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Multiple disruptions putting pressure on supply chain

Trade is still growing, albeit at a more sluggish pace, as those in the business of moving cargo across international borders continue to fight fires old and new.
29 August 2022 •

Economists and analysts have now largely converged on the fact that the global economy is slowing down. Equally, most agree that some countries will almost certainly turn recessionary in the coming quarters.

Ocean container markets are not quite as taut as they have been for the last two years under Covid-19. But the northern hemisphere summer is still proving challenging for ocean shipping stakeholders as a slew of new and re-occurring supply chain disruptions blight the best laid plans.

“Forwarders are used to managing crises and finding solutions to ensure customers’ businesses run smoothly,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific. “Covid-19 has seen those challenges increase and this summer has seen no let-up."

“There are concerning economic signs, but we are still seeing green shoots that the freight pipeline remains healthy, even though volumes might be levelling off from Covid-19 peaks and returning to more historically normal levels,” added Leung.

Summer sun turning up the heat in Europe supply chain

Across Europe, sizzling temperatures throughout summer have left the continent’s rivers dangerously low. The Danube River, Europe’s longest, was barely navigable for barge traffic by mid-August. At the same juncture, the Rhine, a key industrial artery, was all but closed to freight at some sections as water levels fell to historic lows.

European ports have also been hit by strike action. Negotiations between unions and ports operators in Germany are ongoing while in the UK workers at the ports of Liverpool and Felixstowe have announced strikes in August.

The lack of barge shipping options is piling more pressure on already stretched European rail and road networks.

China exports slowed by ongoing pandemic restrictions

In China, factory activity unexpectedly shrank in July as ongoing Covid-19 outbreaks impacted operations. The official manufacturing purchasing managers’ index (PMI) fell to 49.0 in July, from 50.2 in June, with new orders and output both registering declines, according to China’s National Bureau of Statistics. In part, this is because fresh Covid-19 lockdowns in key production regions around Shenzhen in the south and Tianjin in the north have disrupted manufacturing.

Global shipping has also suffered disruptions in recent weeks as China has conducted live-fire military exercises in the Taiwan Strait.

Improved U.S. port situations, but congestion remains

Congestion at U.S. West Coast ports, particularly the Los Angeles and Long Beach facilities which act as the main gateway to North America, has improved through 2022.

Even so, overall U.S. port congestion is not seeing much improvement from the start of the year as congestion has instead shifted to the Gulf and East coast ports. Over 150 ships were waiting off U.S. ports in late July with Savannah, Georgia, New York, New Jersey and Houston among the worst performers. The congestion is the result of record high imports to the U.S. East Coast this year as shippers have sought to avoid delays on the West Coast.

Carrier schedule reliability has plummeted as a result. In June schedule reliability on East Coast services was just 18.7 percent, while vessels arriving late suffered an average delay of nine days, according to Sea-Intelligence.

Economic deterioration

Rising prices of many products alongside slowing economic growth are, of course, dampening economic forecasts. In July, the International Monetary Fund (IMF) downgraded its outlook, forecasting global GDP growth of 3.2 percent this year, a cut of 0.4 percentage points from its April forecast.

The forecast for annual global growth in 2023 was also revised, down 0.7 percentage points to just 2.9 percent.

In terms of freight demand, IMF forecasts for advanced countries – the biggest buyers of many containerised products – were cut even more aggressively. The U.S. economy is now forecast by the IMF to grow 2.3 percent this year (versus a forecast of 3.7 percent in April) and just one percent in 2023 (down from 2.3 percent).

Europe’s biggest economy, Germany, saw a huge 1.9 percentage point downgrade to its GDP growth forecast for 2023 when 0.8 percent growth is now expected. Overall, Europe saw 1.1 percentage point cut to its growth forecast for 2023 when GDP is expected to expand by 1.2 percent.

All of which translates into global trade in goods and services expanding 4.1 percent this year, down 0.9 percentage points from the IMF’s April trade forecast.

Box rates stumble

With macroeconomic headwinds strong and recessions now being forecast for many leading trading economies, it is perhaps unsurprising that container spot freight rates have been falling consistently in recent weeks on headhaul routes out of China. However, although freight rates have fallen a long way this year, this is no precipitous plunge. Freight rates on many lanes are still three to four times higher than pre-pandemic levels.

Even so, carriers have started blanking more sailings in a bid to stop further freight rate slides.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, said much now depends on how quickly central banks can control inflation and limit any major economic contractions.

“It’s clear that carriers will continue to void sailings to maintain the container slot supply-demand balance on key lanes out of Asia to Europe and the US, and also on other trade lanes,” he added. “This means container markets will likely remain relatively tight even if the negative economic forecasts are proven correct. We’re planning for all eventualities and urging customers to do likewise.”

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Economists and analysts have now largely converged on the fact that the global economy is slowing down. Equally, most agree that some countries will almost certainly turn recessionary in the coming quarters.

Ocean container markets are not quite as taut as they have been for the last two years under Covid-19. But the northern hemisphere summer is still proving challenging for ocean shipping stakeholders as a slew of new and re-occurring supply chain disruptions blight the best laid plans.

“Forwarders are used to managing crises and finding solutions to ensure customers’ businesses run smoothly,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific. “Covid-19 has seen those challenges increase and this summer has seen no let-up.”

“There are concerning economic signs, but we are still seeing green shoots that the freight pipeline remains healthy, even though volumes might be levelling off from Covid-19 peaks and returning to more historically normal levels,” added Leung.

Summer sun turning up the heat in Europe supply chain

Across Europe, sizzling temperatures throughout summer have left the continent’s rivers dangerously low. The Danube River, Europe’s longest, was barely navigable for barge traffic by mid-August. At the same juncture, the Rhine, a key industrial artery, was all but closed to freight at some sections as water levels fell to historic lows.

European ports have also been hit by strike action. Negotiations between unions and ports operators in Germany are ongoing while in the UK workers at the ports of Liverpool and Felixstowe have announced strikes in August.

The lack of barge shipping options is piling more pressure on already stretched European rail and road networks.

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Despite softened rates from a Q2 slowdown, uncertainties loom heavily.

With the peak season looming for container shipping, two trends are likely to shape markets in the coming weeks and months.

Firstly, in terms of demand for goods usually shipped on the major East-West trades, the consensus view is turning bearish as economic growth slows, inflation drags on confidence and bottom lines, and the war in Ukraine continues to dog the supply chain.

Secondly, even though freight rates have softened so far this year, global supply chains remain taut and vulnerable to further disruptions despite a Q2 slowdown.

The unknowns ahead of peak season

However, what is not certain is the extent of the impact brought on by the incoming global recession or how far demand for container shipping might decline when key markets start to contract.

Moreover, even if demand for container shipping drops significantly, most analysts believe it will still take multiple quarters to get liner schedules back on track, ports decongested and empties back in position. Indeed, even though demand softened in Q2, very little progress was made on improving liner schedule reliability.

Heading into the third quarter peak season then, this means that even a slight uptick in volumes from Q2 – the traditional quiet period for container shipping – would likely see port congestion in the US and Europe deteriorate further. This would inevitably take vessel shipping capacity out of the supply-demand equation, add to local equipment shortages and, most likely, push spot freight rates back up.

“There is no doubt that many economic metrics have taken a turn for the worse and some markets could be heading towards a slowdown, but how hard any landing might be is not yet clear,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific. “What is clear is that a lot of cargo is still being shipped and supply chain bottlenecks are apparent around the world.

Ongoing logjams

Certainly, multiple choke points continue to impact the efficiency of ocean supply chains, while the risk remains high that more will appear later this year. For example, China’s strict Covid-19 lockdowns have now been eased, especially around Shanghai, but there are no guarantees that more lockdowns will not follow later this year.

In Europe, northern hub terminals are struggling to ship out empties and vessel turnaround times have increased, adding to transit times. Hinterland rail, barge and road operators are also wrestling with capacity shortages.

DHL’s July Ocean Freight Market Update notes that port congestion in Europe is still a major issue. This is prompting delays to schedules and more blank sailings from carriers.  The update also highlights that the equipment situation also remains tight, especially for 40ft high cube container equipment.

A number of keys ports has also been subject to industrial action as inflation prompts unions to ramp up strikes in search of higher pay.

Congestion also continues to blight east coast US ports as shippers have sought to avoid US west coast ports where union representatives and employers are currently negotiating a new contract after the previous multi-year settlement expired at the end of June.

More disruption could easily follow later this year if negotiations do not progress smoothly, while a strike could potentially shut down 29 ports, including the Los Angeles and Long Beach complex so critical to trans-Pacific logistics.

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Liner reliability failures

All these disruptions manifest themselves, of course, in carrier schedule reliability. Sea-Intelligence’s latest Global Liner Performance (GLP) report found that global schedule reliability this year is largely following the trend seen in 2021, fluctuating within a small range but at a slightly lower base.

In May 2022, schedule reliability improved by 2.1 percentage points month-on-month to 36.4 percent, albeit still down year-on-year by 2.3 percentage points. “This means that the 2022 score has been slightly below the 2021 level in each of the first five months,” noted Sea-Intelligence.

The average delay for late vessel arrivals also decreased once again in May, dropping to 6.17 days. “The delay figure is now firmly below the 7-day mark, but it still continues to be the highest across each month when compared historically, albeit with the margin decreasing sharply,” said the analyst.

With schedule reliability of 50.3 percent, Maersk was the most reliable carrier in May 2022 followed by Hamburg Süd with 43.7 percent. There were six carriers with schedule reliability of 30 to 40 percent and six with schedule reliability of 20 percent-30 percent.

Economic clouds turn thunderous

Lower demand is the most obvious route out of the supply chain knots preventing carriers from improving their performance, albeit it being a bitter pill for most in the industry to swallow. And there is growing evidence that an economic downturn is underway.

The World Bank now expects global trade to decelerate to 4 percent year-on-year in 2022, while global growth in advanced economies is set to decelerate from 5.1 percent in 2021 to 2.6 percent in 2022. In emerging and developing economies, growth is forecast to fall from 6.6 percent in 2021 to 3.4 percent in 2022.

The U.S. economy might even turn recessionary during 2022. In June, Federal Reserve chair Jay Powell pointed to the “possibility” of a recession while analyst firm Nomura claims the country is “staring into the void”, with a mild recession starting in the fourth quarter “now more likely than not”.

Already the impact on trade is becoming apparent. Durable goods consumption jumped sharply above recent trends during the pandemic, due to constrained service activity and significant policy support. However, rapidly rising interest rates and deteriorating economic conditions are prompting a pullback in durable goods spending, a trend likely to continue through the rest of 2022 and 2023, according to Nomura.

“In particular, to some degree, durable goods consumption and home sales are interconnected and the recent deterioration in home affordability could weigh on durable goods consumption significantly,” said the analyst firm.

Nomura now expects US imports, which saw strong quarter-on-quarter growth through 2021 and the first six months of 2022, to turn negative until the third quarter of 2023.

In China there is growing evidence that manufacturing and new export orders are falling. President Xi’s strict lockdown policy, amongst other things, has prompted the World Bank to cut its real GDP forecast for Chinese growth to 4.3 percent, versus a government target of 5.5 percent and growth of 8.1 percent last year.

In Europe, there is almost no economic positivity and war is casting a long shadow.  S&P Global’s June PMI survey data showed the eurozone manufacturing economy ended the second quarter on a low as production levels fell for the first time in two years. Total new business intakes and export orders both declined, while business confidence slid to a 25-month low.

Backlogs of work, which built up significantly throughout the pandemic, also fell for the first time in almost two years as companies focused on completing unfilled orders due to falling demand. “Demand is now weakening as firms report customers to be growing more cautious in relation to spending due to rising prices and the uncertain economic outlook,” said, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

With inventories of both raw materials and unsold stock rising due to lower-than-expected production and sales volumes, respectively, Williamson said the downturn “looks set to gain momentum in the coming months”.

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What next?

Bjorn Vang Jensen, VP Advisory Services – Global Supply Chain at Sea-Intelligence, had previously predicted that the current bull run for container lines would “probably end around Q3, 2023” unless there was a global recession. However, he said even if there was a sharp drop in the container market due to a major economic contraction, it was unlikely that carriers would be back to loss-making rates, although freight rates would inevitably fall. “Newton’s Third Law will now do its thing, as it always has,” he said.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, added: “The global economy would need a major correction to entirely rid our industry of container line scheduling reliability issues. That doesn’t seem likely based on current forecasting. I expect flexibility will be critical to supply chain success and cohesion through the third quarter and beyond.”

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China exports slowed by ongoing pandemic restrictions

In China, factory activity unexpectedly shrank in July as ongoing Covid-19 outbreaks impacted operations. The official manufacturing purchasing managers’ index (PMI) fell to 49.0 in July, from 50.2 in June, with new orders and output both registering declines, according to China’s National Bureau of Statistics. In part, this is because fresh Covid-19 lockdowns in key production regions around Shenzhen in the south and Tianjin in the north have disrupted manufacturing.

Global shipping has also suffered disruptions in recent weeks as China has conducted live-fire military exercises in the Taiwan Strait.

Improved U.S. port situations, but congestion remains

Congestion at U.S. West Coast ports, particularly the Los Angeles and Long Beach facilities which act as the main gateway to North America, has improved through 2022.

Even so, overall U.S. port congestion is not seeing much improvement from the start of the year as congestion has instead shifted to the Gulf and East coast ports. Over 150 ships were waiting off U.S. ports in late July with Savannah, Georgia, New York, New Jersey and Houston among the worst performers. The congestion is the result of record high imports to the U.S. East Coast this year as shippers have sought to avoid delays on the West Coast.

Carrier schedule reliability has plummeted as a result. In June schedule reliability on East Coast services was just 18.7 percent, while vessels arriving late suffered an average delay of nine days, according to Sea-Intelligence.

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While air capacity saw some return with reduced demand from lockdowns, the approaching peak season and economic outlook spell further uncertainty.

The air cargo market continues to soften on higher capacity and sluggish demand, but the overall picture is very nuanced even as bellyhold capacity is returning to the market.

Thomas Mack, Global Head of Air Freight, DHL Global Forwarding expects air freight markets to tighten later this year, and urges a sense of caution as the peak season approaches.

“The world enjoyed some breathing room during the months of June and July and we do not expect a sudden surge in demand during this year’s peak season too,” he said, noting that DHL’s July Airfreight State of the Industry is forecasting that the softened demand across trade lanes in the coming months, especially out of Asia towards the U.S. and Europe will continue.

There is ample scope for a market upturn later in the year if – and it’s a big if – economic headwinds ease.

General air cargo market volumes fell eight percent year-over-year in May as war in Ukraine, soaring inflation, stock market declines and Covid-related restrictions in China battered business confidence and shipment levels, according to CLIVE Data Services. June followed a similar trajectory with volumes down eight percent year-on-year and down by seven percent compared to June 2019.

Mr. Subhas Menon, Director General of the Association of Asia Pacific Airlines, said that after a buoyant 2021, air cargo demand was now encountering more challenges, with “export orders facing downward pressures driven by waning business confidence levels amid an increasingly cloudy global economic outlook”.

Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific, noted that the looming presence of inflation, on top of the ongoing Covid-19 restrictions in China, are creating a sense of caution towards the market outlook for the second half of 2022. “Ongoing issues such as the energy crisis in Europe and labor shortages continue to affect the supply chain, bringing much uncertainty for the months ahead,” he added.

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Capacity up

More positively, freight options are increasing as bellyhold space returns to the market, albeit capacity remains lower now than pre-Covid. Available cargo capacity in June 2022 rose six percent compared to June 2021. This is the result of additional summer passenger flights entering the market as travel restrictions are removed around the world. However, total capacity remained 11 percent lower than in June 2019.

According to the July DHL Air Freight Market Update, while overall capacity in July was up 18 percent year-on-year, passenger capacity was almost 19 percent lower than in pre-Covid July 2019.

Delicate balance

Capacity additions and the deteriorating economic picture combined to push rates downwards in June, especially on the North Atlantic where rates have dropped 30 percent over the last three months, according to CLIVE. DHL’s July Airfreight Market Update also notes that general airfreight rates in June this year were still 120 percent higher than in June 2019 and 23 percent higher than in June 2021.

Niall van de Wouw, founder of CLIVE and Chief Airfreight Officer at Xeneta, said the softening Atlantic market, where more capacity has been added this summer, could have wider repercussions even on ex Asia lanes to the US and Europe where flights are currently “relatively full” if carriers transfer capacity away from the Atlantic lanes.

“Will carriers deploy their freighters to other markets in Asia Pacific, Africa, or South America? We are already seeing some freighter redeployment in the market,” said van de Wouw.

“But even on the trans-Atlantic trade land, there are still shortages of space. And globally demand for main deck capacity remains high,” added Mack.

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Explaining rate declines

Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research at Stifel, admitted in a report for the Baltic Exchange that Stifel had expected rates to rise in June. Explaining the downturn, he noted four factors.

First, fuel prices tapered steadily during the month, tempering increases in base rates.

Secondly, the third quarter is typically the second-slowest air freight shipping season and “we are currently entering the normal late-summer lull before the onset of the holiday peak” so the rates drop could also be partly seasonal.

“The third possible explanation is that the post-shutdown manufacturing ramp-up in China has been, and will be, more gradual than we expected,” said Chan.

Finally, Chan said there was also the possibility that demand was starting to moderate on a long-term basis. “Are we seeing signs that the recessionary bogeyman has arrived?” he added. “Airfreight volumes and airfreight rates are likely a leading indicator, in our view, but we don’t have clear evidence to support that thesis,” noted Chan.

Annualized U.S. GDP contracted 1.6 percent in 1Q22, for example, but unemployment and absolute consumer spending figures have been more resilient, and U.S. inventory-to-sales ratios remain near all-time lows.

“We don’t, and cannot, discount the possibility of the last scenario. And, while we do expect a broader slowdown at some point in 2023, we believe that what is currently impacting rates is shorter-term in nature,” added Chan.

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DHL Air Freight State of the Industry – July 2022
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Economic deterioration

Rising prices of many products alongside slowing economic growth are, of course, dampening economic forecasts. In July, the International Monetary Fund (IMF) downgraded its outlook, forecasting global GDP growth of 3.2 percent this year, a cut of 0.4 percentage points from its April forecast.

The forecast for annual global growth in 2023 was also revised, down 0.7 percentage points to just 2.9 percent.

In terms of freight demand, IMF forecasts for advanced countries – the biggest buyers of many containerised products – were cut even more aggressively. The U.S. economy is now forecast by the IMF to grow 2.3 percent this year (versus a forecast of 3.7 percent in April) and just one percent in 2023 (down from 2.3 percent).

Europe’s biggest economy, Germany, saw a huge 1.9 percentage point downgrade to its GDP growth forecast for 2023 when 0.8 percent growth is now expected. Overall, Europe saw 1.1 percentage point cut to its growth forecast for 2023 when GDP is expected to expand by 1.2 percent.

All of which translates into global trade in goods and services expanding 4.1 percent this year, down 0.9 percentage points from the IMF’s April trade forecast.

Box rates stumble

With macroeconomic headwinds strong and recessions now being forecast for many leading trading economies, it is perhaps unsurprising that container spot freight rates have been falling consistently in recent weeks on headhaul routes out of China. However, although freight rates have fallen a long way this year, this is no precipitous plunge. Freight rates on many lanes are still three to four times higher than pre-pandemic levels.

Even so, carriers have started blanking more sailings in a bid to stop further freight rate slides.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, said much now depends on how quickly central banks can control inflation and limit any major economic contractions.

“It’s clear that carriers will continue to void sailings to maintain the container slot supply-demand balance on key lanes out of Asia to Europe and the US, and also on other trade lanes,” he added. “This means container markets will likely remain relatively tight even if the negative economic forecasts are proven correct. We’re planning for all eventualities and urging customers to do likewise.”

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