Hi-tech shippers switch from air to ocean

sea_freight_trackingCargo traditionally sent by air is increasingly switching to sea as shippers capitalise on the mode’s lower transport costs – a trend expected to continue over the coming years.

Lloyds List reports that several leading freight forwarders reported in their full-year results that certain cargo types — particularly hi-tech and telecoms — switched from air freight to sea freight last year.

DHL Global Forwarding CEO Roger Crook said the switch was the result of a price difference of 10 times between the two modes of transport. He said: “Obviously many companies are under cost pressure and looking to reduce total supply chain costs. Therefore, they are buying and moving by ocean freight, and particularly it is happening in the technology sector.”

Panalpina chief operating officer Karl Weyeneth said he expected the trend to continue. “There is a maximum shift you can achieve, depending on what industry you are talking about,” he said.

“But I believe that now supply chains are used to working with more ocean freight, this impact will stay for at least a couple of years, until the economy has really recovered, then it will start to shift back again.”

“We really see this as an important factor in our market for the next two to three years.”

Kuehne+Nagel (KN) chief executive Reinhard Lange said the decision on whether cargo was suitable to be switched from air to sea partly came down to the weight of the shipment. He said that if two products had the same market value, but one weighed less than the other, the overall cost impact of flying was less for the lighter cargo because air cargo costs were based on weight. He said this explained why hi-tech products had transferred to ocean freight while lighter products, such as pharmaceuticals, had, in the main, continued to utilise air freight.

The forwarders said the impact of the switch from air to ocean freight was partly to blame for a decline in air freight volumes last year, while container volumes continued to grow. In its full-year results, Panalpina saw air freight volumes decline 6% last year while ocean freight volumes grew by the same amount. Meanwhile, DHL Global Forwarding’s air freight volumes slipped 5.3% in 2012 with ocean freight increasing 4.3%, while KN saw its air freight volumes grow by 2% while ocean freight increased 6% year on year. Source: LloydsList

Air-to-sea cost differential narrows

Multimodal Freight

Just to keep them on their toes – the following will undoubtedly play a factor in many customs administration’s risk management and intel systems.

Air freight rates slipped in December as the trade returned to business-as-usual following the volume boost of earlier hi-tech product launches, according to Drewry’s new monthly report, Sea & Air Shipper Insight. Drewry’s recently launched East-West Air Freight Price Index, a weighted average of air freight rates across 21 east-west trades, fell by 1.4 points from November to reach 110.8 in December, bringing to an end four consecutive months of gains in the index. “The waning effect of new hi-tech product launches on traffic demand was the primary contributor to declining rates from Asia into North America and Europe,” said Simon Heaney, research manager at Drewry. “Drewry expects pricing on routes out of Asia to decline further, though the impact will be softened by an uptick in demand levels in advance of Chinese New Year.”

Evidence of a tentative recovery in air freight demand comes in the form of a 2% year-on-year rise (the first such increase in 16 months) in November of worldwide semiconductor sales, a traditional bellwether for air cargo. Air cargo demand could also see a temporary boost at the expense of the ocean market. With ocean currently facing capacity issues such as the looming threat of strike action at US ports and carriers cancelling voyages, some shippers, particularly those wanting to move higher-value goods, might well be tempted to shift some cargo to the air. Demand growth for air cargo has lagged behind ocean, which Drewry believes is due to a combination of shippers having access to better IT systems, leaner inventory strategies and greater faith in liner service reliability, which has been improving steadily in the last year or so.

Recent issues in the ocean sector are testing that faith, although of course shippers that do switch to air freight will have to pay a considerable premium. East-west air freight rates and comparable ocean rates have almost mirrored their ups and downs since May 2012, with air prices showing a steeper upswing since October. However, the fall in air freight pricing and a corresponding rise in container shipping rates in December sent Drewry’s east-west air freight price multiplier down 1.3 points to 11.8. The multiplier measures the relationship between the cost of shipping by air relative to sea. “Air cargo is not a viable Plan B for all shippers,” said Heaney, “but for those moving expensive goods it remains a justifiable alternative, particularly at a time when the reliability of the ocean supply chain is threatened.”  Source: Lloyds List