China demand may end period of falling costs

Container Shipping

There appears to be marked downward pressure on costs in global logistics markets at present. Sea container freight-rates are being driven lower, with Maersk commenting that new contract-rates were “approaching spot-rates”, which is perhaps not so surprising. Similarly, the airfreight market has returned to something resembling its pre-pandemic condition as demand is quite soft, with volumes falling in low single-digit percentages. Supply of belly-freight in particular is robust and therefore prices are also weak.

A modest exception is road freight-rates which are falling less rapidly in various markets, possibly because the market conditions of the past two years were less extreme than in sea-freight or airfreight. One area that remains robust is warehousing, which despite the bursting of the e-retail bubble has not seen the sharp fall in either demand or prices, although demand may not be quite as frantic as a year-ago.

So, with the exception of warehousing possibly, what the market is driven by is not supply (although the container shipping market is seeing continued underlying growth in the number of ships available) but demand. Consumer demand in the US is not bad, rather it is muted. The anticipated recession has not been realised and inflation seems to be in retreat.

The effect of this is that those buying freight ought to be looking towards steadily falling costs for much of this year. There is, however, one possible problem. The re-emergence of China may drive-up demand and costs for goods and services, especially oil. The International Energy Agency for example warned in its monthly oil market report that “Global oil demand is set to rise by 1.9million barrels per day in 2023, to a record 101.7million barrels per day, with nearly half the gain from China following the lifting of its Covid restrictions”. Ominously it warned that “Jet fuel remains the largest source of growth, up 840 kb/d”. What may happen is a return to sharply rising fuel costs towards the end of the year.

Whilst the impact of oil prices should not be exaggerated, it does appear that economic conditions will change towards the end of the year. Logistics costs may rise not due to demand for fixed assets such as ships or aircraft but because of higher operating costs such as fuel or labour.

Author: Thomas Cullen

Source: Ti Insights

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