Global equity markets have recoiled in recent months due to a complex cocktail of factors, including the spectre of inflation, record levels of central bank fiscal policy tightening, rising energy costs, the potential for a global spike in food insecurity and geopolitical instability. For freight transportation service providers, the derivative impact on the shipment of goods due to pressure on consumer discretionary spending, as well as the inevitable post-COVID rotation from goods to services, has weighed on volumes. 

For supply-chain fluidity, though, easing demand pressure has allowed for some measure of debottlenecking and some anecdotal reports of air-to-ocean conversion. However, there have been few signs of respite in global air cargo pricing data, which remains elevated relative to 2021 on Asia-origin lanes.

For supply-chain fluidity, though, easing demand pressure has allowed for some measure of debottlenecking and some anecdotal reports of air-to-ocean conversion. However, there have been few signs of respite in global air cargo pricing data, which remains elevated relative to 2021 on Asia-origin lanes. On the Asia-to-Europe side, rates in April from Hong Kong (BAI31) and from Shanghai (BAI81) were still 30% and 70% higher than the same period in 2021.  Similarly, rates to North American from Hong Kong (BAI32) and Shanghai (BAI82) rose 13% and 27% year-over-year, respectively. 

For context, the percentage of the population under lockdown in China right now is estimated to be larger than the entire population of the United States. And, while critical economic functions are still technically operational, the systemic nature of the quarantine restrictions means that production output from some of the country’s largest manufacturing centers are at their lowest levels since the initial shutdown in early 2020.

Early in the year, I expressed some level of surprise that we were not seeing even more upward rate trajectory based on the removal of air cargo capacity due to ongoing conflict in Ukraine. I posited that upward pressure there was being offset, in large part, by a production vacuum in China as a result of widespread COVID-related lockdowns. For context, the percentage of the population under lockdown in China right now is estimated to be larger than the entire population of the United States. And, while critical economic functions are still technically operational, the systemic nature of the quarantine restrictions means that production output from some of the country’s largest manufacturing centers are at their lowest levels since the initial shutdown in early 2020.

At the start of the pandemic, I warned that any shocks to the global air cargo system would be felt more readily and more deeply -i.e. pricing swings would have a higher amplitude -as a result of structurally lower supply and the dearth of a “capacity shock absorber.” Assuming no sharp and sudden deterioration in baseline demand levels (which cannot be guaranteed), there is a distinct scenario in which airfreight rates spike again, even from these elevated levels. That would occur as a result of:

  1. The clearing embolism of backlogged Chinese freight, if and when lockdowns are lifted.
  2. The effects of reduced air cargo capacity on Europe-related lanes due to isolated Russian capacity and swaths of closed air space and:
  3. The potential for more congestion at U.S. West Coast Ports if union labor relations stall and work throughput slows in anticipation of a contract expiration at the end of June 2022.  

Last month, I opined that the quick fixes to elevated pricing in a structurally supply constrained environment would be either time, or a significant demand pull back.  At least one of those events is inevitable -perhaps two. But in the meantime, logistics networks remain very congested and there is a real possibility that any temporary pull back in bottlenecks and rates are “head fakes” and volatility will continue to be an issue until the core problems are resolved.

 

About Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research, Stifel

Bruce Chan joined Stifel in 2010 and is based out of the Miami office.

Bruce Chan can be reached at chanb@stifel.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2021 by J. Bruce Chan.