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12/02/2022 | Press release | Distributed by Public on 12/02/2022 05:20

BAI Index: It’s the End of the Year as We Know It, But Do I Feel Fine?

That's great it started with an Outbreak,

Then a land war affecting air freight.

This Bruce might be afraid

November data is in the bag, and as the year winds down, we have seen a decided lack of peak season manifested in volumes and rates. Zoomingout, absolute airfreight rates have been remarkably flat this year. But in November, we continued to see sequential deceleration from mid-year levels in $/kg out of Asia. Shanghai to North America (BAI82) declined 10% from October, while Hong Kong to North America (BAI32) was down around 4% versus the same period. Europe-destined lanes were a bit more resilient, with Shanghai origin (BAI81) down 5% relative to October, and Hong Kong origin (BAI31) down 3%.

On a year-over-year basis, North America-destined lanes were down 54%, and 44% from Shanghai (BAI82) and Hong Kong (BAI32), respectively (but are each still 1.4x pre-pandemic average

But against last year's very pronounced peak, the comparables look increasingly dismal. They have crossed below 2020's (also strong) peak on certain lanes. On a year-over-year basis, North America-destined lanes were down 54%, and 44% from Shanghai (BAI82) and Hong Kong (BAI32), respectively (but are each still 1.4x pre-pandemic average. One Europe-destined lanes, rates were lower by 30% and 29% y/y from Shanghai (BAI81) and Hong Kong (BAI31), respectively, though still 1.8x and 1.7x above pre-pandemic levels.

Looking forward to 2023, we continue to see significant tail risk. And while we believe much of it is to the downside, the outlook will vary depending upon one's positioning in the marketplace. The key right now is to determine how much of the sagging demand levels results from overbuilt inventories and inventory pull-forward earlier this year and how much is due to core demand weakness. Indeed, there is some of both, in our view. And within the demand question, how much of the softness is transitory, and how much is more systemic in nature?

Even as Europe has so far this year been more resilient than North America-destined lanes from a rate perspective, consumer and/or industrial activity is at risk due to energy scarcity and geopolitical events-not just for 2023 but subsequent years too

As we see, consumer and industrial demand could bifurcate between European and North American end markets. Even as Europe has so far this year been more resilient than North America-destined lanes from a rate perspective, consumer and/or industrial activity is at risk due to energy scarcity and geopolitical events-not just for 2023 but subsequent years too. The U.S., we think, is more likely to see a soft landing, especially if it wins relative growth share.

An interesting artefact of Chinese COVID restrictions is that they weigh on oil demand, thus helping to subdue higher fuel prices in the face of OPEC production cuts

Turning back to the current situation, we believe the U.S. big box and general merchandise inventories continue to normalize. This offers a glimmer of hope for a return to normal seasonality early next year, or even later this year, notwithstanding a reluctant consumer in the face of inflationary pressure. Rounding out the demand discussion, it is important to call out COVID-related shutdowns that continue to occur across China and are affecting Eastbound TransPacific freight flows. In our view, an interesting artefact of Chinese COVID restrictions is that they weigh on oil demand, thus helping to subdue higher fuel prices in the face of OPEC production cuts. If and when Chinese lockdowns subside, oil demand will likely increase, driving up fuel surcharges and thus putting upward pressure on rates next year, all else equal. So, as we discussed at the outset of 2022, while the path forward for rates is likely to continue normalization toward pre-pandemic levels, the path forward is fraught with uncertainty.

About Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research, Stifel

Bruce Chan joined Stifel in 2010 and is based out of the Miami office.

Bruce Chan can be reached at [email protected]. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For more information and current disclosures for the companies discussed herein, please go to the research page at www.stifel.com.

©2022 by J. Bruce Chan.