Industry Insights Special Report: Moving Past 2022 and Looking Ahead to 2023
By Tim Gundlach
As a leading logistics service provider, PGL does more than move cargo for our client/partners. Much of our “value add” is in keeping them advised of current conditions and offering our best advice on what we see coming that can have an impact on their business. As such, thank you for watching and allowing us to share some thoughts on what lies ahead.
First let’s discuss 2022…
It was another highly challenging year for all of us involved in the global supply chain. The story of 2022 cannot be told without discussing “Black Swan Events”. “Black Swan Events” are defined as an unpredictable event that is beyond what is normally expected of a situation but that has potentially severe consequences. The truth is that “Black Swan Events” are nothing new to the logistics business. However, the frequency and severity of facing so many events within such a short period is unprecedented and a “Black Swan event” in itself. In 2022, these events included things such as Chinese covid lockdowns of entire cities, massive port and rail congestion, actual or threatened labor strikes, geopolitical events such as the war in Ukraine, blockage of the Suez Canal, etc. All of these events would have profound consequences on their own, but when combined caused additional layers of complexity resulting in a “bull whip” effect going from one extreme to another in a short period of time.
As we enter 2023, let’s examine the current status of the two of the major modes of international transportation:
With the sudden rise in capacity and drop in demand, rates have plummeted reaching near pre-pandemic levels. With the abundance capacity, Steamship Lines are increasing blank sailings to help mitigate further collapse in rates. Labor issues have been pushed down the line for now, and rail congestion issues are clearing up.
Air Freight volumes ended 2022 with nine consecutive months of decline. Some of the factors leading to this decline are related to the return of supply on the ocean transportation mode as a more cost-effective option for non-urgent or low valued merchandise. The drastic fall in ocean rates is pulling many shipments back to the ocean freight mode. Additionally, the return of increasing capacity via belly space on passenger aircraft now that travel recovery is gaining momentum. Although considered weak by the pandemic era, performance in many regions remain 85% above the pre-covid levels.
Looking to the future, the following are thoughts on what we might expect on the industry and the major events that impacted us in 2022.
Demand should remain well below 2022 level at least until major retailers have cleared out the stockpile of inventory carried into 2023. Growth in capacity can be predicted accurately with an increase in fleet growth by ship builders to the tune of 7% in each of 2023 and 2024; however, it could in fact be as high as 10% if projected vol of fleet scrapping doesn’t take place as expected. On-time performance, which has shown improvement in late 2022 due to a clearing of the port and rail congestion, will continue improvement only hampered by the increase in blank sailings again adding some level of schedule unpredictability although at a much lower level than 2022. Pricing should remain near current levels with some industry experts even predicting a rate war between carriers sometime in 2023.
For air cargo, the first part 2023 continues with decreased demand due to the economy and increasing supply with the resurgence of passenger travel. Normally, one would expect rates to decline under these conditions however, fuel and inflation are expected to push back resulting in a slow stabilization and the return of near pre-pandemic pricing.
There are many challenges facing the rail industry in 2023. One of the biggest is how to improve service and address labor issues. Both shippers and unions are pressing Congress to pass legislation that would give the Surface Transportation board more regulatory authority.
Although predictions by financial institutions vary greatly, most have agreed that some degree of recession is on the horizon. Global growth in 2023 is expected to be below 2% which would result in one of the weakest years in nearly four decades. Experts disagree on the severity of the recession and the timeframe for recovery; however, many US companies are now announcing mass lay-offs as a precautionary cost saving measure driven by the weakening economic forecasts.
There were 374 worker strikes started in 2022, representing a 39% increase over 2021. To name only a few there were actual or potential strikes by US Longshoreman, Portuguese rail workers, Airport Workers in the UK, and lockout of tugboat crews in Australia. Fueled by anger over working conditions and high inflation, the low employment rate and worker shortages gave workers more leverage, but this isn’t the whole story. One of the biggest factors was led by wins of other labor unions. The belief being that conditions were right and if your labor union doesn’t secure its biggest raises now, they are leaving money on the table.
The Russia-Ukraine conflict has affected the global logistics market on every level. The war has impeded the flow of goods, fueled cost increases and product shortages, and created catastrophic food shortages around the globe. Russia has been destroying Ukraine’s agricultural infrastructure, thereby disrupting the entire supply chain. The Black Sea and Azov Sea had been blocked by Russia, and the Ukrainian grain shipments were hijacked in the early months of the attack. In July, Russia and Ukraine signed a United Nations (UN) deal to unblock Ukrainian grain exports from three Black Sea ports to ease shortages. Despite the deal, Russia attacked Odesa’s seaport with cruise missiles hours after signing the deal. The uncertainty has had a snowball effect on supply chains across the globe.
China Covid Lockdown Policies:
China has reversed its pandemic policies. Even with a 30-40% decline in orders, logistics managers are still having to warn clients of delays in their factories being able to complete orders. This is because with the reversal of these policies, there is now a massive wave of infections impacting the labor force there. Some projections have this as high as 75% of labor being impacted and unable to work. As we enter Lunar New Year celebrations where migrant workers return to their hometowns, the further spread to more rural areas seems imminent. This is already impacting the major Chinese ports. Continued disruption after the Lunar New Year holidays are expected but should gradually improve as China’s population develops some immunity to the virus.
Global Protectionist Strategies:
More and more countries are implementing, or considering implementing, protectionist strategies to stem exports and protect domestic needs. The Chartered Institute of Procurement and Supply (CIPS) says the trend is one of global concern. It has identified food and oil as common targets for protectionist schemes, but that the range of product categories affected is expanding. These schemes are intended to offer protection during a crisis, but the continuing rise in their adoption can have a huge impact on the freight forwarding industry.
The wave of crises that arose over the last five years –from COVID and the China-US trade conflict, to high inflation and the Russian invasion of Ukraine– gave pause to developed economies in the West who have for long been overly dependent on Asia as a source of raw materials and cheap, manufacturing power. Consequently, the terms “nearshoring” and “friendshoring” gained prominence. A recent survey conducted by Capterra which surveyed 300 Small to Medium sized businesses show that 88% plan to or are currently switching at least some of their suppliers closer to the US in 2023. The big lesson for manufacturers in 2022 was: to not put all of their eggs in one basket. Many are considering a “China +1” policy meaning to continue sourcing from China but to also have other suppliers in other countries to diversify risks.
In conclusion: We view 2023 as not the end of the pandemic era, but perhaps the beginning of the end and a return to something resembling a new normal. However, we should remain diligent in remembering lessons learned with one key takeaway: “Always expect the unexpected”. PGL will do our part to keep you updated. As always, my colleagues and I remain available to discuss your particular needs or concerns at any time. We are here for you, please let us know how we can help.
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