Ex-China air freight rates set to soar in the coming weeks

2/16/2020

Air freight rates from China are set to rise rapidly once manufacturing production in China rebuilds in the coming few weeks, at least until airline passenger services return in large numbers to China, although the extent and duration of the price rises remain unclear.

Freight forwarders have already been reporting anecdotally of threefold and fourfold air freight price increases for freight needing to move urgently to China from Europe or the US, with reports even of fifteen-fold price rises for capacity to China from Dubai. Air freight pricing sources suggested that some of the anecdotal reports reflected prices for capacity on charter freighters services and urgent and unplanned loads needing to access specific, limited capacity, rather than contract business.

Peter Stallion, aviation and freight derivatives specialist at Freight Investor Services (FIS), said that there was currently a lot of price volatility in the market, exacerbated by the current low volume levels, making any clear pricing trends difficult to establish. But he said there was “only one way” that prices for ex-China capacity will go when demand picks up in the coming weeks, once Chinese factories resume production – upwards.

“We are starting to see it already,” he told Lloyd’s Loading List, adding that he expected that with some factories reopening next week, there would likely follow a period of a couple of weeks while product builds up, followed by significant rises in air freight prices once these goods are ready to be shipped.

The latest figures from Amsterdam-based Clive Data Services, which produces the new dynamic load factor data for the air cargo market each month and is monitoring the latest flows of air cargo to see the impact of the coronavirus, are “especially revealing”. Data for the five weeks to 9 February shows that the reduction of airline capacity, compounded with the further decrease of air freight volumes out of China, has resulted in the dynamic load factor from Europe and Middle East to China and Hong Kong being higher than the westbound load factor – reversing a trend that has existed for the last 15-20 years of market analysis.

But Stallion said this directional switch mostly reflected the fact that most of the air cargo being moved at the moment between Europe, China and Hong Kong was going on chartered freighters, where the emphasis was on the outbound leg rather than the return leg. 

The latest update from Bolloré Logistics yesterday highlighted some of the challenges accessing air cargo capacity from Europe to China, noting: “Except for Chinese airlines, all airlines have suspended passenger flights to China until mid-March. AirBridgeCargo and Cargolux have also significantly reduced their regular schedule as well.

“Capacity is, therefore, under extreme tension and Europe-China freight rates are increasing sharply. The charter solutions offered by Bolloré Logistics successfully address this shortage.”

Bolloré said the “capacity tension” from Europe to China was now spread to Hong Kong and Taipei, where freight rates were also “rising strongly”.

As reported today in Lloyd’s Loading List, Brian Bourke, chief growth officer at SEKO Logistics, highlighted that for the past few weeks, there had been “immense demand” for medical supplies into China – masks, sanitizers, gowns, thermometers – which was compensating to a degree for the delay in the upturn in regular air cargo trade in and out of China and the cross-border e-commerce trade.

But this peak demand for medical supplies had coincided with airlines pulling passenger and all-cargo services serving China, he noted, adding: “There is a huge capacity imbalance at the moment, driving rates much higher than you’d typically see. Demand into China has been consistently high across the board because anyone who's trying to get product into the country is using air freight to do it, and space is at a premium.”

Reports of hikes in rates of 300-400% into China were “probably not far off the mark; but there is a good deal of fluctuation from day to day, and we don’t know where they’ll be tomorrow.”

When the situation does return to normal in China, a surge in demand for capacity – initially focused on air freight – is inevitable, Bourke added. “The fear is this will be a disruptive period in the market with a scramble for space, prolonging the impact of the coronavirus on global supply chains until the end of the year.”

In an air freight pricing update this week, FIS’s Stallion noted: “Factors have collided as we start seeing the pricing impact of coronavirus quarantine measures on Asia air freight capacity. Charters have largely dominated any inbound traffic; however a backlog of air freight capacity orders has yet to materialise, restricting volumes leaving China.” 

He said controls of movement into and out of Hong Kong and mainland China, and the limitations on domestic trucking in China “have appeared to favour Shanghai as a primary export point for European destinations. Conversely, the travel bans from China to US have favoured Hong Kong in the immediate term, severely damaging the strength of Shanghai to US pricing. However, the lack of cargo moving into and out of China makes us cautious to set up an immediate assessment, as the majority of business revenues are unlikely to track index volatility until industrial production and movement of freight resumes at some point in the coming weeks. 

“In simple terms, the bulk of cash flow will not start moving to buy and sell air freight capacity at inflated/deflated prices, until cargo is available to be moved. The diversity of price increases and declines is indeed quite surprising, however reflecting the comments of many major freight forwarding veterans over the past few days, any degree of predictability is unlikely over the next few weeks.

“There is a near-term guarantee of supply chain bottlenecks, pushing the skill and efficiency of the logistics market to clear the impending backlog. The technology sector is one of many to be affected, the freeze of regional and global automotive supply chains has also been in the spotlight.”

Despite the inevitability of air freight price rises ex-China, Stallion said the time-frame for the return of sea and air freight capacity to the market “is still reasonably uncertain, with reviews on-going at most major airlines – including freighter operators such as AirBridgeCargo, Cargolux, Lufthansa who have restricted capacity.

“All eyes will be on how quickly air and sea carriers can muster capacity to provide suitable uplift for any freight volume spike, and how substantial and quantifiable this volume spike might be.”