As we come out of the State Of Emergency in South Africa and head into Quarter 2 of the year, we felt it was time to take a snapshot of where things stand in our industry and how this could potentially impact you, depending on which industry you are in and which regions you are shipping goods from or to.
As large parts of the world still deal with Covid outbreaks and institute containment measures like in China’s Shanghai, Europe is on tender hooks and closely monitoring the war in Ukraine and its bordering neighbours.
South Africa has already begun to feel the ripple effects of the war in regard to fuel and oil costs. Consumers are bracing themselves for price hikes and the potential of food shortages in some areas, which some European countries are already experiencing, may impact consumer behaviour.
So once again we brace ourselves for a challenging quarter and are putting plans in place to manage these unstable times. Below are some of the latest highlights happening across our sector.
Supply chain costs to rise as Ukraine crisis bites
Freight forwarders are warning of higher supply chain costs as the impact of the invasion of Ukraine disrupts transportation operations.
The forwarding sector is experiencing that the airspace restrictions imposed by Russia, European states, Canada, the UK and in North America are forcing airlines to cancel and adjust services.
Adjustments to flight schedules are unavoidable and increased transit times must be expected. As a result, we also expect a financial impact on airfreight rates, we are not able to provide an exact estimate of the impact at this stage.
Due to ongoing developments in the Russia-Ukraine conflict, several air carriers have stopped using Russian airspace. This will have a direct effect on air freight services in the coming period.
Due to the closure of the air corridors over Russia and Ukraine and the mentioned sanctions, we foresee capacity restrictions and, as a consequence, longer lead times.
Overall we expect the current situation will trigger an immediate capacity constraint across transport modes, as well as pressure on freight rate levels, including oil price increases.
The most significant impact is the need for rerouting around the conflict zone and extending transit times.
NATCO is in close dialogue with our carriers to find alternative routings to ensure we provide the best possible service for our customers despite the challenges.
When will air cargo’s supply-demand balance return
to pre-Covid levels?
The International Air Transport Association (IATA) released data for global air cargo markets showing that demand increased in February despite a challenging operating backdrop.
Several factors benefitted air cargo in February compared to January. On the demand side, manufacturing activity ramped-up quickly after the early February Lunar New Year holiday. Capacity was positively influenced by the general and progressive relaxation of COVID-19 travel restrictions, reduced flight cancellations due to Omicron-related factors (outside of Asia), and fewer winter weather operational disruptions in Europe.
Several factors in the operating environment should be noted:
- The zero-COVID policy in mainland China and Hong Kong continues to create supply chain disruptions as a result of flight cancellations due to labour shortages, and because many manufacturers cannot operate normally.
- The impact of Russia’s invasion of Ukraine had limited effect globally on February’s performance as it occurred very near the end of the month. The negative impacts of war and related sanctions (particularly higher energy costs and reduced trade) will become more visible over the next few months.
- The International Air Transport Association (IATA) released data for global air cargo markets showing that demand increased in February despite a challenging operating backdrop.
African airlines saw cargo volumes increase by 4.6% in February 2022 compared to February 2021. Capacity was 8.2% above February 2021 levels.
The air cargo market could only see its supply-demand balance return to pre-covid levels in 2025, although that prediction comes with a plethora of caveats.
Lufthansa Cargo chief commercial officer Ashwin Bhat has predicted that cargo capacity is expected to reach 2019 levels in around 2023 but in the meantime demand will continue to rise, meaning supply and demand will not come back into balance until around 2025.
He said that container port congestion will remain, e-commerce demand will continue to rise and supply chains will face disruption due to missing parts, all of which will favour air cargo.
When exactly air cargo will be in sync, it could be 2025ish but nobody really knows, especially in the current environment because the world is changing every other week and it’s a bit like dancing on a moving carpet.
China’s Covid lockdowns strain economy and global supply chains
China’s Covid lockdowns are putting the economy under strain and threatening to disrupt global supply chains, prompting Beijing to call for more contingency plans to deal with the risks.
Supply chain scares are intensifying as Shanghai — home to the world’s largest container port — battles mounting infections.
Covid controls in the city are impacting operations and reducing efficiency at the port.
Economists warn the situation could worsen in April, denting growth for the second quarter as uncertainty grows about the scope, severity and length of China’s lockdowns.
Ocean freight rates set to stay elevated until 2023
Ocean freight rates look set to stay elevated for another two years, as disruption continues to restrict capacity and with new vessel orders remaining relatively low until at least 2023, according to container shipping analysts. But things may not be so easy for carriers after 2022, as a flurry of new orders in the last few months is set to change container shipping’s supply-demand dynamic.
These are uncharted waters as the container industry has historically been accustomed to low margins, punctuated by only very occasional forays into significantly higher or lower performance.
Using history as the only guide, the smart bet would be to think that the market will cool down fairly quickly, but these are not normal times.
Ocean carriers look set for a prolonged and unprecedented upcycle, which will enable them to improve their financial health, reward investors and spend more.
However, if accelerated ship orders continue, there is a risk of a return to over-capacity that will shorten the cycle.”
MARINE INSURANCE – Why you need it
If the container carrying your consignment fell off a ship accidentally, what would you do and are you covered for it?
In these uncertain times Marine insurance is critical for those companies who ship expensive goods. You can insure your shipment for its total value under our Open Marine Policy, so if any or all of your shipment is lost, you’ll be reimbursed.
THE GOOD NEWS STORY – Key container corridors
Following President Ramaphosa’s announcement of third-party access in his State of the Nation Address in February, the country’s state rail company Transnet announced during a briefing last week that it would make six slots available to third parties in the container corridor between Durban in KwaZulu-Natal and City Deep in Gauteng, and a further 10 slots between Johannesburg in Gauteng and East London and Nelson Mandela Bay in the Eastern Cape from April.
The freight rail sector is a key enabler of the economy, and by providing the confidence that investors need, we’re going to see significant inflows into the rail sector, but perhaps more importantly, the upstream economy.
This initiative will promote the increased use of rail for the transportation of freight – will unlock significant benefits for the broader economy and stimulate the country’s job creation efforts.
NATCO are following this story closely as we believe it will give as an alternate freighting method nationally in the near future that would be more cost-effective that air freight and more secure than road freight.
As scary as this all may sound, things are actually looking up in our industry and many of the flight corridors, shipping routes and supply lines are coming on line to full capacity again and the industry is slowly stabilising.
Those regions that have challenges are being monitored by our team and alternates plans are being put in place to reduce the impact of delays and alternate routes and suppliers are being found.
We always have the best interest of our customers in mind and will keep you updated on any news or changes as soon as we have verified them as accurate.
We value your support and are here to support you during these challenging times.
Should you have any queries or concerns regarding the above, please do not hesitate to contact our team of experts.