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Kristen Hallam

Global demand continues to tread water with the construction and manufacturing sectors facing headwinds from high interest rates. Suppliers are responding by controlling output. Sporadic idling and curtailed investment plans mean less excess capacity in 2024 to absorb supply shocks, along with logistics woes that cause higher rates and longer delivery times, risk is rising. In this episode, S&P Global Market Intelligence Senior Economist Keyla Martinez, discusses logistics challenges and the outlook on shipping disruptions due to rerouting from the Red Sea.

Keyla Martinez

Transportation and logistics have been front and center recently due to the Red Sea causing disruptions and diversions in an already constrained ocean market. However, fundamentals will keep ocean pricing. I'm seeing extremely high rates and disruptive delays as seen in 2021 and in 2022. So to jump right into some key takeaways for today, most transportation modes, on a general note, will begin moderate increases or move to flat pricing throughout 2024.

We are seeing this mild acceleration in prices not due to an indication of demand coming online, but more so for a few reasons. We have marginal growth, some pressure from rising input costs and supply chain disruptions. And supply for 2024 will continue to be a strength for transportation as carriers just bear about weight of adding emission-compliant capacity and taking on more units from when demand was higher.

Now demand, on the other hand, will still be low for 2024 for most transportation modes despite seeing some demand coming online from that pre-Lunar Year rush amidst the supply chain disruptions in the Red Sea. Now speaking of the Red Sea, we saw global shipping rate store in early 2024 as the Suez Canal, the major east to west global trade route became just a target for Yemen-based Houthi military group.

Unfortunately, it still remains unclear on what exact measures that they're using to determine commercial shipping targets, but this will maintain a high risk for all commercial vessels in transit through the Red Sea regardless of country affiliation. Now this situation has caused most Asia origin carriers to reroute along the southern coast of Africa to reach European and U.S. destinations despite international naval support being present in the Red Sea.

Now as a result of this rerouting, voyages have been extended by at least 10 to 12 days, which ultimately drives up those shipping costs. And so in particular, the most vulnerable routes were Asia to Europe and the Mediterranean and Asia to the United States to East Coast. Now these routes, in particular, saw triple-digit year-over-year growth to begin in 2024. Now while the Red Sea disruptions have caused a significant surge in spot rates, fundamentals just indicate that the price spike is unlikely to extend beyond the first half of this year.

Spot rates from Shanghai to Northern Europe and Mediterranean have already begun to pare back from the spike in January. And now this is for a few reasons, right? So we have the ocean market currently in overcapacity. This is just from a legacy of a number of additional carriers that had to come on stream to deal with that post-pandemic surge in demand. And then also to manage some of the re-routings along the Cape of Good Hope.

But really since early 2023, demand has pulled off and left the market with an excess number of containers and ships, which was weighing negatively on shipping rates all throughout 2023. So it can be anticipated that the market will be able to sustain the rerouting along the Cape of Good Hope with new vessels continuing to come online and demand just remaining very soft.

But bottom line here that I want you to take away is that pricing will settle somewhere between the January spikes and the 2023 level lows towards the second half of the year based off just really no support coming from ocean fundamentals to sustain this pricing hike. And now to switch gears, we have another disruption happening that I wanted to highlight for today.

We have drought happening and in particular, more prevalent to global trade as the Panama Canal where we've seen water levels decline, low enough to warrant daily ship restrictions from the Panama Canal authority. Now they began these restrictions in 2023 with water level predictions indicating that 2024 was going to be a lot worse in the final months of 2023.

However, water levels have remained high enough to warrant an increase in daily ships since January 2024, which they have allowed for ‘24 to continue to pass through towards January 2023. There was an upward trajectory for rising water levels, and it can be expected that as we enter the rainy seasons, which are typically in April and May. This will moderately raise water levels for the summer and now average wait times for the canal, which are classified by different types of vessels have been averaging from 1 to 3 days to pass through the canal.

But bottom line that I want you to take away for the Panama Canal is that conditions are seeing modest improvement. This can provide some delivery time alleviation to the situation in the Red Sea, but it is not enough to warrant ocean pricing to return to 2023 level lows. And so we can see proof that the supply chain is showing modest recovery from these longer unexpected voyages along the southern coast of Africa.

And the reduced daily ships in the Panama Canal begin to sort of normalize or we have highlighted trade volumes in the port of L.A. and manufacturer delivering times from the port of L.A. Volumes began to sort of normalize in the final months of 2023 with prior year levels like 2019, 2022.

In January of 2024, volumes have increased by about 15% compared with December of 2023, which also happens to stand 17% higher than January of last year. Now this can be primarily attested to that pre-Lunar Year rush that typically occurs during this time of the year and also some of those diversions from the East Coast volume divergence, from the East Coast who face Red Sea re-routings.

Now these elevated trade volumes are not anticipated to be maintained as the current ocean demand is still soft. We can also see delivery times improving and to take an overall breadth from the onset of the Red Sea, which caused a rise in how long shipments would take as voyages were extended by 10 to 12 days.

Now that the pre-Lunar Year rush has settled, the weaker demand market that was always present has allowed for the ocean market to recover and established/account for the longer routes and incorporate them in announcement and estimates to shippers.

Now shifting gears a little bit to those who are more concerned with overland transportation. We do have an update on trucking prices. Now prices for trucking will overall be lower in the beginning of 2024 before seeing some upward pressure from diesel beginning towards the start of the third quarter. Now this follows the upward pressure seen in crude oil, but I just want to highlight that this will remain significantly below year ago levels and the price acceleration will still be weaker in annual terms.

Now we do expect for the increases to be short-lived. However, pricing for trucking will not be seeing major declines in 2024. And the upward pricing effects of Yellow's reshuffling of capacity has begun to exit the market, and we did see spot rates reflecting that easing in pricing. And so the market will remain still fairly bearish for trucking in early 2024.

And just as manufacturing in the U.S. is still weak, and we still see weak demand continuing to keep trucking prices from any large upper movements in 2024. And supply will continue to be a strength as stated before, for the trucking market. But bottom line here for trucking that I want to have you guys take away is that prices will begin to pick up midway through 2024 as input costs begin to rise.

So in our cargo, the Red Sea disruptions to ocean freight have led to some shift to air, and we saw increased volumes in February, but it won't be expected to have a peak season. This can also be attested to a seasonal pick-up where it was more related to the Lunar Year holiday, rather than a true shift from sea to air. Weak demand really is the biggest factor as there's just not enough of it to make a push to get to air cargo.

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