Are we at the tail end of the great freight recession? Have we reached a pricing bottom? The Baltic Dry Index (BDI), a closely watched barometer of shipping activity, was up 84% in Q1 compared to 2023, indicating greater demand for shipping capacity. As a result, freight rates are increasing substantially on China-Europe and China-Mediterranean lanes, according to BIMCO, citing the BDI figures.
The main driver of demand in what was expected to be a down period this year is the ongoing tension and attacks of Red Sea traffic, leading to continued diversion of all kinds of freight and longer sailings. Exports were up 2.3% in February to $263 billion, but the trade deficit still increased by 1.9%, according to the U.S. Bureau of Economic Analysis.
While impossible to predict with certainty given instability and geopolitical tensions, this dynamic of rising freight rates is not likely to subside during the balance of Q2, driving up the cost of container freight after a long period of depressed prices.
The Overall State of Freight
The Logistics Managers Index (LMI), put together by a consortium of supply chain academics and the Council of Supply Chain Managers (CSCMP), was 58.3 in March, up 1.8 from February. It was the fastest rate of expansion since September 2022, when it registered 61.2.
“The logistics industry is at a healthier place than it was then, however,” LMI said in a release. “That reading from 18 months ago was largely inflated by unwanted inventories and high warehousing costs along with an anemic freight market. March 2024 is a different story as we are seeing long-planned inventory expansions, along with more efficient levels of utilization in both warehousing and transportation as the drivers of growth.”
Retail imports are looking strong, according to the monthly Global Port Tracker from the National Retail Federation (NRF) and Hackett Associates. Imports are projected to cross the 2 million TEU marker for the month of May. This would be a 5.5% gain, and the first time the 2 million TEU threshold has been breached since October.
In February, the last month for which figures are available, 1.96 million TEUs were imported, according to the GPT. This was down 0.3% from January but up 26.4% from February 2023, even with the Chinese Lunar New Year shutdown.
Air Freight Dynamics: E-Commerce Drives Volume, Spot Rates
Data from the International Air Transport Association (IATA) showed an 11.9% increase in demand for air cargo in February. The strong result was driven by a 0.9% increase in cross-border trade and a positive Purchasing Managers Index (PMI) of 51.2, indicating expansion.
Air cargo volume globally was up 11% in February, per Investec, with spot rates increasing out of Asia and the Middle East, but remaining level in the U.S. and Europe. Overall, air freight has been the beneficiary of volume departing ocean freight due to uncertainty related to the Red Sea attacks.
Major freight forwarders told JOC that e-commerce growth is real and driving increased demand for air freight (subscription required). This demand is expected to remain strong into the start of peak season in the fall, requiring more charter service to make up for capacity shortfalls. As of mid-April, air freight rates out of Shanghai were up 7% year-over-year, according to data from Baltic Air Freight indices.
Red Sea Impacts Continue Impacting Ocean Freight
The seizure of the MSC Aries on April 13, which significantly ratcheted up hostilities in the Red Sea, is expected to drive up ocean freight rates even further. Since the Houthis rebels in Yemen began their attacks in November, traffic through the Suez Canal is down 50%, while up 74% around the Cape of Good Hope.
This means higher costs for shippers, and increased prices on all kinds of goods for businesses and end consumers already burdened by inflationary pressures. Longer term, the number of new vessels in the pipeline for major ocean line operators, a bet on future growth, is expected to result in over-capacity. In 2023, the overall industry took delivery of ships equaling 2.3 million TEUs of capacity, up 8%, with a further increase of 10% expected this year, FT reports per Bernstein analysis.
One impact on shippers from the escalating conflict: an increase in insurance rates under the heading of “war surcharge” or “congestion surcharge” as the effects of the Red Sea bottleneck ripple outward across supply chains.
Rail Freight Volume Up Double Digits
Overall U.S. rail volume was up 1.3% for the week ended April 13, but the picture was better for trailer and container volume, which increased 11%, according to data from the Association of American Railroads (AAR).
Categories seeing the most growth in rail freight volume, AAR reported, were motor vehicles and parts (up 9.6%), petroleum and petroleum products (up 14.9%) and farm products (excluding grain) and food (both up 4.9%).
In a bid to grab more market share from trucking, Union Pacific in April added a new service between California’s Inland Empire and Chicago. The major rail provider said the new service will reduce drayage costs at both ends of the line, as it brings intermodal services closer to the first and last mile. Union Pacific said transit times in both directions will be between four and six days, depending on contracted service.
Meanwhile, Union Pacific is under scrutiny from federal regulators for the number of embargoes it imposes on shippers, more than all other providers combined. While meant only for emergency situations such as natural disasters or extreme weather, Union Pacific has been imposing embargoes to manage over-capacity, according to the Surface Transportation Board.
CSX CEO Joe Hinrichs told analysts on a quarterly earnings call that the rail provider is attracting new business, and expects volume to increase in the low- to mid-single digits for 2024.
In another development, the California Air Resources Board (CARB) is looking at not just trucking but rail operators in its bid to force reduced carbon emissions through EV mandates. CARB is calling for all locomotives running in the state to be zero-emission vehicles by 2030, even though commercially available models exist today.
Truckload Faces Pricing Pressure, LTL Rates Stabilizing
While BDI and LMI may be pointing north, the impact has yet to be felt in the truckload sector. Major TL carrier Knight-Swift warned of a buyer’s market, with shippers forcing contract concessions, as it cut its first-half outlook. J.B. Hunt is similarly reporting pricing pressure.
Spot truckload rates were down again in March, according to DAT Freight & Analytics, due to lower demand. DAT’s Truckload Volume Index (TVI), which tracks loads moved, showed modest gains last month for all three equipment types (trailer, flatbed, reefer).
In the less-than-truckload (LTL) sector, rates are normalizing, AFS president Kevin Day said in a Journal of Commerce podcast. Cost per pound of LTL shipments are up 60% since 2018, compared to just 4.8% for TL, Day said. He added even with lingering excess capacity in the wake of the Yellow exit, LTL rates are expected to increase 2.4% this year.
Shippers looking for relief from higher trucking rates can get a quick quote from Wicker Park Logistics, which provides reliable service across all modes and equipment types.
Other Factors Weigh On Freight
Even with nagging inflation concerns hitting already-beleaguered consumers – the CPI rose 3.5% in March, compared to 3.2% the prior month – shippers still need to replenish depleted inventories and look ahead to stocking up for the critical fourth quarter. This reality, plus strength in e-commerce as noted above, should drive an upswing in freight volumes (and rates) as the year progresses.
Events since the March 26 collapse of the Frances Scott Key bridge that shut off the Port of Baltimore have seemingly overshadowed that event, and made it a relative non-factor. In addition, successful vessel and container diversions, plus the recent opening of three shipping channels, have lessened the initial doomsaying about the supply chain impact.
Industry-Specific Impact of Freight Trends
While the overall trend of freight rates based on supply and demand appears headed north in 2024, the effect is different from one industry to another. Below, we take a look at three in particular.
Food & Beverage Sector
Based on data from CargoNet, cargo thefts were up 68% in the fourth quarter of 2023, with food & beverage the most impacted, followed by electronics and household goods. Danny Ramon with visibility and risk management platform Overhaul, told FreightWaves that the ease of reselling stolen food & beverage products – often done locally – is one reason it tops the list for thieves. In 2023, cargo theft was up 57% vs. 2022, according to CargoNet, representing a total value loss of $130 million.
A pullback in consumer spending and supply chain disruptions are leading food & beverage companies to invest more heavily in infrastructure, including automation and data for supply chain optimization, to support growth. This finding was part of a new market report (registration required) from RSM, which found that inflation, a drop in discretionary spending, and changing consumer preferences negatively impacted food & beverage sales. The report suggests food & beverage companies should look to artificial intelligence (AI) to respond to the shifting preferences and gain operational efficiency.
Oil, Gas and Energy
Oil, gas, mining, and quarrying are seen as the fastest-growing users of short-haul trucking in 2024, according to a report from Research & Markets. “This rapid expansion is bolstered by the resurgence of production activities in the oil & gas sector, which sees demand outpacing supply,” the company stated in its report. Recent data from Oil & Gas 360 backs up this claim; it reports that crude oil inventories and production both increased in April.
The Biden administration’s decision to not ease import sanctions on Venezuelan oil is expected to boost domestic production. This increase will lead to greater demand for logistics and transportation services across rail, trucking, and pipeline services.
In mid-April, the International Monetary Fund (IMF) said any escalation in the Middle East conflict would send oil prices up by 15%, while also increasing shipping costs and driving global inflation up about 0.7%.
Paper & Packaging Industry
Fitch has a “neutral” rating on the North American paper & packaging industry for 2024, citing demand headwinds from inflation and lower consumer demand that will impact manufacturers, especially in food & beverage, CPG and healthcare. Research and Markets is calling for a conservative 2.5% CAGR between 2024 and 2028.
All of this will likely equate to lower shipping volumes for paper & packaging companies, which could negatively impact discounting with carriers across modes. Shippers should seek out a logistics partner well-versed in the sector’s unique logistics that can help them better manage transportation costs. An expert provider will have strong relationships with carriers specializing in paper & packaging logistics. They’ll also understand the importance of keeping product dry and free of dirt, dust and light, and at a stable temperature to avoid damage in transit.
Freight Volumes, Rates Appear Poised for Growth
While global economics, disruptions, geopolitical tension and conflict all militate against it, many experts are seeing cracks of light thawing out a long freight winter. Promising signs such as projections of strong retail imports, and positive numbers in bellwether indices like the LMI and PMI, point to growth in freight volumes and costs.
Wicker Park Logistics is keeping a sharp eye on all of these trends as well. This is why our veteran team is well-positioned to provide shippers across industries with solutions tailored to address market challenges. Whatever your business needs across all phases of trucking, intermodal and supply chain services, Wicker Park can help you optimize your transportation spend and hit your critical SLAs. Speak to an expert today to learn more.
