US Retail Inventory Levels Suggest Lower Freight Rates

US Retail Inventory Levels Suggest Lower Freight Rates

June 14th, 2022 Thomas Cullen Leave a comment

The emerging dynamics of US retail inventory may have significant implications for the global logistics market.

Recent numbers from major retailers such as Walmart and Target as well as smaller specialists such as Abercrombie & Fitch, show that they are carrying high inventory levels. Consumer demand is lower than these companies anticipated leading to an overhang of stock. Walmart observed in its most recent earnings release that shoppers were reducing their purchases of ‘General Merchandise’ due to the higher costs of food purchases in their stores.

All complained about higher logistics costs. Target commented that “this year’s gross margin rate reflected higher markdown rates, driven largely by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions, and increased compensation and headcount in our distribution centers”.

The logical response to these issues is for shippers such as Target and Walmart to reduce demand for stock and thus for logistics services. In the US this may be happening. The key port of Los Angeles, which has been at the center of much of the congestion that has driven-up logistics costs over the past two years, saw a year-on-year fall in volumes of 6.89% in April although the port was quick to assert that by historical standards throughput was still high, being “17% higher than the five-year April average of 390,000 TEUs”.

The optimistic view of the Chief Executive of the port of Los Angeles, Gene Seroka, was that he saw “an earlier than normal peak season, combined with seasonal products, think of back to school, fall fashion, all of that should start combining at the end of June.” However, he also observed that the number vessels queuing outside the port had fallen to just 32, as compared to 109 at certain times in January.

If inventory is high across the consumer durables sector in the US then the implication is that there will be lower demand for freight. In turn, this strongly suggests that lower volumes into the US from trans-Pacific routes will increase available space on ships, trucks and aircraft and reduce the pricing power of freight transport providers. This will be compounded by the fall in the level of congestion, which in turn will release further quantities of items such as shipping containers and cross-dock capacity. All of this could lead to heavy falls in freight rates.

Archives, Global Trade Daily, Warehousing

Amazon looks to Sub-let Warehouses as Growth Slows

June 10th, 2022 Thomas Cullen Leave a comment

The fall-off in e-retail activity has been significant and this seems to have left Amazon with too much warehousing space. Several US-based press sources are reporting that Amazon is looking to sub-let space in its fulfilment center network.

The news agency Bloomberg is stating that Amazon’s “excess capacity includes warehouses in New York, New Jersey, Southern California and Atlanta…the surfeit of space could far exceed 10 million square feet” with one anonymous person telling Bloomberg that it could be “triple that” whilst another said the “final estimate on the square footage to be vacated hasn’t been reached and that the figure remains in flux”.

This is not entirely a surprise. Amazon has been indicating that the market for e-retail had slowed and this was having implications for its physical network. Last month, Amazon’s CEO Andy Jassy commented that “our Consumer business has grown 23% annually over the past two years, with extraordinary growth in 2020 of 39% year-over-year that necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years—and doing so in just 24 months. Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network.”

Amazon is not the only company to be affected by the fall in demand for e-retail. UPS has registered a fall in e-retail volumes through its network and the e-retail grocery company Ocado saw sales in its retail business fall 5.7% year-on-year in Q1.

The clear implication is that the slowing market for e-retail is creating an overhang of capacity. Whether this will cool the rather heated warehousing market is far from certain. Logistics property developer Prologis continues to report high demand in many markets with supply still inadequate. However, they report that a good deal of this demand is driven by the need to manage congestion and problems of availability in supply chains.

E-retail has driven the growth of a large part of the logistics market both a domestic level and, to a lesser extent, at a global level. Its growth prospects in both advanced markets and others will shape logistics markets in the short-to-medium term.

3pls, Archives, Global Logistics, Global Trade Daily, Ocean Ports

Record Results for DP-DHL and Maersk in Volatile Market

May 24th, 2022 Thomas Cullen Leave a comment

The bonanza that so many of the large logistics companies are experiencing seems to be continuing with the just-published first quarter 2022 results of both DP DHL and Maersk seeing large increases in both revenues and profits.

For DP DHL, revenue grew 19.8% year-on-year to €22,593m whilst EBIT was €2,159m. A major reason for this jump in profits was a huge increase in the revenue at the ‘Global Forwarding, Freight’ business. This saw revenue leap by 54.9% to €7,359m and EBIT treble to €601m. For an operation that has been falling behind many of its competitors for several years, this may mark some sort of recovery.

DHL Express, which is normally the best performer of DP DHL’s businesses, still put in respectable numbers, with a 15.9% rise in revenue to €6,373m but flat EBIT. DHL Supply Chain saw a 22.8% rise in EBIT. One of the problem areas was Post & Parcel, where the return to some post-Covid normality in Germany resulted in falls in business and a consequent -36.2% fall in EBIT.

Maersk experienced similar conditions but the effects of issues such as the war in Ukraine and the crisis in China had a greater effect. For the whole Group, revenue was up 55% year-on-year whilst EBITDA more than doubled to US$9.1bn. A major part of this was continued high profitability in container shipping despite falls in demand.

Maersk commented that “loaded volumes decreased by 6.7%, primarily driven by lower back-haul volumes in Europe and in North America. The average loaded freight rates increased by 71%, driven by both contracts and shipment rates on routes from Asia to Europe and to North America”. Other parts of the business also did well again, despite mediocre demand levels.

Logistics & Services saw a rise in EBITDA despite losses from closed investments in Russia but the Terminals business suffered an impairment of US$485m as a result of the write-off of investments in Russia, although the business saw record margins at the operational level of 40.3%.

These results are impressive for both companies, but caution should be applied in assessing their importance. The market remains volatile and dysfunctional and this is supporting high freight rates to a very significant degree.

3pls, Archives, Global Logistics, Global Trade Daily, News

KKR buys Hitachi Transport for $5bn

May 13th, 2022 Thomas Cullen Leave a comment

The US private equity firm Kohlberg Kravis Roberts (KKR), has bid to take effective control of Hitachi Transport System, one of Japan’s largest logistics providers.

In a statement issued on 28^th April, KKR said that it would acquire 90% of the voting shares of Hitachi Transport System, with the wider Hitachi Group retaining 10% of the voting shares. The deal values Hitachi Transport System at US$5bn, with KKR offering Y8,913 per share for the stock traded on the Tokyo stock exchange. The price KKR is paying Hitachi for its shares is slightly less.

One of the major reasons for the sale is the wider Hitachi Group’s need to improve return on investment. Hitachi Limited is huge, covering the manufacturing of trains, automotive components, nuclear power stations and construction vehicles. This has made the company too unwieldy and unprofitable. Consequently, Hitachi is divesting many of its subsidiaries, with Hitachi Transport System being one of them.

Hitachi Transport System is not unprofitable. In the financial year 2021, the company saw revenues up 14% at Y743,612m (US$5.7bn) but net income fell 39% to Y14,622m (US$112m). Hitachi Transport Systems has a mix of different types of logistics businesses, with both freight forwarding and contract logistics. One notable contract logistics is Vantec which is a major logistics supplier to the automotive sector, especially to Nissan. The group generally has a substantial presence across ‘Asia-Pacific’ but it tends to serve Japanese industrial customers with activities in locations such as South East Asia. The management of Hitachi Transport systems perceives that this has to change.

To map out a new future the company has embarked on a new corporate strategy called ‘LOGISTEED 2030’ which seeks to redefine its businesses around technology and expand its activities outside Japan. In particular, the company is looking to expand in North America and Europe, probably through acquisition. It appears that one of the secondary purposes of the KKR acquisition is to gain access to the capital required to fund this investment and acquisition activity.

3pls, Air cargo, Archives, Global Logistics, Global Trade Daily, Ocean Ports

Maersk Reveals Focus on Air Cargo

May 4th, 2022 Thomas Cullen Leave a comment

Essentially this is a rebranding of Maersk’s existing air freighter business, Star Air, with the significance of the move possibly being in the re-naming. Rather than a somewhat peripheral subsidiary like Star Air, the intention seems to make Maersk Air Cargo a core market offer from Maersk Group. As the company states in its press release, “Maersk’s ambition is to have approximately one-third of its annual air tonnage carried within its own controlled freight network. This will be achieved through a combination of owned and leased aircraft, replicating the structure that the company has within its ocean fleet.

The remaining capacity will be provided by strategic commercial carriers and charter flight operators”. Surely the most important line here is “replicating the structure that the company has within its ocean fleet”, suggesting that Maersk aims to become as much of an airfreight company as it is a shipping line.

It is interesting that the head of Maersk Group’s ‘Logistics and Services’ business is a former CEVA executive. He comments that Maersk Logistics and Services views air freight as “a crucial enabler of flexibility and agility in global supply chains as it allows our customers to tackle time-critical supply chain challenges and provides transport mode options for high value cargo”. This is a clear statement that Maersk is aiming for a high- to very high-level of vertical integration.

Not only that, but Maersk has also outlined plans to develop Billund airport as its “air freight hub”. It is unclear if this will just be a base for administration and maintenance, or if Maersk envision a hub within an airfreight route network. Bearing in mind Maersk’s shipping operations emphasize networked operations, it may not be surprising if it is the latter.

Maersk Group has long had an interest in air transport, but the creation of Maersk Air Cargo goes beyond this in its implications. It is another significant step towards Maersk becoming a multi-sector vertically integrated, asset-based logistics provider where ships are just one asset class.

3pls, Air Cargo, Airports, Archives, Global Logistics, Global Trade Daily, International Trade, News

Air Freight Rates May Be Spiking Now but a Fall in Rates Looks Possible

April 22nd, 2022 Thomas Cullen Leave a comment

The airline sector is recovering. As Willie Walsh, the former CEO of British Airways and now Director General of IATA said on Thursday, “the recovery in air travel is gathering steam as governments in many parts of the world lift travel restrictions.

States that persist in attempting to lock-out the disease, rather than managing it, as we do with other diseases, risk missing out on the enormous economic and societal benefits that a restoration of international connectivity will bring,” Willie Walsh is, of course, referring to China, which continues the most savage response to COVID-19 outbreaks. This is placing a break on the bounce-back of air traffic at the global level.

The rest of the world is doing its best to compensate. Total air traffic measured in revenue passenger kilometers increased 115% year-on-year in February 2022, although this is still 45.5% less than the volumes seen in February 2019. In particular international traffic is recovering violently, with a 256.8% increase year-on-year, although this is 59.6% lower than 2019, showing how severe the crash in international air traffic has been.

In terms of demand, air cargo is a very different market. Over the past two years the market for cargo has often been extraordinarily strong in the face of a near absence of belly freight. Demand is still respectable, with global traffic measured in cargo ton-kilometers up 2.9% year-on-year for February, with a slight bias to domestic operations, possibly due to e-commerce traffic in markets such as the US. However, IATA also reports that actual ton-kilometers, that is the volume of cargo carrying capacity available, increased 12.5% year-on-year in February, whilst load-factors fell 4.9%.

Cargo capacity is still 5.6% below February 2019, but demand is not increasing as fast as it was in December 2021. If these trends are sustained the implications are that the balance between air cargo capacity supply and air cargo demand will tip towards lower prices.

The disruptions in China and Hong Kong are taking their toll, as is the avoidance of Russian airspace by many airlines, with air freight rates reportedly spiking on China-Europe routes in recent days.

However, as Willie Walsh commented “Demand for air cargo continued to expand despite growing challenges in the trading environment. That is not likely to be the case in March as the economic consequences of the war in Ukraine take hold. Sanction-related shifts in manufacturing and economic activity, rising oil prices and geopolitical uncertainty will take their toll on air cargo’s performance”.

Schenker seems to be “driving” Deutsche Bahn if the German state-owned railway system is to be believed.

Archives, Global Logistics, Global Trade Daily, logistics, News, Rail

Schenker Delivers for Deutsche Bahn again

April 14th, 2022 Thomas Cullen Leave a comment

It is difficult to fully assess the performance of Schenker and its parent Deutsche Bahn, however the numbers suggest that Schenker is doing quite well whilst its parent struggles not so much with demand as profitability.

For the financial year 2021, the results released last week saw revenue rise 32.7% year-on-year to €23.4bn whilst ‘adjusted’ EBITDA (Earnings Before Interest, Depreciation and Amortisation) increased 41.2% to €1.8bn. This performance was largely due to the freight forwarding which saw revenue up 57.5% year-on-year at €12.96bn although there is no number for profits reported.

Contract logistics experience was respectable rather than spectacular at a 9.2% revenue increase. Road freight saw an 11.9% rise. The latter was on a comparatively modest 2.3% increase in shipments. The engine of the freight forwarding business was airfreight which handled 31.4% more cargo whilst ocean forwarding saw a 2.4% reduction. As usual for 2021, forwarders made their money on higher rates and, in the case of airfreight, charter services. The impact of congestion was universal across the different businesses.

The other major logistics business at Deutsche Bahn, rail freight, was not quite so happy. Although volumes carried were up 6.3%, revenue was up 8.9%, EBITDA recovered 68.8%, but the business still made a loss of €100m.The cost base still seems to be a problem, although why these cannot be passed on to customers is unclear.

Deutsche Bahn and its political masters have been emphatic that Schenker is not up for sale. However, the fact that the whole group continues to be loss making, with Net Profits negative by €900m with debts remaining significant, continues to suggest that Schenker’s sale may still have to be considered. Certainly, Schenker is profitable, however it is a good question whether its performance equals the very best in the sector.

Less than a year after spinning off its contract logistics business, XPO Logistics has said that it will separate its North American

Archives, Global Logistics, Global Trade Daily, News

XPO splits business to simplify and increase value

March 28th, 2022 Thomas Cullen Leave a comment

Less than a year after spinning off its contract logistics business, XPO Logistics has said that it will separate its North American less-than-trailer load operation and freight brokerage into “two focused, publicly traded companies at the top of their industries”. In addition, XPO said that it “expects to divest its European business and North American intermodal operation to simplify its transportation service offering.”

The truck brokerage will be launched as a separate company by the end of 2022. XPO Logistics said that it had “an exclusivity agreement in connection with a potential sale of its intermodal business, which provides rail brokerage and drayage services”.

The restructuring is the result of the creator and CEO of XPO, Brad Jacobs, manoeuvring his assets to get the best possible valuation for his companies from the capital markets. Like the oil trader that he was, Brad Jacobs is trying different pitches to investors in order to maximize his returns, describing “a large universe of investors who want to invest in a pure-play like LTL that’s asset-based with a high return on capital and levered to the ongoing industrial recovery.” Whilst a different group of investors “want to invest in an asset-light, tech-enabled truck brokerage platform that the spin-off will be”. Brad Jacobs said that the difference in valuation was huge, with other more focused LSPs valued at “around fifteen times EBITDA, we are trading at about seven and a half EBITDA.”

There is an operational reality behind the move, with Mr Jacobs admitting that “when a management team is focused solely on one thing, they do a better job”, but the main motivation appears to be shareholder value.

Once one of the largest logistics companies in the World, XPO Logistics will essentially be no more, rather it will create a legacy of a string of still quite large, focused firms across much of the logistics services markets, including contract logistics, LTL and ‘truck brokerage’. It is a singular approach, with much of the rest of the logistics sector pursuing acquisitions and diversification at a furious pace. That an investor as successful and experienced as Brad Jacobs is so strongly moving away from such a strategy is worth thinking about.

Archives, Global Trade Daily

UPS Supply Chain rescues a UPS still struggling with costs

October 27th, 2018 Thomas Cullen Leave a comment

Supply Chain and Freight came to the rescue for UPS in the third quarter, with a strong performance in road freight and forwarding counter-balancing profitability problems elsewhere.

For the whole company consolidated revenue increased by 7.9% year-on-year, whilst stripping-out currency fluctuations, it was up 8.4% at $17.444bn. Net Income was up 19.8% at $1.508bn, a number slightly flattered by lower income tax costs. Operating profit was only 0.7% higher.

The core US Domestic Package revenue was good at $10.437bn, an 8.1% rise. Here the underlying picture was of strong demand from internet retailing in particular enabling a better pricing environment. However operating profit fell in the third quarter possibly influenced by higher transport subcontractor costs, which for the whole group climbed by 13.6% compared to the same period last year.

International Express was not quite as strong in revenue terms, up 3% at $3.47bn. Volumes fell slightly over the quarter by 0.2% but this was balanced by higher average revenue per package. However, fuel costs and currency effects conspired to drive down operating profits by 11% to $536m.

A much better performance was recorded by the Supply Chain and Freight business. It saw profits sharply higher at $242m, a 24.1% increase on revenue up 12%. In UPS Forwarding and UPS Freight a virtuous circle of higher volumes and better utilization improved margins as did better quality products. Presumably this must have been in the face of higher underlying transport costs.

This quarter’s numbers were roughly aligned with the trends seen through the rest of the year, that of good revenue growth but difficulties with the cost base. This is especially the case in the Domestic Express segment, for the first nine months revenue is up 7.2% but operating profit is down 17.8%.

The pre-Christmas period will be key to UPS in terms of whether it can match capacity to demand in both in terms of volume and cost effectiveness. UPS needs get on top of the problem of a cost base that is increasing faster than the market. A company with the resources of UPS ought to be able to achieve this.

Source: ti-insight.com

US Retail Inventory Levels Suggest Lower Freight Rates

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