Doubts Limit Q3 Cargo Growth

October 12th, 2018

Though still positive, growth in air and sea freight was restrained by concerns over economic lulls in Asia and Europe, and possible U.S. trade policy hardening.

Growth in international freight went unexpectedly soft in the third quarter of 2018, with demand in both air and maritime sectors limited to modest rises. The reasons for the slowing appear to be lurching macro-economic activity in certain key regions – particularly Asia and Europe – and wariness among exporters about how potential hardening of U.S. trade policy might affect activity.

Though full Q3 figures have yet to be released, available statistics indicate an easing of the 0.4% increases in Europe’s GDP in each of the first two quarters of 2018. Similar easing occurred across Asia. Factory output across Europe in September dropped, and in China 15 straight months of successively higher industrial production came to a halt.

Though the U.S. continued its strong performance with an estimated 3.2% GDP rise, the tough trade measures emanating from Washington at least partially inspired the doubts and hesitancy that slowed export activity in other regions.

“Routes to and from the U.S., especially trans-Pacific volumes, remained dynamic, but demand slackened elsewhere – particularly traffic to and from Europe,” says Anne-Sophie Fribourg, Sea Freight Procurement Director for Bolloré Logistics in Paris, adding Q3 growth is not expected to match the 4% level of the previous quarter.

“That slowing, and continuing over-capacity, held base rates fairly stable, and we don’t foresee any major changes in volumes soon,” she says. “However, the addition of surcharges to offset higher oil prices since June has accompanied new opacity of fuel and bunker costs that freight forwarders are challenging. That must be resolved ahead of the considerable rise in shipping prices that’s on the way.”

The reason for that hike, Ms. Fribourg explains, is new environmental requirements reducing sulfur emissions 85% by 2020. To prepare for that, maritime transporters are installing filters to cut sulfur discharges, or ordering new vessels to be outfitted with natural gas engines.

“It’s estimated these measures will cost around $60 billion – a heavy expense, especially to transporters that collectively lost 3% to 4% in the first half of the year despite higher volumes,” Ms. Fribourg says. “Carriers are already planning to pass those environmental costs on to clients.”

Rising oil prices also made air freight more expensive -- though clients using the skies will be spared the extraordinary environmental costs awaiting maritime exporters. More broadly, however, the same tepid economic growth combined with concerns about tightening trade measures created a drag on air cargo activity in Q3 as they did on the seas.

“Positive, but meek, with volumes still low enough that we’ve yet to see the usual peak season surcharges we usually do heading into the last months of the year,” says Claude Picciotto, Air Freight Procurement Director for Bolloré Logistics in Paris. “Europe is idling and activity in and out of China is soft. Meanwhile, the growth boost in recent quarters added by new booming e-commerce doesn’t provide the same lift now that it’s become a fixed and expected part of the mix.”

According to the International Air Transport Association (IATA), tapering volume increases in the third quarter had already started slowing in Q2 with 2.8% growth-- the lowest rise in over two years. One cause of that sag was the end of a major restocking cycle by companies replenishing depleting reserves – a periodic surge that fueled freight rises in both air and maritime transport in the end of 2017 and start of this year.

But the unexpectedly low growth in Q3 volumes, Mr. Picciotto says, suggests basic economic conditions influencing decisions by consumers and company managers have created a degree of doubt and hesitation few people expected. As an example, he says, air freight carrier Uni Top – which recently launched thrice-weekly flight service between Chinese and European destinations -- postponed introduction of five additional weekly flights it had planned anticipating stronger demand.

“There’s sufficient capacity available, so the market doesn’t really need any increases,” says Mr. Picciotto. “A year ago, shortage of long-term capacity had sent spot rates sky rocketing. Today, the supply covers demand.”

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