Lockdowns in China, the war in Ukraine, and the rising inflation are a toxic mix of uncertainty for sea liners. While container spot prices are currently falling, they are still in line with regular seasonal declines, and ocean carriers have successfully secured considerable contract rate increases. At present, there has been little effect on container freight costs. In the near term, the shortage of available containers to load in China owing to intermodal regulations may cause carriers to lower prices to collect as much cargo as possible, ensuring that ships do not sail light.
Logistics companies are alerting clients about China’s recent action, which announced a phased-in evacuation of the lockdowns for the eastern section of Shanghai. The military stepped in to test millions of citizens. The Chinese government is focusing on the “zero COVID” policy. It appears that this policy will not be abandoned anytime soon.
Last week, the Asia-North Europe spot market indices fell between 1% to 2%, with Drewry’s WCI, Freightos Baltic Index (FBX), and Xeneta’s XSI readings of $11,099, $12,095, and $12,699 per 40ft, respectively.
Shanghai’s recent lockdown to contain the most significant wave of COVID-19 since the epidemic’s beginning is strangling air freight capacities.
From Monday to Friday, the city’s eastern half was shut down. At the same time, the residents on the western side were advised to quarantine at home or in compounds from Friday until April 5 while the government conducted mass testing. Workforce shortages hamper industrial and logistical activities due to a lack of public transportation and workers getting trapped at home. According to logistics businesses operating in China, many factories and warehouses have closed. Transferring products to and from local airports are challenging since only a few trucks are available, and airports have an insufficient workforce to handle cargo.
During the lockdown, motor carriers cannot utilize the highways leading to Shanghai Pudong Airport, the primary freight hub. Both Shanghai Pudong and Shanghai Hongqiao city airports are operational, albeit only to a limited extent and primarily for passenger flights.
The COVID restrictions come when the air freight industry is dealing with a loss of transportation capacity and rising fuel prices due to the Russia-Ukraine war. Russian cargo aircraft were forced out of the market due to Western sanctions, and Russia closed its airspace to overflights, prolonging trips between Europe and Asia. The cargo operations of Cathay Pacific, a primary cargo carrier, have also been significantly hindered by Hong Kong authorities’ pandemic restrictions. Air China has also postponed numerous cargo flights to Los Angeles and three planned trips to Chicago last week. As a result, the cargo prices have increased in the previous month due to a lack of capacity and rising operating costs.
The trucking sector is now battling rising fuel costs. Nonrevenue miles, sometimes known as “empty miles,” are now more expensive for companies. When a truck isn’t loaded, the trucking company loses money at a higher rate due to higher fuel costs. Carriers use fuel surcharges (FSCs) to compensate for variations in fuel prices for paid mileage. Yet, they do not account for deadhead, out-of-route mileage, or idle time. That implies that if gasoline prices rise, so do the expenses.
Last week had one of the most significant one-week increases in diesel fuel history, at $5.25 per gallon. According to the Department of Energy’s statistics and analysis division, the week before, it was the highest since 1994.
Diesel’s meteoric rise began towards the end of 2020. For 2021, the average weekly price grew by 30% year over year (up 37 per cent). Prices were approximately 40% higher year-over-year at the start of 2022 when Russia invaded Ukraine. Because diesel prices have risen sharply this year and empty miles are more expensive, carriers can’t immediately renegotiate contracts to account for the increases.
Increased fuel costs alone might increase the extra cost of empty kilometres by $2,000 to $3,000 per truck in 2022. The calculations assume that diesel prices remain stable and that deadhead and fuel consumption indicators remain close to industry averages.
Large fleets would face fewer headwinds due to greater fuel purchasing power and superior mileage economics. They frequently use newer equipment and employ more sophisticated fuel economy techniques. On the other hand, smaller carriers are likely to suffer since they will be left to recuperate the higher costs through rate hikes if the market cooperates. With the tough competition from the big players, that won’t be easy.
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4PL operations can be described as outsourcing the management and coordination of the entire supply chain – this allows the customer to focus on their core business.
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