Capacity into China improves, but where is the demand?

While capacity into China has improved since COVID-19-related restrictions lifted in early June, the resulting supply chain disruptions throughout Asia are triggering production and demand shortages for goods due to a dearth of raw materials and components for production. “The story is the same everywhere: empty cargo terminals due to no demand, no production capacity caused by no materials for production,” Marc Schlossberg, executive vice president at Unique Logistics, told Air Cargo World . “Our major fashion apparel retail, technology and home furnishing clients were all reporting internally cooling sales and sharply reduced orders due to rising inventories. At the same time, inflation was climbing, Russia invades Ukraine , and the price of gas and fuel is skyrocketing.” [caption id="attachment_96703" align="alignright" width="487"] Cargo moving through PACTL’s Shanghai (PVG) facility. Photo/Royal Media[/caption] With the “absence of ‘black swan’ events from 2021 that drove the unprecedented airfreight, where is demand to come from in 2022?” Schlossberg added. He referenced 2021 events including the Ever Given container ship , which blocked the Suez canal in March, along with COVID-19 lockdowns and bottlenecks at USWC ports. Currently the only vertical still driving demand is the automotive industry, which is desperate for components, he added. Manufacturing demand on the decline Indeed, export orders have been lessening in all major global markets except for the U.S., especially as Russian sanctions continue to disrupt manufacturing activity, the International Air Transport Association recently reported . In fact, the global goods trade and demand for inventory have been on the decline since March . “We see the inventory-to-sales ratio has basically come back to pre-pandemic levels —companies have enough inventory,” Neel Jones Shah, vice president and global head of airfreight at San Francisco-based Flexport, said during a June 14 air market webinar presented by the company . “In fact … Target has made very public statements about the fact that they have too much inventory.” Looking ahead, the industry is starting to see a decline in orders placed by existing customers, with expectations that the impact will be felt in the second half of the year, Shah added. The industry remains optimistic despite the slowdown. “June is turning out to be quite a slow month, even though China has emerged from their lockdowns [as] many factories haven't restarted anywhere close to full production, [although] they're expected to over the course of the next 30 to 60 days,” Shah said. “There is a lot of pent-up demand for orders that haven't been placed over the past three months, so we do expect a relatively strong end to the year, and we think there will be a lot of demand particularly for airfreight.” Forwarders initially expected volumes to surge following the re-opening as businesses and manufacturers slowly resumed production . Although volumes at Shanghai Pudong International Airport (PVG) have reportedly begun to improve, the supply chain has yet to stabilize. “I think the airfreight market is looking a lot like the post-2008 financial crisis as we enter a period of recession while the global supply chain is still trying to balance itself,” Unique Logistics’ Schlossberg said. “We are now on the wrong end of the scale, and it will be a rough 12 months for airfreight.” Rising fuel, falling rates Despite the reported lack of demand, prices remain elevated. In fact, jet fuel spot prices in the U.S. were at $4.14 per gallon as of June 10, up nearly 6% compared with May’s monthly average . Meanwhile some rates, albeit still high , are currently on a downward trend. For instance, PVG-U.S. rates hit a recent high of $8.96/kg June 6 before falling to $8.31/kg as of June 20, according to TAC Index data. PVG-Europe rates, however, continue to grow and are currently logged at $7.21/kg as of June 20, up 2.9% week over week. “The only thing holding up pricing is the inability of airlines, terminals and airports to ramp up staffing to support the returning belly capacity as passengers flood back into the markets,” Schlossberg said. “Even with that and sky-high fuel, market rates are nosediving across most trade lanes, and charterers across all markets are dumping rates just to fill dead space. “In Vietnam, we cancelled a bunch of flights and paid the cancellation penalty, then booked the same tonnage on commercial lift because it was cheaper to pay commercial plus the penalty, than to pay the charter rates — that’s how far the market has fallen,” he added.

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