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China logistics still Struggling with COVID


China logistics still Struggling with COVID

So far, the implications for ports and airports appear not to be too serious, although why this is the case in not clear, as many major cities and regions are in some form of emergency measures. Ominously, the city of Shenzhen has issued a “work from home” order despite the wider region appearing to relax measures in the face of public disturbances.

Chinese state media reports that the neighboring port of Guangzhou, “has seen a limited impact on logistics and trade so far thanks to the local government’s launch of dynamic epidemic control measures to bring down the possible impact of the outbreak and quick reining of the virus.”

Ports further up the coast also seem to be unaffected. For example, the city of Dalian relaxed measures at the end of last week.

However, the city of Shanghai, which is the location for China’s largest container port, has just embarked on a further round of restrictions, with mass testing, business closures and movement restrictions. In the past such measures have led to serious disruption at both ports and airports, with truck-traffic in particular unable to drive through the city.

Similar measures are reported to be being applied in Chengdu and Wuhan, with both production and logistics activities being disrupted. Wuhan is a significant river port on the Yangtse and a key feeder location for Shanghai. Last week saw unrest in Zhengzhou in response to the imposition of new measures, with the most high-profile disturbances at the large Foxconn production and logistics hub in the city.

The situation is all the more febrile due to the political implications. The central Chinese government has attempted to articulate a change in policy over COVID measures, emphasizing a shift away from sweeping quarantine policies. However, it does not seem that these new policies are being applied on the ground. There has been extensive public unrest in reaction to these measures.

Judging by the little emerging from China, it seems that much of the regional and national government is keen to keep production and logistics operations continuing. However, it is unclear how successful they will be in the face of other parts of the state that seem wedded to a more extreme response.

The immediate implications for air and sea freight do not yet seem to be at the level of seriousness seen in 2021, when a number of major ports in regions such as the Pearl River Delta and Shanghai reduced operations to a minimum. What the present situation implies is that sea and air freight will recover at a slower rate than had been assumed. In particular it would appear that markets such as aircraft belly freight will remain short of volume.


Habben Jansen Outlines the Short-term for Container Shipping

As usual, the CEO of Hapag Lloyd, Rolf Habben Jansen, has articulated the reality of the container shipping market. In presenting his company’s third quarter results last week, Mr Habben Jansen observed that the fundamentals of the container shipping sector were changing. He commented that “we should always look at supply and demand in this market and that the order book remains relatively big…the industry needs an order book that’s a little bit smaller than what we see right now but we do see that ordering activity has come down this year and that makes sense. I would also say that when you look at the global supply-demand balance it is likely that we will see more supply growth than demand growth”. Mr Habben Jansen also noted that “we assume that there is not going to any major congestion but rather the congestion will ease”. He admitted that freight-rates will soften and his colleague Mark Frese pointed-out that there is considerable inflation in costs, not just bunker fuel but handling and wage costs as well. All of this strongly points to falling freight rates through 2023 and falling margins for the carriers.

Yet Hapag Lloyd continues to be profitable. The first nine-months saw revenue up 58% year-on-year, to US$28.4bn whilst group profit is up 120.4% at $14.6bn. Things do look like they are slowing, with quarterly numbers growing more slowly, yet Hapag Lloyd is sticking to its forecast of an “EBITDA in the range of $19.5 to 21.5 billion and an EBIT in the range of $17.5 to 19.5 billion”

Of course, Hapag Lloyd has striven to base its shipping business on more stable longer-term contracts rather than the spot market, none-the-less the company must feel the effects of the trends at sometime in the not-too-distant future. And this could be a time of considerable peril for the container shipping sector, squeezed between falling rates and cost inflation. A company such as Hapag Lloyd is cushioned in the shorter term by its financial strength but it is worth considering what its response will be to a more hostile market. The possibility of more consolidation or diversification through acquisition would appear quite possible.


Multiple Forces Combine to Drive down Rates

It can hardly be a surprise that freight rates are continuing to fall from their previously exalted highs. The Oslo-based shipping data company Xeneta has commented this week that its container shipping -rate benchmark index that monitors longer-term contract-rates fell “by 1.1% in September. This is the first drop since January and one of only three declines in the past 21 months”, adding that “it won’t be the last with market fundamentals suggesting the halcyon days of ever-increasing rates for carriers may be drawing to a close”. It should be noted that this index attempts to measure contract-rates, not the more volatile spot market.

There are specific market dynamics behind the fall in rates. Moderation in congestion in and around ports is releasing additional ship and container capacity into the market, amplifying the surplus of supply and driving down rates more violently than the moderation in demand might otherwise suggest. The shipping lines are clearly alive to this, with the major lines blanking services since the summer.

In terms of underlying demand however, inventory levels are also likely to play a disproportionately high level. Large shippers are reporting higher inventory levels than usual, for example this week sports-wear company Nike reported higher stock levels than usual for the time of year, not just in the US but also in markets such as China as well. Of course, high inventory levels also imply that the market for air freight will be weaker.

These trends are only confirmed by the latest indications emerging from China that show export activity is slowing even as the Renminbi falls in value against the US Dollar. Reports in the Chinese press assert that data from the Chinese Customs Ministry show that the year-on-year levels of growth are around half that of last year for the third quarter. The implication is that this slowing will continue.

The pessimism should not be over-done, as the US consumer demand is still just about in positive territory and smaller markets such as Australia are not seeing a recession. Yet what freight markets are confronted with is a mix of underlying and market-specific forces that point to a significant correction in prices generally. The recession experienced by many economies in both the developed and emerging economies is likely to heighten the effects of the changes in the availability of capacity for sea, air but possibly also land freight markets.


New York’s Leading Position Highlights Volatility

The port of New York/New Jersey is claiming to be the largest port complex in the US, having overtaken the Port of Los Angeles in terms of TEU throughput.

The claim is only partly true as the combined figure for Los Angeles and Long Beach is still very much higher. However, the New York/New Jersey port authority asserted in a press release last week that it has seen “a double-digit increase of cargo volume compared to pre-pandemic August 2019. The seaport was the busiest in the nation in August and marked 25 straight months of monthly cargo growth”. In the year-to-date in August, the volume of TEUs handled rose to 6.5m, a year-on-year growth of 9.9%. Loaded imported containers were up by 10.2% as compared to last year. In contrast, the Port of Los Angeles saw a fall of 15.6% in total volume of containers handled and a fall of 16.5% of loaded imported containers in August as compared to August 2021.

The explanation for the diverging trajectories is not clear. The growth in East Coast traffic during 2021 and 2022 was driven in great part by shippers looking to avoid the congestion on the West Coast. However, the problems within terminals and landside transport have eased considerably at Los Angeles and Long Beach, yet shippers are still routing more traffic through New York as well as the Georgia and Gulf Ports.

It may be that the ports of the West Coast have simply picked-up the trend towards falling container demand more quickly than the East Coast terminals. Consumer sentiment is muted, with the US economy possibly facing a recession and the peak season is far from vigorous.

That said, the leap in the value of the US Dollar cannot be ignored. The implication of the rise in value of the currency is that despite wider economic conditions, exports will increase and this might moderate any fall in import volumes. What the impact of this will be on ports is worth speculating on. It could be suggested that the rise in Dollar might replicate some of the imbalance between imports and exports seen in 2021, with all the implications that had for congestion.

Supply chain strategists can use GSCi – Ti’s online data platform – to identify opportunities for growth, support strategic decisions, help them stay abreast of industry trends and development, as well as understand future impacts on the industry. 


Supply Chain Management has become Very Political Recently

An example is the speech by President Xi Jinping, at the ‘International Forum on Resilient and Stable Industrial and Supply Chains’ in Hangzhou on Tuesday. Addressed to an audience of senior managers from Western companies with significant operations in China as well as politicians from nations in South East Asia and South America, Xi stated that “China will unswervingly ensure that industrial and supply chains are public goods in nature, take concrete actions to deepen international cooperation on industrial and supply chains…China is willing to work with other countries to seize the new opportunities presented by the latest scientific and technological revolution and industrial transformation, and build a global industrial and supply chain system that is secure, stable, smooth, efficient, open, inclusive and mutually beneficial”.

As so often in Chinese politics it is hard to fully understand the meaning of what is being said, however it is widely being interpreted as a political message about Chinese economic and strategic policy. In response to American actions such as the ‘Chips Act’, China is looking to create supply chains that are insulated from American influence, constructed in collaboration with friendly nations. The latter seems to include Chile, Cuba, Indonesia, Pakistan, Argentina and Serbia, who with China, at the conference put-forward a proposed initiative called the ‘International Cooperation on Resilient and Stable Industrial and Supply Chains’. Whilst a good deal of this is just rhetoric, it does point to an underlying direction of Chinese trade and investment policy that might have significant implications for trade patterns.

And China is not alone. Another example is Emmanuel Macron, President of France, who addressing French diplomats in what was admittedly a long speech last week, commented that “the pandemic broke apart production chains. It re-regionalized, and sometimes re-nationalized certain production chains. And I believe that it deglobalized a significant portion of global production for the long term. That is the first reality that fractures the international economic order, whether we like it or not.” French politicians have often been uncomfortable with free trade, but, like Xi Jinping, Macron is attempting to influence supply chain management dynamics in certain areas.

What the effects of these policies will be is very unclear. It is likely that sectors such as semiconductors will attract considerable political interference, however it is uncertain if this will spread to areas such as food.

Supply chain strategists can use GSCi – Ti’s online data platform – to identify opportunities for growth, support strategic decisions, help them stay abreast of industry trends and development, as well as understand future impacts on the industry.


FedEx Lower Results Suggests Downturn

FedEx has triggered a wave of pessimism across markets in reaction to its quarterly results that were published on the 15th September.

The Memphis based company stated that its “first quarter results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter. FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of approximately $500 million relative to company forecasts. FedEx Ground revenue was approximately $300 million below company forecasts.”

In other words, lower demand has resulted in lower profits. For the whole company in Q1 Revenue was up US$1.2bn over Q1 2021, at $23.2bn as compared to the same period last year but income fell by $210m to $1.19m. The real action was in the core Air Express business. This saw a collapse in profits from $567m in Q1 last year to $174m in Q1 this year. Not all of FedEx suffered, with FedEx Freight seeing operating income almost doubling to $651m. Nonetheless, with FedEx having halved its expectations for profits for the year, it is not surprising that the mood around the numbers is pessimistic.

In response to the downturn FedEx is cutting costs aggressively, with a reduction in the intensity of air operations even to the extent of parking-up aircraft, reductions in working hours, cuts in staff numbers and the closure of offices. The vigour and extent of these measures imply that FedEx thinks that the downturn may be sustained for several quarters.

It is hard not to view these results as a leading indicator of lower demand and lower prices across much of the logistics sector. Admittedly, FedEx is disproportionately affected by the remarkable fall-back of internet retailing volumes, however the direction of the markets indicates a more broad-based drop in demand. Indeed, FedEx’s CEO, Raj Subramaniam, stated in the media that he thought that the world could be looking at a recession with even US consumer spending slowing.

Supply chain strategists can use GSCi – Ti’s online data platform – to identify opportunities for growth, support strategic decisions, help them stay abreast of industry trends and development, as well as understand future impacts on the industry.



Russia Gas Crisis Threatens German Logistics Sector

The prospect of a reduction, or even termination, of gas supplies from Russia is concerning the German industry. At the beginning of this month the German government issued a warning that there was a possibility that the country could face serious shortages of gas over the coming winter. If this happens large areas of the German economy would not merely face higher costs but may become non-viable, something that would have an enormous impact on logistics in Germany and neighboring economies.

The chemical sector is particularly dependent on Russian gas. BASF is the largest of Germany’s chemical producers and was heavily involved in the Nord Stream 2 gas pipeline project. What is often not understood is that gas moved by pipeline from Russia was very cheap and this low-priced raw material underpinned BASF’s German operations.

BASF headquarters and leading production location is at Ludwigshafen in the Rhineland-Palatinate. It is one of the largest centers in Europe for rail and barge transport. It is also a leading customer for both road freight and warehousing services. Reports are suggesting that BASF is drawing-up plans to close parts of the Ludwigshafen site, although shutting the whole complex is viewed as an extreme option that would only happen if there was a serious shortage of gas in Germany.

If production were even to be reduced substantially it would have an enormous effect on rail freight companies, the intermodal sector, barge operators on the Rhine but also some contract logistics providers, especially medium-sized companies in western Germany. The impact on road freight would not be as great, but it would still affect the market.

The effect may not simply be one of a reduction in logistics activity. Rather there is likely to be a shift in supply chain patterns. The past several decades have seen the growth of chemical production to coastal sites and an increase in the ability of both up and down-stream products to be moved by ship. Antwerp is the largest production location in Europe and it may look to increase its share of production, although a large part of its gas is also sourced in Russia. However, it is likely that additional chemical products could be sourced from either Saudi Arabia or the US, especially Texas. This would require a very large increase in activity of marine chemical logistics, both in terms of bulk chemical tankers, tank containers but also chemical terminals and their landside transport. Essentially a large part of the chemical logistics network in Europe would have to be restructured.

As is so often the case in crisis, some logistics providers will suffer but others will benefit.


State of Logistics Report Sees US Logistics Costs Rise To Highest Levels In Ten Years

For the US economy, inflation in logistics costs was remarkable over 2021 and had the effect of driving up the proportion of GDP absorbed by logistics to levels not seen for over a decade. That is the assertion from the management consultancy A.T. Kearney which has produced the American 2022 ‘State of Logistics Report’ for the Council of Supply Chain Management Professionals.

With the significant proviso that the years 2020 and 2021 were hardly normal for American logistics markets, overall growth in business logistics costs was an extraordinary 22.4% as compared to a compound annual growth rate of 5.8% over the past five years.

Of the different logistics markets broken-down by Kearney the highest increases were seen in areas such as dedicated road freight services, which leaped by 39.3%, waterborne freight transport which increased by 26.3%, and inventory carrying costs which were up by 25.9%. For water transport, the rate of increase is an enormous departure from the longer-term trend which saw costs fall by over 4% a year over the past five years. Possibly this suggests that markets are not behaving normally at present and further, that the return to their previous behavior might be expressed quite violently. However, the violent increase in dedicated contract carriage is a little surprising, given contract logistics has not shown quite the enormous levels of growth seen, for example, in freight forwarding or airfreight.

It should be remembered that the macro-economic conditions of the US economy also have not been normal. With occasional extraordinary restrictions on the functioning of parts of the economy combined with enormous fiscal expansion, growth has been very strong, focussed disproportionately on certain sectors but also, possibly, unsustainable.

The overall result is that Kearney estimates that at the beginning of 2022, logistics accounted for 8% of US GDP, reversing more than ten years of decline. At 8% the US still has a low-cost logistics base which is a considerable strength for its economy. Even other advanced economies will regularly have logistics costs accounting for one or two percentage points higher than this. However, if the 8% figure were sustained for even a few years, it would represent a considerable fall in the productivity of the US.

Rumors suggest DSV move for C.H. Robinson

Rumors are circulating that part of the leading US logistics service provider, C.H. Robinson, is the next target for acquisition by DSV.

Reuters published a story last week, quoting anonymous sources, stating that “DSV, which is looking to expand in North America, last week met with a small group of investors and said that it would be interested in acquiring C.H. Robinson’s global forwarding business, which would give it critical access to transpacific ocean trade lanes”. It was suggested that the price for forwarding unit would be “as much as $9 billion”

Caution should be shown towards such stories as journalists can be used by various parties to influence the outcome of negotiations.

Reuters implied that C.H. Robinson’s inclination to consider selling part of its business was related to its conflict with activist investment company Ancora Advisors, who have managed to gain two seats on C.H. Robinson’s board as well as having formed a ‘strategic options’ committee for the company.

Certainly, DSV has stated that having absorbed Agility’s ‘Global Integrated Logistics’ business which it acquired last year, it is now on the lookout for further deals. The likelihood that these would include forwarding business with substantial exposure to Asia Pacific is high as it is a growing market where DSV has a somewhat weaker presence.

For C.H. Robinson, selling its forwarding business would be a notable development but far from the end of the company. Forwarding accounts for around a third of the business by revenue and it gives the company valuable exposure to markets outside the US. However, C.H. Robinson’s core business has always been ‘freight brokerage’ in the US where it is a leading provider, generally delivering steady profit growth. Selling its freight forwarding would still leave it a substantial logistics service provider in North America. Profits in both businesses have been leaping upward in double-digit percentages and C.H. Robinson is a substantial forwarder, but its market position in air and sea forwarding is not as strong as in freight brokerage. Selling the forwarding business at the top of the market may be attractive in the short-term.

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Apple starts iPad assembly in Vietnam

The press is full of stories of Apple diversifying its supply chain by moving some production from China to Vietnam.

Reports in the Nikkei Asia state that the Cupertino-based giant has shifted some iPad assembly into Vietnam, away from its production locations in Eastern China, especially around Shanghai. The short-term reason appears to be the impact that the lockdowns in Shanghai have had on both the Apple supply chain across China but also its outsourced assembly operations in the regions around China’s largest city. Nikkei’s sources state that Apple is pressing component manufacturers to increase buffer stocks in anticipation of continued disruption.

Apple has been considering reducing its reliance on China for several years. In 2020 it began planning to expand assembly operations in Vietnam, asking Foxconn to expand assembly operations in the country. The latest story seems to be the implementation of that policy. The long-term motivation in 2020 for the shift to Vietnam was political. Increasing tensions between the US and China implied that it was risky for Apple to be so reliant on China as they have been for twenty years or more. This issue has become even more complex as Apple has increased the proportion of components it purchases from Chinese ‘State-Owned Enterprises’, itself a reflection of the complex relationship that Apple has with the Chinese state and Chinese consumers.

Yet these issues are not restricted to Apple. Sony, Samsung and LG expanded production in Vietnam several years ago, building airfreight infrastructure in Hanoi to support their assembly of mobile phones. Sony has had a major presence in Thailand for several years and the electronics sector is beginning to grow in neighbouring countries such as Cambodia. The decision to move these Korean and Japanese electronics companies was also heavily influenced by political considerations.

Certainly, Vietnam is at the front of the queue for the relocation of electronics production. It also has a rapidly developing presence in furniture and clothing. However, if major brands are to move sourcing out of China there will be opportunities for many economies, not just in South East Asia but in many other regions. A key driver of such sourcing decisions will be the availability of logistics services.