Weak demand and rising capacity drive air freight prices lower


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May 16, 2023

Weak demand and rising capacity drive air freight prices lower

But if China keeps growing fast and any recession in the west is brief and

But if China keeps growing fast and any recession in the west is brief and shallow, perhaps the market may yet reach a bottom soon.

After a modest bounce during March, global air freight prices resumed their downward trend in April.

According to TAC Index, a leading price reporting agency for the sector, the overall Baltic Air Freight Index (BAI00) dipped a further 0.8% during the week to 1 May, to leave it lower by 42.5% over 12 months.

There were, as usual, regional variations, with Hong Kong (BAI30) up 1.1%, week on week, to leave it down 42.2% year on year, but Shanghai (BAI80) down 2.3% WoW, to leave it down 48.5% YoY – but with upper quintiles in the range of prices paid falling again after an uptick in March.

Markets were weaker in Europe, with Frankfurt (BAI20) down3% and London (BAI40) down5.1% WoW, leaving them at -38.8% and -43.0% YoY, respectively. But rates were firmer again out of Chicago (BAI50), with a WoW gain of 5.6%, leaving the YoY figure at -28.2%.

Overall, the latest data reflects the fact that demand seems to have softened from certain key sectors, while capacity in both dedicated freighters and bellyhold continues rising.

It isn't surprising, therefore, following the boom in air freight during the Covid pandemic, that there was an unmistakeably more sober mood at this year's IATA World Cargo Symposium in late April, in Istanbul.

Outlining the data on market dynamics to the IATA crowd, Sander Schuringa, of Accenture, reeled off a series of statistics showing just how much demand had fallen back.

Demand from the pharma sector had fallen most, he said, by 29% over the previous year, not surprising perhaps given less need to move Covid vaccines. In other key sectors, fashion was down 18%, hi- tech down 12% and auto down 11%.

At the same time, following the Covid boom, there had been a sharp rise in the number of new air freighters on order, Mr Schuringa pointed out – including many yet to be delivered. Furthermore, the end of Covid had driven a revival in passenger traffic – which boosted bellyhold capacity by some 26% in the year to end-March.

With demand falling and capacity rising that much, it doesn't take a genius to work out that market forces drive air freight rates lower.

All that said, following steep falls over the past year, many market participants have been hopeful that, with demand still strong in other key sectors like e-commerce, market rates may reach a bottom soon – perhaps as the busy summer season gets into full swing.

Optimists will have been buoyed by a continuing fall in jet fuel prices – down a further 11.5% in the month to 28 April – to put them 45.1% lower over 12 months, according to Platt's, very much in line with the fall in freight rates.

Whether that more optimistic scenario pans out depends most critically on how the global macro outlook develops in major markets. In the US, as we noted last month, the sudden collapse of Silicon Valley Bank and then Signature Bank has raised the spectre of a new banking crisis.

Decisive action to save customers of the afflicted banks, orchestrated by treasury secretary Janet Yellen and Fed chairman Jerome Powell, seems to have averted the immediate threat of that – with Republic Bank the latest to be rescued in a takeover by JP Morgan.

On the other hand, a flood of deposits away from weaker, smaller banks into bigger banks and money market funds in the US will be tightening credit conditions considerably – and increasing chances of a deeper, longer recession.

In Europe, by contrast, the outlook has brightened considerably in recent months – driven by the sharp fall in natural gas prices.

With a stronger, more tightly regulated banking sector than the US, that has opened up the prospect of a period of ‘benign disinflation’ in Europe – though experts remain doubtful recession can be avoided.

The best recent news in terms of economic performance has been coming out of Asia, where China has finally started to revive strongly from its Covid era torpor, with GDP now projected to rise about 5.2% this year.

The economy has definitely been on the up, but Chinese equity markets, by contrast, have not – or at least not yet. The main reason for this ‘disconnect’ between the real economy and the markets has been geopolitical worries, particularly about the deteriorating state of the US-China relationship – not least over potential conflict in Taiwan.

Coming on top of vulnerabilities in supply chains, exposed during the Covid pandemic, such geopolitical worries have further heightened talk about more on-shoring, ‘near-shoring’ and ‘deglobalisation’.

Developments like the US Inflation Reduction Act are being seen by many essentially as protectionist measures to drive and keep growth in key sectors, like new energy onshore. This new mood has also been giving an apparent boost to alternative supply chains out of different locations – such as India, Vietnam and Brazil.

Despite all the talk about those things, the data presented by Accenture at the IATA meeting would appear to show that not much has really changed in global supply chains – yet, at least.

Mr Schuringa cited data, for instance, which showed China's share of global mobile phone production had indeed fallen, from 77% pre-pandemic to about 71% now – down quite a bit, but still a very dominant market share.

Over the same period, the global market share of India in mobile phones had grown dramatically – four-fold – but only from 1% to about 4%, still pretty modest.

In laptops, China's market share had held up even more robustly, according to the numbers cited by Accenture – dropping from 89% to 84%, still an overwhelmingly dominant level.

With numbers like these in key sectors, it is no surprise that Hong Kong – as tracked by the BAI30 index – continues to be the busiest cargo airport in the world. And that the most important mainland Chinese airports, like Shanghai Pudong (BAI80), remain among the most closely watched outbound locations.