2021 Rate Outlook: Higher shipping rates dead ahead

In its latest “World Flash” intelligence report, IHS Markit economists note that as the dreaded second and third waves of COVID-19 arrived in late 2020, they crushed any illusion that the world could quickly and easily control the spread of the virus. The resurgence was especially pronounced in Europe and parts of the United States, where “pandemic fatigue” has become a formidable challenge for governments.

“Even before the most recent surge in infections, we were predicting that growth would fade in the closing months of 2020 and the beginning of 2021,” says Nariman Behravesh, chief economist for IHS Markit. “That fade is morphing into something worse. In the case of the Eurozone and the UK, real GDP will contract in the fourth quarter of 2020, and recovery will be limited in the first quarter of 2021.”

However, prospects are a little less dire for the U.S. economy, IHS economists maintain. After the United States grows an expected 3.7% in the fourth quarter of 2020, average growth in the four quarters of 2021 should be a mere 1.9%. The outlook is brighter in much of Asia, where the infection rates have remained low.

Other mainstream economists and multilateral organizations—such as the International Monetary Fund—are calling for more fiscal stimulus as the need to strengthen struggling economies has overwhelmed notions of austerity. Furthermore, with institutional and political constraints in Europe and the possibility of a divided government in the United States, more limitations on budgetary expansion in the emerging world mean hopes for big fiscal stimulus are dashed or fading fast.

Meanwhile, central banks will continue to bear the burden of stimulus, IHS economists contend. Despite repeated pronouncements to the contrary, monetary authorities around the world are not in retreat, as was amply demonstrated during the 2008–2009 global financial crisis. “The bottom line is that, once again, the near-term global economic outlook has worsened, and the most likely policy mix looks to be suboptimal,” concludes Behravesh.

Energy enigma

Within this context, no discussion of freight transportation costs can be understood without first looking at the energy picture. Derik Andreoli, principal at Mercator International and a frequent contributor to Logistics Management, says that it looks like we’ll enter 2021 with “significant headwinds” that will continue to suppress oil demand and prices.

Andreoli maintains that oil demand is on track to decline by between 8.5 million barrels per day and 9.0 million barrels per day, while domestic production will likely continue to dip at least through the first half of 2021, as the global economy is expected to continue to struggle with new waves of virus infections.

“The U.S. Energy Information Agency predicts that demand will only grow by 5.9 million barrels per day in the coming year, which will leave global demand around 3 million barrels per pay below 2019 levels,” says Andreoli. “And for this reason, we should expect to see oil prices continue to remain low, though uncertainty around the continued collective determination among OPEC members to maintain production cuts is likely to cause price volatility.”

Andreoli adds that this volatility could be intensified by a “global geopolitical reset” that could come about as a result of change in U.S. leadership. “It’s unclear how eager President Biden will be to re-engage Iran with a new nuclear deal, resulting in increased Iranian oil production,” he says. “Meanwhile, the entire Middle East region—which has seen four historic peace deals brokered in recent months—could destabilize.”

For these reasons, says Andreoli, logistics managers should expect crude oil prices to be volatile throughout the coming year. “But most needles point to persistently low oil prices, and this should translate to low fuel prices,” he concludes.

Ocean: “Stratospheric” spot pricing

Despite a softening of energy prices, shippers may expect a sustainable hike in ocean cargo rates, says Philip Damas, director and head of the supply chain advisors practice at London-based Drewry. “Manufacturers and retailers should expect ocean contract freight rates on most routes to increase in 2021, following major market changes since the COVID-19 outbreak,” he declares.

Damas adds that signs are obvious in the spot market for ocean transportation that carriers have gained pricing power and are managing ship capacity to their advantage. “Some routes and regions stand out as benefiting from lower rates, but the vast majority are seeing rates rise—particularly trans-Pacific eastbound—where the increases are worryingly high for shippers and the rates are much more profitable for ocean carriers,” he says.

The “stratospheric” increases in trans-Pacific spot rates and the current shortage of capacity in Asia have led regulators in China and the U.S. to signal that they’re watching the competition situation closely, observes Damas. China’s Ministry of Transport met with most major carriers late last year, requesting that carriers bring back more ship capacity to the market.

At the same time, the U.S. Federal Maritime Commission said that it’s “actively monitoring” any potential effect on freight rates and transportation service levels, using a variety of sources and markers, including the exhaustive information that parties to a carrier agreement must file with the agency.

“Particularly this year, shippers and forwarders should track the development of spot freight rates because they signal the tightness of the market on some routes,” adds Damas. “They may be a leading indicator of contract rates, and could point to future problems of capacity availability.”

Trucking: Rates jumping

The domestic surface transportation industry is also poised to take advantage of spot pricing and capacity management, says David Ross, transportation analyst at Stifel Investment Banking.

He advises logistics managers to begin analyzing truckload (TL) pricing because it has implications for less-than-truckload (LTL) and intermodal as well—and it’s by far the largest market in domestic freight transportation.

“It has been a wild ride this year, but after a shaky start, the trucking market has been a good one for carriers since June, with spot rates rising each month the last couple of quarters,” says Ross. “Contract negotiations will lag, but the industry pricing has already been reset higher. Driving these increases has been the combination of reduced industry supply—fewer drivers and fewer trucks—and improving and steady demand after we emerged from the lockdowns.”

Looking to 2021, Ross doesn’t see the supply issues being quickly resolved. However, the bigger swing factor will likely be overall consumer demand. Still, he sees rate increases up in the high single digits in 2021 versus 2020 on the contract side.

Meanwhile, with a positive backdrop provided by the TL capacity issues, Ross says he sees no reason why LTL can’t continue its steady push of low- to mid-single digit rate increases. “It doesn’t need as much, because LTL is a more consolidated industry with steadier annual price adjustments, but we expect the carriers to take advantage of the rising tide and push closer to 5% than 3% for rate increases in 2021,” he concludes.

Rail and intermodal: Steep climb ahead

Navigating the road to post-pandemic normalcy will be a major challenge for rail and intermodal operators, says Jason Kuehn, vice president of the consultancy Oliver Wyman. He adds that third quarter 2020 rail traffic data can be described as nothing short of resilient overall, with a handful of exceptions in the bulk commodity areas comprising coal, non-metallic minerals, metallic ores and metals, and petroleum.

“Intermodal volumes have climbed above 2019 weekly counts in the third quarter and remain there in the first half of fourth quarter,” says Kuehn. “A relatively strong consumer market and very constrained truck capacity have been tailwinds for domestic intermodal rates and volumes. In the meantime, a surge of imports from overseas for replenishing inventories coupled with the normal peak for the Christmas shopping season have tested both truck and intermodal capacity at times.”

At the same time, spot truck rates are up considerably. And while this bodes well for first quarter 2021 contract renewals and rate increases, the long-term outlook for intermodal and rail in general is still dependent on longer-term, secular trends and disruptive shifts in supply chains and the trucking sector.

The carload business—excepting the bulk commodities—has also rebounded, albeit at a much slower pace than intermodal. This also potentially sets up a relatively strong pricing environment for this line of business going into 2021. Much of this business is housing related or intermediate goods—inbound raw materials—for the consumer space.

The heavy industrial sector—energy and metals—remains weak, and for Kuehn, this suggests that “caution is a better emotion than euphoria.” Market uncertainty is keeping metallic and non-metallic ores and metals depressed. “This all suggests that, while the environment is robust now, we expect at best a plateau and at worst some returning weakness in 2021,” he adds.

Air & Parcel: Could be a bumpy ride

For Chuck Clowdis, managing director at the consulting firm Trans-Logistics Group, Inc. the coming year brings even more uncertainties than usual for the air cargo sector.

“Consumer spending will certainly be a driver of air cargo volumes and higher rates,” says Clowdis. “Manufacturing, as demonstrated by auto sales, is also a beneficiary of consumer confidence and spending. Consumer and home improvement items have likewise translated into more demand for airfreight than anticipated.”

Furthermore, says Clowdis, COVID-19 vaccines and treatment drugs will buoy demand for airfreight capacity, while new cell phones and tablets will generate more business for consolidators. “Rates are already rising and will continue should there be changes in import/export regulations, especially in the international air space,” he says. “Express and regional service carriers will benefit as early vaccines become available and more pressure comes from every community for access to these drugs—and rates will rise accordingly.”

However, available capacity will remain a question mark. With parked freighters and cargo conversions now entering the market, ongoing pandemic concerns will have an impact on crew capabilities as dedicated freighter capacity continues to grow, Clowdis maintains.

“Conversely as passenger flights are canceled, belly space on passenger flights drops,” says Clowdis. “Loss of this capacity to even mid-sized communities can have dramatic impact on shipments. As example, Delta and American have also announced cuts of more than 100,000 flights due to low demand in December,” he says. “A combination of ongoing epidemic fears and belt-tightening by consumers in 2021 may give air cargo providers a prolonged, bumpy ride.”

Similar turbulence is expected to confront logistics managers in the parcel sector, says Jerry Hempstead, principal of Hempstead Consulting. In particular, “peak season fees” were plugged in as capacity across the oceans diminished due to the cancellation of passenger flights. In turn, many air carriers had a lot of cargo below deck, keeping air cargo rates stable.

“Sheltering in place during the lockdown caused us all to begin procuring everything under the sun, and peak season was almost all year in 2020,” says Hempstead. “We’re now we seeing peak on peak fees.” Exacerbating that reality was the fact that some shippers were told that there would be volume limits on how many transactions they can tender to the carrier during the “shipathon” between Thanksgiving and Christmas.

“This is a new phenomenon for the parcel industry,” says Hempstead. “The UPS strike of 1997 might have given us a glimpse, but this is new territory. The problem for the carriers will be the decision making on capital expense. Do they add capacity for what may be a temporary windfall? Or do they just sweat the resources they already have in their networks and deal with the service complaints later?”

Hempstead adds that UPS has had a 6% late payment fee for some time, which is a key driver of revenue for them. FedEx will be employing the same strategy in January, which means that logistics managers may be seeing bills with 6% added to balances over 14-days outstanding.

“This is not going to be appreciated by accounts payable,” says Hempstead. “And it will leave shippers wondering why their projections were off.” He advises logistics managers to either figure out what’s driving their costs with the parcel carriers, or hire a professional.

“If you have a freight audit and payment service, make sure they understand the ramifications of not paying within term and hold them accountable,” adds Hempstead. “Know that the terms and the percentages charged are negotiable.”

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