Midyear Review: Four Key Trends That Will Define Supply Chains In H2

As we cross the threshold into the second half of 2023, the longed for stability that many shippers have been craving post-Covid is, to put it mildly, yet to materialise. Instead, the supply chain world has swapped one form of disruption – high demand, low capacity – for another driven by low demand, economic malaise and geopolitical manoeuvring.  

As global commercial trends remain unsure, stakeholders within the supply chain ecosystem are taking steps to look out for their own interests, both short and long term. This includes such macro events such as the dissolution of the 2M Alliance to the front-line discontent among port and infrastructure workers who have borne the brunt of disruption for the past three years. For shippers, acting on unilateral incentives may have yielded dividends from a rock-bottom spot market, but in order to drive strategic advantage in H2, retailers will need to embrace the big picture.

To make sense of this landscape, we sat down with Catia Fernandes, Head of trade Asia & IPAK at Zencargo to discuss the key trends in the first half of the year and what they mean for shippers trying to stay afloat.

H1 headlines: a market looking for a way forward

We began the year in a low-rate, low demand environment, with many retailers overstocked and underselling, as consumers and businesses tightened their belts in the face of a gloomy economic environment. 

On this front, the situation remains challenging. While inflation in the UK has dropped from 10.1% in January to 8.7% in April, the rate of decline has not matched Bank of England expectations, driving the UK base rate of interest up to 4.5%, with 5% a distinct possibility after 13 rate increases in a row. The UK is expected to finish the year at 5% inflation, still above targets, and creating ongoing roadblocks for retailers who just want to get back to selling.

In this volatile environment, the logistics market has seen its own big shifts as the industry attempts to adapt to a new reality.  

The 2M Breakup

One of the most significant events of H1 2023 was the splitting of the 2M Alliance, originally formed in 2015. While it’s premature to quantify the precise impact of this split on shippers, the breakup of one of the largest shipping alliances signals a new direction from carriers as they attempt to carve out more distinct value propositions in a tighter market.

Maersk’s strategy seems to hinge on  being a one-stop shop for logistics, leveraging its vast networks of air transport, freight forwarding, trucking, and last-mile delivery to offer a complete service. MSC, meanwhile is doubling down on expanding its fleet, having announced it will relaunch its Asia to North Europe Swan-service, as a standalone MSC service. The Swan service was originally a 2M service suspended in May 2020 but will relaunch on the 9th July. 

The breakup of the 2M alliance is likely to have ripple effects across the rest of the alliances as we approach its 2025 deadline, leading to a broader impact on the market, with new services for shippers, but also a potential reduction in the frequency of sailings. 

The Return of Blank Sailings

The slump in global trade demand has seen the return of the much-maligned blank sailings, adding a familiar air of uncertainty to ocean shipping. Catia explains, ‘We’re seeing a decreased number of options a shipper has access to when they’re trying to load, and the habit of last minute blankings has an impact on lead times.’ 

On the plus side, these challenges have also highlighted the relative resilience of the logistics market at this time as blankings, coupled with low demand, have surprisingly improved schedule reliability, which currently stands at around 65%—a 30% YoY improvement.

The Great Rate Erosion

The trend of declining rates across all trades has been a defining feature of carrier, shipper and forwarders all year.  Across all trades rates have been coming down… some of them are basically at the bottom now, from what we believe at least, compared to pre-Covid levels”, says Catia.

While low rates offer a boon for logistics managers being pushed to reduce costs in the face of tighter margins, they also have the effect of keeping the wider industry in a holding pattern. All parties are treading water, trying to keep costs as low as possible until demand returns. But in this model, shippers and carriers are working at cross purposes, as the former try to pay as little as possible for their freight, while carriers compensate with attempted GRIs and service changes.

For the industry to move forward, shippers are going to have to bite the bullet and put service above price, at least for a time, or risk being shut out of capacity once demand returns.

What will H2 look like?

The question of when demand will return remains the defining question of the industry. While predictions have been made with regularity, dates have also been repeatedly pushed back. Current estimates are eyeing Q3 2023, but this year has also shown how other events can conspire to derail predictions.  

Ongoing Industrial Action

Industrial actions have been a significant challenge for all lanes in H1, affecting everything from rail availability to port operations and customs clearance. 

“All of these obviously have an impact on the lead times of cargo, and anything that has an impact on lead times of cargo has an impact on costs or missed revenue”, says Catia. Approaches to these strikes have ranged from conciliatory to hardline, but the global nature of this issue – from trucker stoppages in South Korea to dock strikes in Britain – defies easy fixes.

This may be a circular issue: employers may dangle the possibility of changes in pay and conditions once demand returns, but workers may be unwilling to facilitate this return to growth without concrete action. In the short term at least, shippers will need to operate with multiple contingencies to ensure their goods can find a route to market through disruption.

The rate market outlook

Moving into H2, the drop in rates seems to be reaching a plateau, even if just in terms of unit economics for carriers. Rates largely now sit at pre-Covid levels, though with inflation taken into account this makes for rates that are lower than ‘normal’.

Hopes of a peak season were quickly dashed as ocean carriers were unable to see any significant uptick in export orders from China. May marked the point that 12-month contracts in the US ended, with Xeneta reporting that new contracts showed a significant reduction in price.

However, recent months have also attempts from carriers to float GRIs, often to stiff resistance from shippers. The push and pull is likely to continue as both sides attempt to balance their books. 

Taking a proactive approach to H2

In a market driven by macro forces, many shippers are focusing on the now, reducing costs while waiting for the moment to act. However, given the long lead time of supply chain changes, waiting until the last minute brings its own risks. To build certainty and predictability will take a leap of faith of sorts – one based on sound strategy and data.

Looking at the long term

The spot market play has helped shippers shore up balance sheets after the brutal rates of Covid, but it’s unlikely to be a long term strategy. Markets move, eventually, and those who have been betting big on the spot market risk finding themselves with higher rates, limited choice and poorer commercial prospects.

Considering the current low market levels, and following the example of US contracts, now could be the time to commit. “Locking in longer term deals to get that low cost stable for a period means if the rates increase, shippers won’t be penalised for that”, explains Catia. Working with a forwarding partner to allocate a portion of your freight onto a reliable service opens the door to solid state planning, based on fixed costs, capacity and service levels to form the basis for planning your inventory levels and managing your working capital more effectively over the year ahead.

Investing in partnerships

In this volatile market, the right freight forwarding partner can make a significant difference to the options, modes and tools available for planning and executing your strategy.

“You want a partner that will communicate effectively, that will have the tools and technology to provide you with visibility and control over your supply chain”, says Catia. Your freight forwarder should be able to offer competitive rates, but more than that, provide visibility into your shipments, help you understand what’s working and work as an extension of your team.

Moving forward together

Zencargo’s digital freight forwarding service provides your business with the latest technology and expert logistics support to help you make the most of the commercial opportunities available.

• Real-time supply chain management based off live SKU data to help you manage and avoid risk, reduce costs and improve team collaboration.
• Tailored service design, including tactical solutions to strategic initiatives, such as centre of gravity analysis, cost of serve, and flow analysis.
• Collaborative execution based on our unique understanding of your supply chain operations and company goals in order to drive strategic outcomes at each stage of the supply chain.
• Regular performance management and reporting beyond simple OTIF metrics, including container fill, landed cost, exception management and supplier performance.

To find out more about how the right support can help you succeed, get in touch with our team today.

To find out more about how Zencargo can support your road freight strategy, get in touch with our team.