The logistics world in 2008!

The fate of the worldwide transport and logistics industry in 2008 will be inextricably linked to the state of the global economy. This makes any sort of prediction very difficult as economists themselves are divided on the outlook. However, most are agreed that industry faces a slowdown; it is the extent to which this will occur that is still uncertain.

The roots of the slowdown lie in the so-called 'credit crunch' in global financial markets, which was triggered by defaults in the 'sub-prime' mortgage sector in the US. The effects of this have yet to unravel – hence widespread uncertainty. In many respects, fear of the unknown is likely to result in a self-fulfilling prophesy. Consumers will reduce their expenditure and manufacturers will put off investment decisions, creating a recession built on lack of confidence. Shipping volumes are bound to be impacted.

In addition to the 'credit crunch', spiralling fuel costs have fanned inflation, leading to rising interest rates worldwide. Many logistics providers have felt the full force of these rises, being unable to pass them on in their entirety and suffering a consequent impact on margins.
If a slowdown is inevitable as economists think, the question remains as to its extent. A recession in the US, the world's largest economy, will of course impact on transpacific volumes. This has already been experienced in the container shipping sector. Maersk Line is reducing its workforce by 2-3,000 jobs (although this is partly the result of internal problems); the president of Japanese global operator Mitsui OSK Lines (MOL), Akimitsu Asida, has said that 2008 "losses on the North America route will be significant"; and NYK has outlined a plan to reduce ship speeds by 10% in order to cut fuel costs. Meanwhile, recent and continuing investment in new capacity by shipping lines has made any slowdown in volume growth all the more critical.

A recession is also likely to badly hit air cargo markets. Traditionally cyclical high-value goods, such as electronics, are amongst the first to see cutbacks in demand. Shippers may decide to migrate some lower value volumes to sea, or within the US from air to road, as traditionally occurs in a weak market.

If a slowdown occurs, 2008 will be characterised by increasing freight capacity and volumes failing to keep pace – certainly in the shipping sector. Freight forwarders will be the major beneficiaries as this scenario would enable them to take a bigger slice of buy-sell revenue. With capacity in some air freight markets also running high, a steep drop in rates in this sector could also be on the cards – which would be further bad news for carriers which have been battling a steady decline in overall yields for some years.

However, there is a chance – even a good chance – that all this talk of global recession is overblown. The Asia Pacific region may well continue its strong growth, with China very much less reliant on the US market than it once was. China's own domestic economy will continue to suck in goods from its neighbours – especially Japan – and those countries will in turn grow in significance as export markets. Likewise, Europe has yet to show any real signs that it has caught the US economic cold, despite slightly wobbly retail figures over Christmas.

It has been said that more efficient supply chains, coupled with more flexible job markets, have made the chances of worldwide recession far less likely than in the past. Economies are now much better able to compensate for the type of financial and commodity pressures that have been seen in the past year. This will hopefully mean that any slowdown experienced in the global economy is far less serious than many analysts currently fear.

Will 2007 prove to be the lull before the storm?

In economic terms, 2007 will be remembered for a shift from a China-fuelled boom to a property-focussed bust. The present crisis in the global banking and credit system is so acute that some more cautious commentators are already describing it as a "blow to the Anglo-Saxon economic model".

Behind the scenes, one of the underlying trends is an 'unwinding' of trading patterns that have been established for several decades. The worrying thing for those in the logistics industry is that such developments are almost certain to affect them during 2008.

The past year has marked a zenith in the boom for logistics services. Freight forwarders, in particular, have seen continued double digit growth during 2007. That trend has been largely fuelled by the demand for container shipping out of China into the US and Europe.

The prosperity in the freight forwarding sector, which has been apparent for over a decade, has both attracted new players into the market such as Geodis and CEVA and underpinned the growth of established major players like Kuehne + Nagel into other segments of logistics.
Contract logistics has continued to perform in a modest way but that market is cautious, emphasising the complexity of the market for outsourcing.

German companies have remained high profile throughout 2007. Deutsche Post World Net has had a quiet crisis in its strategic direction, with the appointment of John Allan as chief financial officer indicating a shift away from 'size at any cost'. Meanwhile, the other German logistics giant, Deutsche Bahn, is stuck in a tunnel of the politicians making, with its privatisation stalled, at least for the moment.

The same forces that have stalled Deutsche Bahn's private sector ambitions have also skewered mail deregulation in Europe. Rail may also be suffering from similar resistance to the consequences of open markets in Europe despite a healthy number of private sector entrants hoping to exploit the potential of that mode – a potential well demonstrated in the US where rail has attracted long-term investment on the back of the promise of sustained high growth in container and energy sector traffic.

Volumes in the container shipping sector have also remained strong but as is so often the case the shipping companies have responded with the purchase of huge new capacity. Maersk, in particular, has suffered badly from its failure to properly manage expansion, illustrating that as in so many transport markets it is remarkably difficult to profit from market dominance.
Air freight is another sector where over-capacity is a traditional weakness. However, in 2007, many airlines could not indulge in their usual habits of creating too much capacity due to so many of them emerging from Chapter 11. This is already set to change in 2008.

Road freight in the US was hit by lower volumes in 2007 as that sector felt the effects of a major downturn. In Europe, growth rates remained flat, with even the biggest network road freight companies returning meagre figures. However, the market for acquisitions in Europe was strong with the UK and Germany seeing big purchases by DPWN, K+N and Norbert Dentressangle.
One sector for which 2007 turned out to be a great year was container ports, which saw their value shoot through the roof as financial investors realised the potential of those businesses for stable yet strong returns.

This year also saw the return of oil prices as a major cost pressure for the logistics industry as a whole. Yet so far it has appeared not to be a constraint on economic activity, in part because many transport providers have increased productivity and improved their fuel efficiency. Higher oil prices have, however, depressed profits in a fewer weaker markets.
In summary, 2007 was a quite good year for the logistics industry despite slower US growth. Volumes remained strong and many logistics providers were able to pass higher costs on to customers. What might be suggested with some degree of confidence is that 2008 will be worse.

Source: Transport Intelligence.