The freight forwarding industry is highly fragmented and subject to intrinsic challenges, many of which fluctuate depending on political, macroeconomic, technological, and regulatory factors. This was evident during the pandemic because the changing consumer spending patterns and sporadic effects of Covid 19 on the labour market meant the vulnerability of global supply chains was exacerbated. Disruptions, be it by natural disasters, geopolitical tension, health crisis, or other unforeseen events, can lead to shipping delays, bottlenecks and heightened uncertainty, which as a byproduct throws shipping rates into a state of flux and results in a supply and demand imbalance. 2023 was a year characterised by these diverging factors, we have put together an overview of the key themes and market issues impacting freight forwarders and logistics operators this year.
Capacity Issues
This year has seen tremendous variation in shipping supply and demand, with many of the pandemic consumer trends being reversed, global inflation has led to a cost-of-living crisis which naturally reduces the publics ability to spend on non-necessity items. This reduction in consumer spending, has impacted shippers and freight forwarders over the last year as many have experienced a drop in volume YoY. When supply and demand is volatile, this can lead to excess capacity on vessels, cargo planes and truckers alike. What we have seen is a sharp rate reduction in these markets, as carriers seek cargo volumes. The erosion of the shipping rate market has resulted in forwarders revenues retracting far below pre pandemic levels, which has caused many to struggle with soaring overheads.
When demand for vessel space is low and rates are bottomed, strategic blank sailings are initiated by carriers where they cancel or exclude certain ports on a planned route to recalibrate capacity. The aim is to drive rates up, given the reduced supply of vessel space. On the reverse side, we saw carriers add extra voyages in 21/22 to meet increasing container requirements, but supply chain issues caused ships to be delayed at ports, resulting in cancellations despite increased capacity. An equilibrium in shipping demand is rare and at best short lived, with consumer shifts, trade imbalances, port congestion, labour disputes, adverse weather, and unforeseen global events all impacting the market this year.
Inflationary pressures – A tougher market for the asset operators
With soaring overheads, escalated by energy price rises and rising labour costs, businesses across the supply chain have had to navigate cost challenges this year. Arguably asset-heavy businesses such as trucking companies have felt the pain the most. Given that assets need to be operated and maintained regardless of the price point in the market. Additionally, a shortage of skilled professionals in the industry, including truck drivers, warehouse staff, and logistics managers has also made things difficult for the trucking companies.
Many have tried to navigate labour and cost challenges whilst maintaining competitive pricing, however this has proved difficult in an industry with extremely low margins already. Unfortunately, a record number of UK hauliers became insolvent this year, as a direct fallout from the position of the economy. Accountancy firm, Price Bailey, reported in their FOI survey that 463 haulage businesses had gone bust in the last 12 months, which is more than double the number two years ago. Working at unfavourable margins and increasing costs, it’s unsurprising that many operators have struggled. With reductions in road freight volumes and consumer spending, it has created a perfect sector storm.
ESG – A growing priority
2023 has highlighted the need for supply chain operators to consider environmental issues and implement sustainability initiatives. As a sector which is the most visible for its greenhouse gas emissions, the conversation around sustainability has never been more prevalent. There has been a necessity for industry leaders to rethink long-term infrastructure investments, embracing both environmental responsibility and technology.
Ocean forwarding accounts for just under three percent of total carbon dioxide emissions, with alternatives being sustainable marine fuels (SMFs) currently being explored by the likes of Scan Global Logistics, who signed a global pledge to use ocean biofuel, providing customers with the option of using 100 percent carbon neutral shipping. Others paving ahead include Rhenus who offer carbon footprint trackers, less-than-container lines, and services that are almost entirely carbon neutral. In addition, the number of carriers attaining ESG certificates has grown substantially in recent years.
Air transport represents 2.1 percent of global carbon emissions, but with the air freight industry expected to grow 4.8 percent over the next 20 years, alternatives still need to be considered. With electrically powered aircraft still far from ready, a viable solution, used by many aviation providers already, is sustainable aviation fuels (SAFs). These, according to IATA, can reduce emissions by up to 80% during their full lifecycle.
Road transport is considered the most developed mode in its sustainability transition, with electric vehicles (EVs) reaching cost parity with internal combustion engines (ICEs). Hydrogen-powered fuel is another alternative to consider over EVs. In this evolving landscape, the growing emphasis on environmental impact caused by supply chains will continue to be a topic of conversation for C-suite across all modes of transport.
Rewiring supply chains with digital integration
Following the issues experienced during the pandemic, freight forwarders have been forced to innovate their transportation networks. This rare period highlighted the exposure shippers had and acted as a catalyst for change in the pursuit of efficiencies and transparency in the end-to-end supply chain.
One of the defining challenges continuing to wreak havoc in the market, is the fluctuations in supply and demand. Following the surge in 2021 – 2022, the drop off was stark thereafter, meaning forecasting has become harder in recent years given the consecutive market events which have caused the highs and lows making it difficult to predict. As upstream material processors and downstream product assemblers struggle to set capacity requirements, the recent effects of sudden surges in demand are amplified across the supply chain. Data analytics which monitor demand trends are frequently being used to improve visibility, with many of the multinationals aiming to ramp up digitalisation.
It is important to note that whilst technology offers opportunities for efficiency gains, many logistics companies struggle with integrating and adopting new technologies such as blockchain and artificial intelligence. With challenging market conditions this year, the implementation and training costs associated with these new technologies prohibits the industry adopting new trends at speed.
Cybersecurity Threats
As logistics operations become more digitalised, the industry is increasingly vulnerable to cybersecurity threats. With clear benefits in terms of profit margins, fleet efficiency and route optimisation, forwarders must consider whether these outweigh the potential risks. Unauthorised access to systems, data breaches, and ransomware attacks can compromise sensitive information and disrupt business operations.
One of the main concerns for freight forwarders is the large expenditure associated with resolving cyber incidents. If personal data of employees or customers is leaked and operators are no longer compliant with GDPR or insurance protocols, the legal fees associated with notifying the subjects and possible court proceedings can be sizeable. We saw this in September, when KNP Logistics, a notable privately owned UK forwarder was sadly declared insolvent. The group had to make 730 staff redundancies, with the decline associated with a ransomware attack on the company back in June.
The maritime industry also has additional cyber hazards to consider when looking at e-navigation, if systems are hacked, ship collisions could occur, resulting in serious injury, damaged assets, cargo loss, ocean pollution, and legal proceedings. This has been reinforced by Ensign InfoSecurity, highlighting maritime as one of the most targeted sectors for ransomware cyber-attacks. Port operations are particularly vulnerable, evident in November this year when DP World Australia reported a cyber-attack at its ports in Melbourne, Sydney, Brisbane and Fremantle.
Additionally, operators can be at risk even from using the most basic digital marketing tools. There have been cases in which cyber-criminals have impersonated a forwarders online website, which is also known as ‘brandjacking.’ By leveraging another forwarder’s branding, hackers can steal sensitive shipping information such as quotation requests etc.
Red-Sea Issue
One of the most recent events we’ve seen that looks like it will impact forwarders in Q124 is the Red-Sea issue. The Suez Canal stands as one of the pivotal passages for global trade, marking one of seven strategic geographic chokepoints worldwide. Recent targeting of shipping containers in the Bab al-Mandab Strait, by the Houthi movement due to the Israel-Hamas conflict, has caused major shipping lines to reroute around the Cape of Good Hope. This has extended journey times by approximately two weeks. This redirection is likely to increase freight rates, potentially causing congestion at alternative routes and impacting consumers with higher prices for goods, due to increased shipping expenses. The situation has necessitated naval intervention and may lead to a spike in demand for air freight services. These elevated costs could contribute to inflationary pressures, potentially influencing the Bank of England to adopt a more hawkish stance on interest rates, contrary to expectations of rate cuts in the near future.
With much of the year characterised by global trade tensions and geopolitical uncertainty, companies have had to navigate this landscape to maintain consistent supply chains.