

Slow but steady growth for air cargo

Despite the upturn, it is worth noting that global air cargo demand has not yet fully recovered to pre-pandemic levels. According to Niall van de Wouw, Xeneta’s chief airfreight officer, Xeneta data reveals that the slow recovery can be mainly attributed to declining general cargo volumes rather than specialized cargo, which has remained steady.

“The 8 percent decline in global demand compared to pre-pandemic also points to the fundamental fact that overall air cargo demand is growing slower than real global GDP growth,” explained Van de Wouw.

On the other hand, he also pointed out that global air cargo capacity has almost returned to its pre-pandemic level thanks to a full recovery of belly capacity in many markets. Van de Wouw predicts that there will be less pressure on rates in 2024, simply because less capacity will be added to the market.

“We will not see a similar return of air freight capacity next year. Hence, the downward pressure on load factors and rates will be less than what we saw during Q2/Q3 this year,” he added. 

However, there remain upside and downside risks for 2024. For example, Nomura forecasts that China’s export sector may continue to face strong headwinds, as developed economies seek to hold their interest rates higher for longer, the U.S. and its allies are sparing no effort in their moves to diversify their supply chains, and foreign companies attempt to withdraw their direct investment from China.

Van de Wouw noted that the ocean freight market might be the significant determinant of air cargo fortunes in 2024.

“After years of bumper profits, the ocean carriers are now (back to) operating at low to negative margins. It remains to be seen what this will do to the reliability of their service offering and hence the need for airfreight,” he said.

“If this reliability continues to fall in 2024 from the current historical (sub-peak) levels, then air freight demand on individual lanes could receive an unexpected boost, and hence, an upward push in rates.”

Frank noted that e-commerce demand and tech product launches ahead of the holiday season had given air cargo markets out of Asia a peak season boost. “Overall, there are positive signs for air cargo and for exports out of Asia. Whether this has the energy to take us through to Chinese New Year, we will see. But I think the fundamentals of export demand from many Asian countries are improving,” said Frank.