Is air freight set for a soft landing – or will China lockdowns and protests get in the way?

 

Following a massive surge during the Covid-19 pandemic years, air freight prices have been trending a long way (back) down over recent months. 

According to the latest data, the overall Baltic Air Freight index (BAI00) is now down a massive -41.3% in the 12 months to 28 November – though it still remains, so far, comfortably above pre-pandemic levels.

During the past year, there have been some notable regional variations – with routes from China harder hit than from other major locations, with the index for Outbound Shanghai routes (BAI80) down more steeply by -52.5% YoY. 

During the past year, there have been some notable regional variations – with routes from China harder hit than from other major locations, with the index for Outbound Shanghai routes (BAI80) down more steeply by -52.5% YoY. 

Over the same period, prices have held up more strongly out of Europe, with the Outbound Frankfurt index (BAI20) only down by -26.4% YoY.

And out of North America, the Outbound Chicago index (BAI50) is only down -27.1% YoY.

So there has been plenty of regional variation. But the overall narrative has been pretty consistent – and consistently bad given negative factors like:

  • Soaring energy prices, particularly in gas, exacerbated by the war in Ukraine
  • Rising inflation and interest rates 
  • Renewed constraints in China due to its zero-Covid policy – with the protests against them doing little to ease concerns about supply chains
  • Plummeting levels of economic growth and trade

These developments have also come at a time when more air freight capacity has been coming back on stream following the pandemic – making more planes available to move fewer goods. 

And following a general move by shippers away from ‘just in time’ and towards ‘just in case’ supply chain systems – which has meant inventories high and warehouses full – at a time economic activity has been stalling. 

All of which leads, of course, to lower rates for air freight.

But, despite the negativity, could all that be about to change? Could the tide turn – and we suddenly reach an inflexion point? 

Over the past month or so, there have been signs of a change of direction that may be coming. 

First of all, there has been a collapse in European gas prices – arriving like manna from heaven for governments in Europe and the UK, who had been forced into massive support packages to shelter households and businesses from soaring gas and electricity prices. 

Big support packages for the winter of 2022-23 are already in place. But this recent drop in gas prices should much reduce the support required for the following period. 

That, in turn, seems to have eased the gloomiest scenarios of a significant recession in Europe – boosted by a feeling that Ukraine has now gained the upper hand over Russia, which may help end the war there more swiftly.

Second, expectations of rising inflation in the US – which had been causing alarm for markets worldwide – appear to be approaching a peak. 

With the latest US inflation figures coming in below expectations, markets now expect Federal Reserve chairman Jerome Powell to have more leeway not to push interest rates so high – and hence not squeeze so much growth out of the global economy.

Third, and perhaps most importantly, have been expectations that a full reopening of China – post-Covid – must finally happen, and perhaps soon.

ll of this has been reflected in a sudden surge in global equity prices over the past couple of months, with the MSCI World up more than 6% in November as we approached month-end – and more than 10% in European markets, buoyed by that falling gas price.

Taken together, these developments have raised expectations that although the global economy may still be heading for recession, it could be with more of a ‘soft landing’ – which might also mean the ongoing fall in air freight prices coming to an end.

Taken together, these developments have raised expectations that although the global economy may still be heading for recession, it could be with more of a ‘soft landing’ – which might also mean the ongoing fall in air freight prices coming to an end.

Against that, it must be said that plenty of economists and macro commentators remain sceptical that they can achieve a soft landing. 

Some of these sceptics view the recent equity market rise as something of a ‘dead cat bounce’ – the short-term relief rally that often occurs in a bear market.

They point to various things – not least that the Ukraine conflict remains far from over, ongoing trade tensions between the US and China, and what they see as disappointing at the recent Chinese Party Congress – all as factors of concern.

The recent outbreak of nationwide protests across China against continuing Covid restrictions – and market reaction in Asia – will not have eased such concerns.

With supply chains in China far from back to normal, there is still plenty to be concerned about. But an inflexion point is coming. 

Even if so, an end to the long-running fall in air freight prices may take a while to show through – perhaps not until next March or April at the soonest. Any sign of it before then would indeed be an early indicator.

Neil Wilson, TAC Editor

Neil Wilson is Editor of TAC Index, which provides independent, accurate and actionable global air freight data, allowing our customers to make comparative, cost-effective and intelligent air freight decisions.

Neil has more than 30 years’ experience in financial journalism and publishing, specialising mainly in derivatives and alternative investments. He has contributed to various publications including The Financial Times, The Economist and Risk magazine. He has also been a guest speaker at many industry events.

Neil has a B.A. with Honours in Philosophy, Politics and Economics from the University of Oxford.