Supply Chain Matters highlights the increasing realities of declining global trade and freight rates that are occurring in the first-half of 2023.
Background
Global wide transportation and logistics costs increased at unprecedented rates during 2021 and 2022. Carriers and logistics services providers experienced windfall profit levels in their ability to leverage the constant disruptions and ship deployment imbalances into skyrocketing spot rates, added services fees, surcharges or demurrage penalties.
During 2022, as consumers shifted their physical goods buying patterns away from products and into travel and services, global shipping volumes steadily declined and so did spot rates. The Drewy World Container Index, which stood at $9,304 per 40-foot container at the beginning of 2022, was reported as $2,120 by the end of 2002. That index now stands at $1898 as of this week, with the Drewy WCI Shanghai to Los Angeles sub-index reported at $1959.
As we noted in our specific 2023 prediction focused on the global transportation industry sector, entering 2023, industry perspectives were on the ability to be able to maintain higher rates by basis of multi-year signed contracts executed at the height of shipping rates. Other means were in the ability to manage the headwinds of forecasted reduced global trade volumes thru the mechanisms of either formed multi-carrier capacity alliances metering major trade route capacity, increased blank sailings or additional slow steaming transit times.
Our specific prediction was that manufacturers and retailers will exercise considerable pressure on carriers for re-negotiating existing transportation and logistics contracts.
Added Developments
Industry bellwether Maersk Line was the first to acknowledge an expected decline in global trade volumes, initially from a forecasted one percent decline. Earlier this month, the forecast was revised to an expected 2.5 percent decline in global trade. Vincent Clerc, the new incoming CEO of Maersk indicated to Bloomberg: “The world is facing a significant inventory adjustment after a period where demand has been absolutely exceptional.” According to the published Bloomberg report: “Maersk’s underlying earnings before interest and tax could be as little as $2 billion in 2023 compared with $31.2 billion in 2022, the company estimated.”
The above development was followed by a subsequent Bloomberg published report (Paid subscription required) indicating that Barclays Plc has now forecasted that shipping costs “will likely go below pre-pandemic levels or, at best, back to where they were pre-pandemic given current trends.” The advisory reportedly noted that the industry would not be able to weather reduced shipping demand levels by existing capacity constraint methods. Barclays in-turn cut 2023 earnings estimates for Maersk and Zim Integrated Shipping Services. The financial firm further indicated it now expects “a significant correction in (industry) profitability over the next two years.”
As to our prediction for re-negotiation of existing shipping services contracts, The Wall Street Journal reported last week (Paid subscription required) that: “Retailers across the U.S. hope to slash shipping costs and slash millions of dollars when they sit down later this month to negotiate long-term contracts with ocean carriers following last year’s surge in rates.” The report further indicates that many retailers have pulled back on inventory replenishment orders while continuing to work through backlogs of inventory.
Other industry and business media reports reinforce that for some retailers, existing inventory levels remain a challenge. While the recently completed holiday fulfillment quarter was able to shed some inventory, levels remain high for certain segments including fashion and apparel and discretionary consumer goods sectors. Additionally, household budgets for many consumers remain stressed given the ongoing high levels of price inflation for essential or discretionary goods.
Retailers Home Depot and Walmart in conjunction with reporting their latest quarterly financial performance, both provided cautious guidance relative to retail volumes, indicating that consumer demand for non-essential goods could continue to moderate for the remainder of this year.
Our belief is that with warehousing and inventory costs remaining at considerably high levels, the desires among manufacturers and retailers to reduce costs will clearly be focused on transportation and logistics areas, along with further reductions in overall inventory levels. That clearly has an impact on ocean container shipping carriers and logistics providers in the coming months.
Specifically for the transportation and logistics industry segment, prior extraordinary profitability levels would be better served by investing in more enhanced information flows, more efficient as well as flexible global logistics movement capabilities rather than buttressing margins, balance sheets or incremental investor dividend payouts.
Indeed, the realities of declining trade volumes, the building pressures for manufacturers and retailers to reduce spending levels despite numerous price increase actions, are bringing home a more sober reality.
Supply chain driven cost inflation always have implications, and increasingly, such implications are taking on multi-faceted consequences. An unprecedented industry profitability boom has implications for structural changes across supply chains.
Bob Ferrari
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