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Will the end of ‘money for nothing’ send air freight back to pre-Covid lows?

The global economy has been stalling – and air freight prices falling. After a big surge during Covid, is the market dropping back as far as pre-pandemic levels?

In a global economy beset by serious challenges, it should come as no surprise air freight prices have been falling.

According to data from TAC Index, the leading price reporting agency (PRA) for air freight, the overall Baltic Airfreight index (BAI00) dropped -34.1% in the 12 months to 23 January.

Nevertheless, despite that steep fall over the past 12 months, the BAI00 index remains at a level almost double where it was three years before in January 2020 – prior to the Covid pandemic.

As we look forward, however, industry insiders are asking if that will continue to be the case – or if prices will keep falling back to pre-pandemic levels? And/or if there is more than meets the eye already in the data?

One thing to note is that, although index levels for the biggest outbound destinations such as Hong Kong (BAI30) and Shanghai (BAI80) are still well above pre-Covid levels, that is not the case for some smaller but also significant markets – such as Vietnam and India.

Indeed, recent TAC data shows that price levels for China to US and China to Europe routes are roughly about the same levels as two years ago in January 2021 – but still well above those pre-pandemic lows:

For India to Europe, however, rates are trending down much lower towards the levels of three years ago – of January 2020. And India to US rates have already fallen that far:

The data for rates from Vietnam to Europe and Vietnam to the US are not dissimilar:

One thing to note in the data is that it reflects all sorts of Air Way Bill (AWB) prices being paid – which in practice includes a blend of business conducted at spot prices and business at pre-agreed forward contract rates.

For the bigger BAI indices, such as Hong Kong and Shanghai, in what was only recently such a hot market many shippers were so anxious to secure capacity they were taking as much cargo space as they could on contract – which might mean that some are still paying prices even now well above spot levels.

Whereas for other markets, like India and Vietnam, a much higher proportion has always been ad hoc business conducted at spot rates – with prices often much more volatile.

Indeed, according to the head of global airfreight procurement at one major tech company, spot prices have already fallen much further than the indices would suggest out of all major locations in Asia, including Hong Kong and Shanghai.

Arguably, this has already been reflected in the TAC data by lower quintiles in the range of prices paid – making that arguably a more important indicator of marginal demand.

That said, contracts recently being renegotiated for 2023 have generally been getting done at lower levels too – even with rising levels of business in China, finally starting to reopen post-Covid, as that has also had the effect of boosting capacity into a weak market.

Initial research also suggests that falling demand from consumers is also visible in the data – with prices generally falling furthest from locations which have the highest proportions of consumer goods in their exports.

This can be seen on the following chart, which plots a country’s proportion of exports by level of consumer goods (based on World Bank data) versus the levels of airfreight prices achieved per kilogram:

Proportion of exports in consumer goods versus change in airfreight prices, Jan 2019 – Jan 2023

Clearly, this is just a snapshot – and more research needs to be done to test these initial findings. But it certainly looks an interesting insight.

And where does the market go from here?

Going forward, there seem to be many macro risk factors likely to keep the market whipped up in a volatile state.

At the top of the list are geopolitical risk factors, such as with the war in Ukraine, including tail risks that cannot exclude the potential use of ‘tactical’ nuclear weapons – with who knows what consequences.

Likewise from the more bellicose posturing of China – raising the temperature towards potential conflict in Taiwan, the world’s most important producer of semiconductors.

More mundanely, there are also major uncertainties about the direction of the US economy depending on how things pan out with inflation, which may prove more sticky than expected – forcing interest rates higher and for longer.

In the West, the era of the ‘money for nothing’ economy – which began with quantitative easing (QE) after the financial crisis of 2008 and persisted for a decade and more – finally seems to be over.

The end of this ‘false market’ and towards a more ‘normal’ economy, with genuine real interest rates, may be a good thing overall. But it probably won’t be good for everybody – such as, for instance, some tech companies which found it so easy to raise money whether or not they had a strong business model.

Arguably, there is now greater certainty about a post-Covid recovery in China – which should gather pace there as Covid restrictions are eased. As in the West, Chinese consumers built up huge savings during lockdown. When unleashed, that ought to boost global growth.

On the other hand, reopening in China will also be coming against the backdrop of ‘deglobalisation’ and rising ‘resource nationalism’ – trends which accelerated during Covid.

Air freight rates, as always, will likely be a key barometer of these many countervailing forces.

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