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Logistics Management: How Market Volatility Impacts Freight Transportation Rates in 2016

The continuing economic slowdown of international markets, particularly in China, is leading to a volatile period of global rate fluctuation in 2016, world energy, logistics, trade, and transportation analysts agree. These analysts also bring to the table their concern about sustaining long-term distribution plans. All together, it could prove to be very challenging years ahead for shippers who are looking to keep costs manageable.

During a recent webcast titled The Impact of Global Market Volatility on Freight Transportation Rates, a panel of industry analysts discussed the current state of the U.S. economy and its impact on freight transportation, which way oil and fuel are likely to go in 2016, and what to expect in terms of rates and capacity across all models.

 

“The current prices don't support investment anywhere,” said Derik Andreoli, senior analyst at Mercator International. Last year, Organization of the Petroleum Exporting Countries (OPEC) production increasing drive global supply up. Iraq and Saudi Arabia accounted for nearly all of the growth, according to Andreoli's presentation. 

There is uncertainty in how current oil oversupply is likely to evolve over 2016. Even under the low case it will take the entire year for market to rebalance, according to Andreoli. 

“Demand has been weak, especially during the second half of 2015,” added John Larkin, managing director for the Transportation & Logistics Research Group at Stifel Nicolaus

Domestic production trends such as reshoring, in sourcing, near shoring and the like, in combination with manufacturing automation, enable carriers to touch freight multiple times. 

For Philip Damas, director, Supply Chain Advisors, at Drewry spot container freight rates reached historical lows in 2015 and contract rates will be lower this year. “Carriers have a huge problem to manage trade route capacity,” he said.

According to Charles Clowdis, managing director of Transportation Advisory Services at IHS Global Insight, leftovers from 2015 that linger into this year include:

  • Weak and potentially flat air cargo performance
  • In-service wide body capacity (up 2.2% with new deliveries)
  • A tough global economic environment and feeble world trade hurts
  • Business slowdowns in China
  • Struggle in emerging markets
  • A drop in the semiconductor shipments has been pronounced
  • Lagging consumer confidence
  • Unusually high inventory levels
  • Lower load factor levels which exacerbates capacity increases
  • Flat shrinkage yields to air cargo operators, both cargo-only and belly space

As for expectations for air cargo operators for 2016, IHS stated that oil prices are low, a reality that certainly doesn't hurt consumer spending. Meanwhile, someone, somewhere in the electronics lab may offer a new consumer product that forces demand for air cargo upward. Clowdis wondered if container weight limits enforcement will have a major impact on air cargo volumes. 

Although air cargo service providers will make compelling cases for higher rate levels in 2016, it's unlikely that there will be an increase of between four and five percent, IHS found. However, capacity should be plentiful and service reliable, according to the research firm. 

“Shippers should negotiate wisely; if you have volumes, you are favored in this match,” concluded Clowdis. 

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