Market Update: July 8th, 2022

Latest News

CP joins United Nations Global Compact. Canadian Pacific is the first freight rail company in North America to participate in the United Nations (UN) Global Compact, a voluntary leadership platform for the development, implementation and disclosure of socially responsible business practices. Launched in 2000, the UN Global Compact is the largest corporate sustainability initiative in the world, with more than 15,000 participating companies in over 160 countries. “CP’s participation in the UN Global Compact marks an important milestone as we advance our commitments and position as a sustainability leader in the rail industry,” said Keith Creel, CP’s president and CEO. “CP is proud to join thousands of other companies globally committed to sustainable and responsible business action.” Creel added that CP is committed to aligning its strategies and operations with 10 principles in the areas of human rights, labour, environment and anti-corruption and taking action in support of the UN Sustainable Development Goals. CP recently received the 2022 World Finance Sustainability Award for Most Sustainable Company in Transportation.

AIR Freight

‘The air cargo market hasn’t collapsed, it’s just the seasonal norm’. When Shanghai’s lockdown ended most companies expected a surge in cargo and a bounce in airfreight rates, as China attempted to rebuild its export market, This, of course, has not happened. But the question is, why? According to Stifel, writing for the Baltic Exchange, there are four possible explanations – or a mix thereof. First, it said June’s “fuel prices tapered steadily during the month, tempering increases on base rates”. IATA’s jet fuel monitor recorded prices down 6.4% in June, from May, and down 5.4% in Asia and Oceania. Stifel said the fall had “removed upward pressure on fully baked airfreight rates”. Second, noted Bruce Chan, Stifel’s director global logistics, it was June. He said: “We are currently entering the normal late-summer lull before the onset of the holiday peak. So there is a potential that seasonal demand patterns are helping to keep pricing stable.” The third potential explanation is that the manufacturing ramp-up in China is more gradual than expected. Mr Chan added: “Manufacturing PMI in China recovered in May, but was still below trend and in contraction territory.” Some forwarders in China, however, have suggested that exports continued to flow, to some extent, but via hubs other than Shanghai. Fourth and finally, noted Mr Chan: “There’s the possibility that demand is starting to moderate on a longer-term basis. “Are we seeing signs that the recessionary bogeyman has arrived? Airfreight volumes and airfreight rates are likely a leading indicator, in our view, but we don’t have clear evidence to support that thesis. “Annualised US GDP contracted 1.6% in Q1 22, for example, but unemployment and absolute consumer spending figures have been more resilient, and US inventory-to-sales ratios remain near all-time lows. “We don’t and cannot discount the possibility of the fourth scenario. And, while we do expect a broader slowdown at some point in 2023, we believe what is currently impacting rates is shorter-term in nature.” One airfreight orwarder agreed that the demise of the market had been exaggerated, and likely a short-term lull. “Every year you get busy, medium and slack times in air freight. Market is soft, market is congested, market is reasonable … every year – up until 2020 and the pandemic,” he said. “Then it just became peak season all the way through from PPE, to e-commerce, to recovery mode with product, to retail merchandise as shops opened; and all with most of the world’s passenger fleets grounded, so bellyhold cargo capacity supply was devastated. “So what we are seeing now is quite normal – May/June/July are traditionally quiet times for air freight demand. People forget this fact and now it is being reported that the air cargo market has collapsed. It hasn’t – it’s just going through its seasonal soft period.” He pointed out that China to US and Europe were “actually still very busy and rates are rising weekly”. As the market softens, expect to see more airfreight rate renegotiations.

News that the air cargo market is continuing to soften is likely to trigger more rate renegotiations between carriers and customers. The latest data, out today, shows volumes in June were down 8% year on year, while demand was down 7% compared with 2019. Capacity was up 6% over 2021 – but is still 11% down on 2019 levels, according to Clive Data Services, part of Xeneta. Overall, rates remain 129% higher than in 2019, but the market is seeing a steady decline, with the North Atlantic “a test case for the direction of other markets” – seeing a fall of 30% over the past three months. “Rates [are] very close to 2020 levels,” said Niall van de Wow, head of airfreight for Xeneta. “If we just look at the spot market, the rates are already lower in the past two weeks compared with 2020 by around 5%, and the market has yet to bottom out. This will be causing some interesting soul-searching for airlines and forwarders.” Mr van de Wouw told delegates at last week’s Tiaca regional event in Amsterdam that airlines had become “more nimble” at responding to external events – and shippers wanted to renegotiate as rates changed. “Shippers used to deal with forwarders at a fixed price for a year. Now, some are setting prices every two weeks, renegotiating. It’s a tremendous amount of work. Airlines are constantly adjusting prices because of technology. Shippers are renegotiating more, the market is a lot more dynamic and a lot more intense.” Tristan Koch, former airline cargo manager and now chief commercial officer for tech company Awery, agreed that more transparent rates would lead to “shippers demanding more short-term visibility on rates”, adding: “Renegotiation is inevitable with more transparency, people want to know the rate today, not for six months.

SEA Freight

Carriers holding spot rates steady, but how sustainable are contracts? Ocean carriers appear to have succeeded in halting the erosion of container spot rates from Asia this week, thanks to aggressive blanking programmes, but falling demand from Europe and the US is a growing concern for the integrity of contracts. Global demand data released this week by Container Trade Statistics (CTS) shows evidence of further signs of weakening in the market, with 2.8% fewer full containers transported in May than in the same month last year. And a carrier contact The Loadstar spoke to this week admitted that the peak season had got off to “a slow start”, adding: “We are hoping that August will be stronger.” Maersk’s recent Asia Pacific market update remained optimistic on the outlook for Europe and North America, describing demand as “stable”. And for North Europe, the carrier “expected demand to pick up throughout July/August as we approach the traditional summer peak”. However, it expects the Mediterranean to have a traditional peak season boost, and said it had “strong advance bookings from some key customers” for the route. But on the transpacific, Maersk was less optimistic, predicting “a slight uptick, with demand strengthening from mid-July to August”. One of the most bullish trades for the carrier is Latin America, where it reported capacity utilisation was “over 95%” and “cargo-rolling is likely, due to increased demand”. Meanwhile, spot rates from Asia to North Europe were stable this week, according to the FBX, WCI and XSI indices, with readings ranging from $9,280 to $10,490 per teu. Blank sailings and continuing port congestion at North Europe hubs are preventing a rate collapse as load factors plunge to 80% on some westbound sailings. Moreover, unlike on the transpacific, where spot rates have sunk below contract rates, carriers to North Europe and the Mediterranean are not so far facing pressure from shippers to renegotiate contracts. For the transpacific, Xeneta’s XSI Asia to US west coast component declined 4% on the week, to $7,309 per 40ft, while the Freightos Baltic Index FBX lost 2% to $7,425, with Drewry’s WCI edging down by 1% to $7,556. However, for the US east coast ports, the FBX and the WCI were virtually unchanged, at $9,881 and $10,175 per 40ft, respectively. Spot rates from Asia to North America have fallen by about a third in the past 12 months and transpacific carriers are coming under increased pressure from BCOs to renegotiate contracts, many of which are now more expensive than deals the same carriers are offering on the spot market.

CN strike ends as union agrees to arbitration. A two-week strike at Canadian National Railway Co. is ending after the union representing 750 signals and communications workers agreed to binding arbitration. Steve Martin, a spokesman for the International Brotherhood of Electrical Workers, said the strike that was launched June 18 will end just after midnight. Employees will return to their roles Wednesday morning, the company said in a news release. The IBEW initially rejected the railway’s proposal to resolve remaining differences, on wages and benefits, through binding arbitration, saying the concessions didn’t go far enough. But Martin said the time was right to take this step now. “It was a collective decision by the negotiating committee that considering all the facts and the current state of where we’re at in the strike that it was the most reasonable thing to do,” he said in an interview. In addition to wages, arbitration will decide on a lifetime cap on some health benefits. The Montreal-based railway thanked management employees and contractors for their service that “allowed rail operations to continue uninterrupted during the strike.” The company’s offer from late June included a 10 per cent wage hike over three years and better schedules ensuring two consecutive days off.