Current supply chain landscape

Global supply chains have slowed down in the last year due to volatile market conditions characterized by high inflation, reduced demand, and subsequent effects on end-consumer spending. This, coupled with high inventory levels for retailers due to excessive ordering during peak times and soaring warehousing costs, has led to a decline in freight rates since the unprecedented highs witnessed during the COVID-19 pandemic. These rates have fallen below what was largely expected at the beginning of 2023 and have yet to stabilize.

Ocean Freight

Ocean freight has been one of the most affected by the drop in demand and rates characterizing the current global supply chain scenario. The situation remains stagnant, which has led to carriers implementing measures aimed at stimulating the market, with some reporting that around 1 million TEU are now sat idle.

As a result, aggressive blank sailing programs have been implemented by all carriers in recent months, aimed at increasing rates by reducing available capacity and frequency, with carrier alliances suspending some services completely for the foreseeable future. As anticipated, the most significant impact has been observed on the Transpacific routes with THE Alliance carriers Hapag-Lloyd, HMM, Ocean Network Express, and Yang Ming announcing the suspension of the EC4 Asia to US East Coast services after dropping the PN3 Asia to Pacific Northwest West service in September. Data shows that to keep a supply-demand balance, around 1 million TEUs of capacity must be scrapped by the end of 2023.

Similar dynamics have been observed on Asia - Northern Europe routes, with 2M’s carriers, MSC and Maersk, running a reduced “winter schedule” from November until December to mitigate the impact of downward demand, alongside blank sailings being announced regularly.

These blank sailings do seem to have had some affect on rates more recently, with Asia-US and Asia-Europe trades seeing some increases from November 1. How long rates remain at this level is uncertain, with carriers pushing for a further GRI from the December 1 on the Asia – Europe trade lane.

Whilst some industry supply chains have become more tolerant of longer lead times since the pandemic, the longer term impact of these most recent blank sailing strategies is still uncertain, with service reliability dropping and rates not lifting as much many carriers would like. The disruptions will continue to affect Asia routes until the end of 2023, while further challenges are expected, with blank sailing programs likely extending into 2024 to at the very least maintain the current rate levels.

Andy Ball comments: “The outlook for the remainder of the year is continued significant pressure on the market, and as we move into 2024, there are many factors that will determine the performance of all trade lanes, not just Asia-Europe and Asia-North America. These factors include the global economy, trade policies, technological advances, and specific industry and consumer trends, but what is clear is that carriers will almost certainly continue with aggressive blank sailing programs into 2024 until all trade routes start to see rates increasing.”

Despite what is currently discussed by many in the market, our US Director, Dan Williams, highlights how shipping volumes are not in decline when compared to pre-pandemic levels. Instead, Transpacific volumes, particularly into the Los Angeles/Long Beach terminals are trending and have been keeping pace or exceeding those of 2019. However, very optimistic rate and volume predictions for 2023 made during the unusual 2020–2022 period and the introduction of more capacity given by larger vessels have left the market feeling underwhelmed. Already, we’ve seen a combined total capacity of 0.9 million TEUs and over 120 new container ships enter the global market in the first half of 2023, with more vessels on order and expected to arrive in 2024. The total amount of additional vessel capacity ordered in 2021–2022 is estimated to be around the 7.2 million TEU mark.

Additionally, the ocean freight industry has also been challenged by the disruptions affecting the Panama Canal. Due to a water shortage, authorities reduced the number of daily vessels allowed into the canal, leading to congestion and delays on some services, particularly LNG and bulk tanker vessels. Despite minimal impact on container ships, many carriers are rerouting Gulf and East Coast volumes back to US West Coast ports to avoid disruptions, further buoyed by increased shipper confidence in shipping through the port of Los Angeles, following an agreement being reached on a long-term deal with dockworkers.

Road and Rail Freight

Similar to the challenges faced by ocean freight, the national road and rail freight in the US has experienced a series of setbacks in recent months, marked by a decrease in demand and rates falling below expectations. In parallel, trucking operating costs increased as interest rates, insurance premiums, and fuel costs rose over the last year. As a result, many trucking companies are increasingly relying on brokers to expand their reach and maintain their operations. A notable illustration of the trucking freight issues in the USA is the insolvency of the US-based trucking company “Yellow Trucking,” which had to cease operations in August, and the more recent demise of digital US truck broker Convoy.

US rail networks have also experienced disruptions throughout 2023. Rail terminals have been temporarily closed, and industrial action (or threats of action) have caused varying degrees of congestion at rail terminals. Despite these complications, last September, US intermodal rail saw a slight increase in volumes and is expected to stabilize by the end of 2023.

Air Freight

The air freight sector has seen improvements since Coronavirus restrictions were lifted, thanks to increased frequency as a result of passengers returning and carriers optimizing their load capacity by merging flights. Demand has grown, and a marginal increase in rates was observed on Asia - US routes, while Transatlantic routes are maintaining stable rates and demand. An imminent peak in demand is not expected, yet a gradual increase is anticipated as we move into 2024.

However, a recent increase in fuel prices, which is leading rates to surge and operational costs to increase, is slowing down the recovery of the airfreight sector. Since the beginning of 2023, the average spot price of crude oil has increased, reaching its peak in September at 92.22 USD/bbl.

2024 prediction

Considering the above-mentioned, the year ahead is expected to continue to present challenges for shippers and the industry alike. Influenced by political, economic, and societal dynamics, there are two key factors that will predominantly continue to shape the supply chain landscape: excess capacity influx and volatile fuel prices.

Increased competition and the introduction of larger vessels to the ocean freight market are creating excess capacity, with Drewy estimating an additional 5% increase in global fleet volume by the end of 2023, further destabilizing the carriers in the new year and likely having an impact on operations. In parallel, the upward trend of fuel prices is not anticipated to stop, with operating costs on the rise, especially for ocean, air, and road freight.

One beneficial effect of the newly introduced fleets is that many vessels are expected to be environmentally cleaner than those currently in service in order to meet International Maritime Organization (IMO) rules implemented in January 2023, which will require allships to calculate their energy efficiency on an annual basis.

Dan Williams states: “Some ocean carriers are suggesting that they want to commit to maintaining long-term contract rates at their cost levels for at least 50% of their volume, and this strategy could sustain or potentially increase current spot rates, fostering a more stable ocean freight market. However, whether carriers will lower rates to secure volume against their increasing capacity in either the contract or spot market remains uncertain and likely won't be clear until early 2024.” He adds, “The challenges faced by ZIM, which heavily relied on the short-term spot market, may influence the decision-making process during the 2024 BCO contract negotiations and set the tone for the rest of the year. I think we can expect to see significant turbulence in the ocean market into 2024, with carrier alliance changes and consolidations a possibility. Despite early signs of some small recovery in volume in recent months, as excess retailer inventory is depleted and new stock is being ordered, what we are seeing now may well be what to expect throughout 2024 and beyond.”

Our experienced Woodland teams will continue to guide our clients to successfully navigate any disruptions and optimize global supply chain planning. From rerouting, alternative sourcing, transport modes and trade lanes to cost-effective temporary and long-term storage solutions through our own warehouse locations across the globe, contact our dedicated Woodland specialists to find out how we can support your supply chain planning in 2024.