Early 2022 was met with the aftermath of the supply chain disruptions and logistics constraints which characterised much of 2021, coupled with increased consumer spending as ecommerce activity reached new heights, container rates soared to five times their pre-pandemic cost.
In this year’s annual Freight-View, we reflect on the events which affected freight & logistics operators throughout the year.
Newfound challenges – A macroeconomic storm
This year, supply chain disruption continued with transport providers having to navigate additional hurdles to remain agile in the marketplace. The delayed impact of Brexit policies, a global pandemic, soaring fuel costs were the major factors which contributed to the chaos for the transport and distribution industry this year.
In Q1, we saw the resurgence of covid lockdowns in China, causing disruption at Shanghai port, the world’s largest shipping terminal experienced capacity issues and labour shortages following the new restrictions. Containers were estimated to have to wait 12 days from arrival, before being unloaded, drastically longer than the typical 5 days which shippers were used to incurring. It was reported that as many as 500 ships per week, were forced to remain anchored outside resulting in bottlenecks which fuelled further strain on the terminal infrastructure during the unprecedented period. Carriers were under a constant battle to manage the rerouting of vessels to other port locations, to avoid the everchanging congestion levels.
Skyrocketing fuel prices following the war in Ukraine brought about problems also. Many SMEs struggled to bridge the increased overheads. Alongside an energy crisis, driver shortage has continued this year with China and Europe amongst the worst hit, exacerbated by a perfect storm of Brexit, Covid and IR35 tax laws between subcontracted and employed drivers changing
Maersk executive, Vincent Clerc, acknowledged in December the difficult headwinds many operators have faced this year, suggesting that every transport mode in the supply chain has felt pressure at various times this year. Clerc was sure to emphasise that it’s not all doom and gloom though, noting an inventory correction in America & Europe currently and commenting on an intended Maersk hiring spree, across it’s land based logistics divisions in the coming months which offers a level of optimism whilst looking towards the near future for the sector
Containerised shipping rates – The Rise and Fall
Of course, it wouldn’t be possible to discuss the trends of ’22 without mentioning the rise and fall of container spot rates. During H2 of 2020, spot rates began to rise considerably, resulting from heightened shipping demands following increased consumer spending. What followed was a global shortage of containers, limited ship capacity, and port congestion. As this continued to spike throughout 2021, the higher rates enabled forwarders to generate huge earnings, in many cases best ever year end results. Whilst experts warned of a market reversal being inevitable, when that might actually occur was the million-dollar question which was largely unanswered.
We saw first-hand what these rates did to financial performance of shippers and carriers and how they became a constant discussion when it came to company valuations during an M&A process. Unsurprisingly, the sustainability of a company earnings was now harder than ever to predict, this certainly made deal making in the Freight sector harder to conclude, with buyers and sellers in the industry needing to take practical views on what ‘normal’ could look like.
Very few experts predicted quite how rapidly the rates would decline. In September, spot rates from the Fast East plummeted by 45% in 20 days, the biggest decline since 2012. Drewry WCI predict rates could break below $1,000 by New Year. Looking forwards, Lars Jensen, CEO of Vespucci Maritime, emphasised this month that the liner market is officially experiencing “a hard landing” with spot rates reaching their lowest in early Chinese New Year. Global Supply Chain Regulation – Calls for tougher legislation
Amongst such fragmented market conditions this year, a tale of two halves has emerged, between carriers and shipping lines when negotiating shipping rates. The four largest container carriers, said to control more than half of the global container capacity, FIATA called for global regulation at the Logistics for Europe Forum in Brussels, to prevent further domination. Conversations were sparked by the introduction of the 2022 Ocean Shipping Reform Act, passed by US congress, which implemented measures to enable better visibility and regulation over American exporters and importers, as monitored by the Federal Maritime Commission (FMC).
On the one hand, carriers have been accused of collusion and price fixing, but arguably the maritime industry has always been oligopolist by nature, due to non-contractual trading relationships, which has always led to alliances amongst carriers as a way of competing in the market. The argument for the former is that carriers have been too forceful in monopolising their control at the ports, with forwarders having to agree to outlandish rates to get space on the vessels, or otherwise source other, perhaps more costly alternatives.
Additionally, the strategic initiatives of the shipping lines appear to be changing, with various carriers considering vertical integration to diversify revenue streams. This may cause concern for the forwarding community, perhaps those who have limited global footprint with just a small international partner network.
Now as the year ends, we see a price correction at worrying pace, increased collaboration, and transparency between forwarders and carriers might offer some future stability to a highly fragmented market which might benefit from some prolonged consistency in it’s shipping rates.
2023 M&A outlook
Historically, M&A has transformed and consolidated the Freight & Logistics sector, with many operators now considering their options in vertical integration to remain competitive in the marketplace. With geopolitical tensions creating new challenges for the sector, many are wondering what lies ahead for 2023 M&A activity.
Whilst M&A deal volume in Q4 2022 was at it’s lowest since 2018, Connect’s view for the upcoming year remains optimistic. In a recent survey conducted by BDO, operators are still looking to expand by acquisition, with 45% of survey respondents claiming they would likely still close a deal in 12 months.
With buyers now showing extra caution on deals, strategic objectives are usually firm and don’t change easily, meaning transactions should still happen, providing the rationale remains solid. Risk mitigation might result in transaction structures being quite different but presuming a portion of strategic buyers still looking for the right type of complimentary businesses, deals will continue to be made irrespective of the macro climate, providing companies are pragmatic.
We don’t need to look too far for an eye-catching freight forwarding M&A transaction in 2023 – Given the recent board announcement of D.B Schenker, the fourth largest forwarder supporting a sale process and moving forward with a proposed divestiture of a deal that would reportedly generate $20-25billion dollars. We shall watch this mammoth transaction play out very carefully indeed.