Despite recent jitters in global financial markets and ongoing concerns about dimming prospects for global trade, the Freightos Baltic Indexes show rising air and ocean rates out of Asia in the first week of November, reflecting growing volumes as the peak season gathered momentum. Air freight rates from China both to the US and Europe climbed 6% during that week.
Forwarders and carriers have reported rising volumes. “The peak has been strong, especially from China and Southeast Asia. Volumes have been quite strong,” observed Neel Jones Shah, senior vice-president global air freight at Flexport.
Dachser lined up air freight charters to cope with traffic out of Asia. “We are expecting this year’s peak season to be another strong one for air freight,” said Timo Stroh, head of global air freight.
While consumer demand and e-commerce have been strong drivers of the rise in volumes, operators and observers are wondering how much of a factor the trade conflict between the US and China has been on trans-Pacific flows.
“I have a feeling a good percentage of the growth is people trying to beat the January 1 tariff deadline,” Jones Shah said.
“Freightos data shows recent increases in US imports from China. Paradoxically, they indicate that the trade tariffs are driving increased Chinese imports in the short term. Even before September’s big announcement, the speed with which the first two rounds of tariffs were implemented prompted many importers to immediately start stocking up. The January 1 tariff increase is still spurring demand, but so too is the spectre of tariffs soon being applied to all remaining products,” said Zvi Schreiber, CEO of Freightos.
Jones Shah reckons that a clearer picture will emerge after next year’s lunar new year holiday. “I think things will remain strong until Chinese New Year, and then the real test will come,” he said.
After two years of rampant growth feeding bullish expectations, the outlook has dimmed recently. In October, the International Monetary Fund scaled back its global growth forecasts for 2018 and 2019 by 0.2 percentage points to 3.7%.
Economists at market analyst firm IHS Markit say that a global recession is probably still a year or two away but warned of gathering storm clouds on the horizon after the company’s purchasing managers’ index for global export orders contracted for the first time in over two years. They now predict that global GDP growth will sink from 3.2% this year to 3.1% in 2019 and 2.9% in 2020.
Probably the starkest reflection of rising concerns has been Air China’s decision to sell off its 51% stake in Air China Cargo to sister company Capital Holding to concentrate on the more promising passenger business. Management cited profitability issues and “uncertainty of international trade” for the decision to step away from cargo.
Marco Bloemen, senior vice-president of Seabury Group, pointed to a number of concerns, from trade conflict over the re-balancing of capacity and demand to rising costs pushed upwards by higher fuel prices and labour shortages.
“Labour costs have risen faster than revenues last year,” he noted.
Arguably the biggest cloud on the horizon is protectionism, above all the proliferation of tariffs on goods moving between China and the US. Bloemen warned that the full impact is yet to come, as the first two rounds of tariff increases targeted goods of less importance for air cargo. They affected 158,000 and 465,000 tonnes of air cargo altogether.
Ultimately the pain from tariffs for air cargo companies could be a lot more severe. According to Bloemen, half of air freight is potentially affected by trade conflict. He pointed out that the tariffs coming into full effect on January 1 will affect air freight staples like mobile phones and computers.
Notwithstanding the standoff between Washington and Beijing, Jones Shah is optimistic. “Even if China goes to zero percent growth that’s still a lot of volume from China,” he remarked.
The tariffs are likely rerouting rather than stifling some flows. Operators have argued that they will accelerate the shift of production from China to neighbouring countries which has already been playing out for years as a result of rising costs in China. Many firms with production in China are currently evaluating their options, one forwarder executive based in Singapore reported.
Despite the mounting uncertainty, industry executives remain upbeat on the foreseeable future. A poll at a session on the outlook at the TIACA forum in October showed that 97% expect global growth to continue over the next three years.
“I think it will be a solid market next year, although not as strong as the past year,” said Darren Hulst, managing director, market analysis and sales support, Boeing Commercial Airplanes.
Jones Shah is also confident. “I think 2019 is going to be a good year because the economy is strong,” he said, adding that Flexport intends to grow further.
Hulst foresees a growth rate of 4.5% for global air cargo over the next five years, citing Boeing’s long-term outlook, which it unveiled at the TIACA event. The planemaker’s 20-year forecast projects 4.2% annual average growth in air cargo traffic over the period. Rival Airbus is less upbeat, predicting 3.7% annual growth for the next two decades.
Its analysts expect express to grow at a significantly faster clip, rising 5.1% a year, while general cargo is expected to climb at the more pedestrian rate of 3.4%. A big driver there is e-commerce, which has shifted customers’ expectations.
Asia will be the hottest arena for this. According to Hulst, over the next three years e-commerce in China will outpace parcel traffic in the US and Europe combined.
By Ian Putzger
Air Freight Correspondent | Toronto