Tough economic times continue to take their toll on transportation

Author’s note: I was asked by Transporeon to look at what is happening in the European transportation market, and they provided me with access to their Transporeon Insights market data for additional insights and perspective. This post is an excerpt of my comments from the April 2023 Transporeon Journal Market Updates video commentary. I encourage you to watch the full video commentary for more insights about the European transportation market. 

When I was a kid growing up in New York City, the mayor at the time was Ed Koch, and he was famous for always asking “How’m I doin’?” to city residents.  

Collectively, those of us in the supply chain and logistics industry, can ask a similar question: How are we doing? 

Tough times ahead 

There is no doubt, the world is still facing several issues. In addition to the Russia-Ukraine war, recent events such as China's balloons flying over the United States, North Korea firing long-range cruise missiles, and Iran producing enriched uranium have added to the geopolitical tensions. According to a survey conducted in January 2023 with Indago's supply chain research community, 'Geopolitical-related disruptions' ranked second on the list of risks that supply chain professionals need to plan for more effectively in the future. 

On the economic front, the global economy is facing multiple challenges in the months ahead, which supply chain professionals need to navigate carefully.  

The International Monetary Fund's projection for global growth in 2023 is 2.9%, which is 0.2 percentage points higher than its previous prediction in October 2022. However, this still falls significantly below the historical average of 3.8% from 2000-2019. The IMF also expects global inflation to decrease from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, but these levels are still higher than pre-pandemic levels of about 3.5%. 

Despite these projections, bringing down inflation remains a real challenge. According to Bloomberg, consumer prices in Germany rose 9.3% in February from this time last year, driven by services and food costs, while consumer prices in France and Spain saw even greater increases of 7.2% and 6.1%, respectively. 

Contract and sport market trends: a lane-by-lane analysis 

How are we doing from a transportation standpoint? 

We can look at the Market Insights dashboard to get some perspective. The Capacity Index was 94.2 in February 2022, indicating a capacity constrained environment. However, in February 2023, the Capacity Index increased to 112.1, which is a year-over-year increase of 19%. This means there is significantly more capacity available at the beginning of this year, compared to last year. 

With more capacity in the market, spot prices are decreasing. The Spot Price Index tracks spot rates across 70 major European lanes and was 108.31 as of February 2023, which is an 11% decrease from February 2022. 

Changes in contract prices take longer to materialise due to procurement cycles. The Contract Price Index tracks contract rates across the same 70 major European lanes, and was 110.9 in February 2022. It increased to a high of 123.7 in August 2022, better aligning contract rates with spot rates at the time. However, since then, the Capacity Index has remained relatively flat, with a slight decrease to 122.4 in February 2023. 

Based on the trends we’re seeing in the Capacity Index and Spot Price Index, it’s likely that we’ll see reductions in the Contract Price Index in the months ahead. 

Similar trends are evident in specific lanes. For example, the France-to-Germany lane had a 16% decrease in spot rates and an 8% increase in contract rates in March this year. However, the Latvia-to-Estonia lane saw a 32% increase in spot rates, while the UK-to-France lane had a 23% decrease in spot rates. This indicates that the transportation market is not homogenous; you need to look at it on a lane-by-lane basis. 

EU Cost Index  

Let’s take a look at one more index. The EU Cost Index shows the evolution of costs for trucking carriers across the 70 biggest lanes in Europe. It aggregates data into five clusters which represents the five biggest cost factors for carriers: driver costs, fuel and Adblue, vehicle, toll, and services. It then adds all these up into a single index, via a total-cost-of-ownership calculation model.  

The index has a baseline of 100, which represents the average cost seen in the last two quarters of 2019. This means that values larger than the baseline represent an increase in costs. 

In Q4 2022, the Cost Index was 120.75, which is significantly higher than the 105.75 reading in Q4 2021. The main reason for this was the hike in fuel costs, sparked by the Russia-Ukraine war and other factors. The Cost Index is forecast to increase to 121.43 to 122.59 in Q2 2023, driven in part by expected increases in labour costs, which remains the largest component of total costs for carriers. 

The combination of increasing operating costs, decreasing rates, and freight demand means that carriers now find themselves between a rock and a hard place. Unfortunately, those that are unable to remain profitable are likely to go out of business. 

Ocean market insights and supply chain sustainability 

In this episode of Transporeon Journal Market Updates I was joined by two industry experts for updates on key areas of the transportation industry. I spoke to Patrick Pretorius, Director of Business Development North America at Transporeon about ocean transports, and Jakob Muus, Director Sustainability Tribe at Transporeon about the inclusion of sustainability in supply chain decision-making, 

If you want to hear what they both had to say – and you really should – watch my video blog.

Watch now

It’s all about collaboration 

In terms of how we are doing overall in the supply chain and logistics industry, it depends on who you ask.  

The current market environment is more favourable for shippers in terms of rates and capacity compared to the past two years. However, carriers face a more challenging situation as they try to balance lower freight demand and decreasing rates with higher operating costs. 

What hasn’t changed is the need for shippers and carriers to build collaborative relationships. I think we can all agree that we continue to face risk and uncertainty in the market. The answer to “How we doin’?” will undoubtedly change in the weeks and months ahead. This is why it’s more important than ever to stay informed of what’s happening in the world — in terms of regulations, the economy, geopolitical activities, transportation and labour markets, the competitive landscape, emerging technologies, and more.