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Outbound Cargo Rates Soar as Covid-19 Slashes Airfreight Capacity

Author: Mindy Tan
This article first appeared in the Business Times on 2 March 2020.

Outbound freight rates are skyrocketing on the back of weeks-long labour shortage and disruptions to logistics links that continue to dog operations in China, although there is still international air and ocean capacity, albeit much reduced from before, according to industry players.

This is set to catch on in airfreight sectors elsewhere too as the coronavirus spreads through Europe and potentially Latin America and the African subcontinent, warned Raymon Krishnan, president of The Logistics and Supply Chain Management Society.

Reduced airfreight capacities have resulted in rates “going through the roof” with rates doubling or tripling for flights leaving China, said Dr Krishnan. “I also just heard that some are paying up to six times the regular rates.”

The situation is also worsened by the cancellation of thousands of passenger flights to and from mainland China, resulting in the reduction in belly capacity for cargo.

According to Dr Krishnan, rates from China to the US West Coast are about US$6/kg now while rates from China to Singapore are about US$5/kg – a two to three-fold jump in rates.

Meanwhile, Freight Investor Services said in a report on Feb 17 that charter rates and spot prices on the Frankfurt-to-Shanghai lane have jumped 193 per cent from the average of US$2.78/kg. Trans-Pacific charter rates fluctuated between US$500,000 and US$800,000 one way in the week of Feb 10, it noted.

This spike in rates is in turn causing third-party logistics and large shippers to turn to the air charter market, as firms clear customer and production backlogs in preparation for the anticipated March rush due to pent-up demand that has been building up since the Chinese New Year (CNY), he said.

Meanwhile, on the seaport front, workers are returning to their posts following the easing of travel curbs. Reuters reported on Friday that some ports have even managed to surpass year-ago processing rates in an effort to clear the backlog. Shanghai’s port of Yangshan, the biggest deepwater container port in China for instance, cleared 59,800 TEUs (twenty-foot equivalent units) on Feb 20, exceeding the average daily volume in 2019 of 54,200 TEUs.

But even as ports work to clear the massive backlog, the increase in blank sailings and the fact that more ships are bypassing Chinese ports are contributing to delays in the supply chain, said Peter Yu, deputy chief executive officer of ZALL Smart Commerce Group, which develops and operates Asia’s largest B2B offline-to-online trade ecosystem in China and SEA.

Blank sailing is a scheduled sailing that has been cancelled by a carrier or shipping line so a vessel skips certain ports or even an entire route.

Lloyd’s List, which specialises in shipping and maritime intelligence, reported on Feb 19 that capacity cuts over the eight-week period since the CNY on Asia-Europe trade is expected to reach 700,000 TEUs.

This is in sharp contrast to the post-CNY reduction of just 340,000 TEUs in 2019 and 210,000 TEUs in 2018.

“One thing to bear in mind as well is that when capacity is reduced, it means a two-way reduction in capacity. There will be a pendulum effect. Increasing blank sailings will affect backhaul or return trade with limited capacity for outbound services from Europe and the US,” noted Dr Krishnan.

He added that he expects market rates for ocean freight in the short to medium term to go up, although this will be less volatile than airfreight. “Shippers will invariably move away from airfreight wherever possible and switch to ocean freight and also overland by rail (especially) and in limited cases, trucking to avoid paying such high airfreight rates.”

Factories and offices on the mainland are also slowly finding their footing. “From an informal poll of all the clients that I’ve been talking to, about half to 75 per cent have opened their doors… their production facilities and offices,” said Kent Kedl, partner and head of Greater China and North Asia at Control Risks. “In their offices, I’d say probably 10-20 per cent are back to work, the rest are working from home. It’s the production workers that really is the biggest concern. Of those that are open, half or even less than half of their production employees are back at work,” added Shanghai-based Mr Kedl.

ZALL’s Mr Yu noted that companies and factories that are idle are mainly in areas that have been heavily hit by the outbreak. That being said, some sectors – such as the medical supplies industry – are going against the trend.

Many SOEs (state-owned enterprises) have followed the steps of China’s private enterprises by converting manufacturing lines to produce face masks to help contribute towards China’s fight against the deadly coronavirus epidemic. For instance, Jihua Group – a supplier of army uniforms for the People’s Liberation Army (PLA) – has started manufacturing virus protection suits, and currently supplies one-third of the country’s protection suits.

“We’re encouraging companies to think about recovery now, and it’s hard to do because everybody’s still pretty heads-down and focused on getting this solved. But, in the middle of a crisis, that’s the time to think about recovery,” pointed out Control Risks’s Mr Kedl.

One key lesson from this has been the importance of contingency plans and diversified supply chains.

For one, Fairprice employs a strategy of diversified sourcing especially for daily essentials to protect customers from supply shortages and price shocks. “Besides diversified sourcing, we also practise stockpiling and forward buying,” said a Fairprice spokesperson.

While Fairprice imports a range of food products from China, including fruits and vegetables, and processed products such as condiments and canned food, its supplies of fruits and vegetables have not been affected as they are imported from ports that remain open.

The spokesperson informed: “We are, however, seeing some delays in the shipments for canned food such as luncheon meat, braised peanuts and pickled lettuce and are monitoring the situation closely. In all, supplies and prices of food items from China have remained stable. We will continue to diversify our sources from multiple countries to ensure that the community has access to a stable supply of daily essentials.”

Dr Krishnan suggests companies start looking to the future but warned that while relocation may seem simple in theory, it will be challenging. “The ABC (Anywhere But China) phenomenon has companies relocating or stepping up plans to relocate their manufacturing outside China. South-east Asian countries, Taiwan and India have become alternative manufacturing locales or sources of supply,” he added.

“Relocation, coupled with the exploration of plausible options such as reshoring and nearshoring, must be considered in any supply chain network optimisation exercise.”

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1 Response

  1. P Balasubramanian

    The high airfreight rate seems to be a temporary phenomenon, exacerbated by the blank sailings as well as non availability of containers. In that short time, alert air carriers will capitalise but it is a moot point whether that would be good enough to sustain their bottom line. Panic buying in the west seems to be the chief ‘demand creator’ rather than ‘real demand’.

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