Air freight peak season bounce an encouraging sign amid flat markets

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“E-commerce activity is still strong, though markets worry about a slowdown in China as well as in the west”

Air freight rates stayed in a fairly narrow range again in August, the traditionally quiet summer period.

The overall Baltic Air Freight Index (BAI00) was lower by some 1.8% in the week to 28 August, leaving it down 3.5% over the previous four weeks and down 45.9% over 12 months.

While the market overall was flattish, as is often the case in the summer, sources reported continued strong e-commerce business out of southern China, including intra-Asia, as well as to the US and Europe.

That was reflected in the outbound Hong Kong (BAI30) index being up 2.2% over the month, to leave it  down 40.5% YoY.

Air cargo rates out of Shanghai (BAI80) were also up over the month, by some 4%, though lower by 46.9% YoY.

Out of other regions, the market was more mixed. From Europe, the outbound Frankfurt (BAI20) index was -14.1% on the month, leaving it at -44.0% YoY; London (BAI40) was off even more – down 17.5% in August – to leave its YoY change at some -55.9%.

Check out TAC Index’s Neil Wilson talking about airfreight in this latest Loadstar Podcast clip:

Out of the Americas, while rates from many locations were rising in late August, outbound Chicago (BAI50) had also fallen 14.1% MoM to take its YoY drop to 53.5%.

Despite the flat-to-weakish tone overall, some sources still foresee a rise in rates, given the significant product launches coming up, starting in September, and hence some sort of peak season this year. That would be a welcome improvement on last year, when the traditional peak in rates ahead of the Thanksgiving and New Year holiday season simply failed to occur.

Others, however, remain nervous about ongoing weak demand and continuing overcapacity, despite recent cutbacks in services announced by carriers.

So, for the time being, cargo rates have continued bouncing along the bottom. With jet fuel prices spiking again, by more than 26% in the month to 25 August, according to Platt’s data, that would appear to put a renewed squeeze on profitability for carriers – especially operators of dedicated freighters with older, less fuel-efficient aircraft.

On the other hand, passenger traffic has also been very high over the summer – which has probably made the volume of bellyhold cargo less important for many airlines.

In the background, macro developments have included what one commentator dubbed the ‘bear extinction phase’ in equities, with the MSCI World index gaining a further 3% in July, despite the murky economic outlook.

Nevertheless, as we mentioned last month, developments in China, including property market problems, have since been weighing on markets. In August, some of those problems started to deepen, with huge property developer Evergrande filing for bankruptcy protection in the US.

According to UK Financial Times reports, Evergrande has $340bn in debts, including $19bn owed overseas. And it is not the only Chinese developer in trouble – others like Country Garden and Zhongrong also missing repayments.

The Chinese authorities have vowed to take decisive action to bolster the property sector, but the market has been underwhelmed by the action so far to support beleaguered local government financing vehicles.

In the meantime, a decision to halt the release of statistics on youth unemployment – which had been climbing uncomfortably high – has also done little to boost market confidence.

Not surprisingly, equity markets have thus started to give back some of their gains of the previous nine months, with global equities overall heading for something like a 4% to 5% fall in August as the month came towards a close.

Until recently, western markets had remained surprisingly robust – especially in the US, driven by the strength of the top half dozen or so tech stocks.

Demand has been keeping up well in the US, though driven, it seems, mostly by consumer borrowing after savings accumulated during the Covid shutdowns finally running dry. Commentators are increasingly convinced that spending levels must start to diminish soon – given the impact of higher interest rates.

Meanwhile, European markets remain weakened by the Ukraine conflict, which shows little sign of coming to an end soon.

In the past month, there have been some interesting developments in Japan. First was renewed weakness in the yen – given the caution of Bank of Japan, the central bank, in raising interest rates compared with other big economies – which has further boosted the competitiveness of the corporate sector.

Then, in late July, BoJ made a small move to allow rates on longer-term 10-year bonds to start to rise. Some market participants think that may have significant implications for the many players who deploy the so-called ‘carry trade’ – borrowing at very low rates in yen and then investing into higher-yielding currencies and assets.

But, not surprisingly, market attention continues to be focused most heavily on China – the engine-room of global growth in recent decades – to see if it can get back on track towards its 5% GDP growth target for the year.

The continued strength of e-commerce business out of China is one encouraging sign. Some sort of peak season bounce in air freight would be another.