Return to Market Normalcy Offers Opportunity

The last few years have certainly disrupted global supply chain operations, but the 2023 Halftime Logistics Report from AlixPartners pegs this as an opportunity.

“Cash generated over from the past two years — records for ocean carriers —should be used to fund M&A, restructuring, and operational upgrades,” the report concludes.

The report notes that reshoring/nearshoring is opening up new trade lanes that provide “additional opportunities to develop strong long-term relationships.” Also, investments in automation and digitization “can increase the strategic advantages of firms for future economic expansion.”

Marc Iampieri, managing director, digs deeper into the expectations for the remainder of 2023 in a recent edition of GrowthX’s Logistics, Supply Chain & Transportation podcast, but the report, released June 27, offers a glimpse of where AlixPartners sees the current market.

“Industry players and investors cannot sit still in the meantime. Ocean carriers have the cash to deploy on strategic initiatives, including mergers and acquisitions, restructuring, or operational improvements. Shippers can leverage favorable pricing to reevaluate supply chain needs and prepare for further disruption,” the report notes.

The Halftime Logistics Report: Soft freight conditions continue, presenting a period of opportunity, notes continued pressure on consumer spending as “the marketplace focuses on basic necessities over discretionary purchases and shifts more dollars to experiences and services” as a contributing factor, leading many big box retailers to lower their full-year outlooks.

It also cites declining U.S. manufacturing activity – the latest ISM report found manufacturing activity in May declined for the 8th straight month – as well as falling output in China and the Eurozone and continued inventory alignment issues as concerns for the remainder of the year.

A separate report from S&P Global, “Right place, right time: Supply chain outlook for third quarter 2023, found that supply chain activity is trending back to normal, but we are not all “the way back to historical levels and patterns.”

That was backed up by AlixPartners, which offered context on different sectors.

Ocean

Ocean volumes are down 10% overall, and port terminals are underutilized, it said, with net income for ocean carriers in 2023 roughly 70% lower than the same period in 2022. That remains above historical pre-pandemic averages, however, and most carriers will likely be profitable this year.

Green fuel regulations, drought conditions in Panama that could lead to reduced payloads, and proposed EU fuel regulations are among the challenges.

Warehousing

Warehouse demand remains high, but inventory-to-sales ratios are increasing and vacancy rates have been trending up. However, industries are boosting buffer stock, demand for cold storage is increasing, and more items are being returned by consumers, increasing the need for storage space.

Trucking

Expectations call for a bottoming out of trucking rates by the end of 2023, followed by a rebound in 2024. In the immediate term, nearshoring is impacting rates in Mexico and triggering the expansion of logistics firms south of the U.S. border. Industry consolidation is happening as companies that expanded or entered the space during the 2021-2022 timeframe of record-high rates now face difficult economic conditions.

Rail

Intermodal volumes have declined 11% year-to-date, driving by West Coast port impacts, but overall services has improved “slightly” in the first half of the year. Investments into the railroads and more customer-centric approaches could pay dividends in future years. Also, many railroads have reached labor agreements this year, creating more labor certainty. Tight labor conditions are still a thorn for rail operators. Additionally, low import volumes are raising pressure on intermodal transport. Demurrage fees continue to create issues.

Air

The overall air market is soft, and the condition is exacerbated by a glut of air cargo capacity that is further affecting spot rates this summer. FedEx aircraft utilization dropped 10% in April, suggesting more short-term pain in the market. In addition, new entrants are continuing to enter the market, further impacting rates.

Opportunity exists

AlixPartners concludes that despite some of the uncertainty, that past few years have set up companies to take advantage.

“Additional strategic acquisitions can be made during this rough patch to set companies up for the future,” it writes. “Distressed asset/debt sales will present opportunities for consolidation, as smaller firms or highly leveraged firms struggle in the low-price environment.”
For shippers, now may be the time to evaluate production and other internal processes as the market goes through a calm period this year.

There remain risks, however, according to S&P. Among these are the continued conflict in Ukraine, increasing tensions between the U.S. and China, the potential for additional labor strikes at U.S. ports and the low water levels in Panama.

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