High shipping rates promise to remain elevated ©123RF Siwabud Veerapaisarn

Ocean Freight: Key Economic Indicators Suggest Continuing High Rates

Several key economic indicators suggest the economy is finally rebounding. As the economic recovery takes hold, shipping rates are also rising.

For the near-term, 2 – 3 years, contract and spot rates will likely remain elevated. As long as other conditions remain the same, rates should stabilize ending recent volatility.

The key economic indicators this post will review are the PMI for manufacturing; the PMI for non-manufacturing, and the Baltic Dry Index.

We’ll start with definitions of these 3 key economic indicators. That will help show their relevance to forecasting economic and rate growth.

Next, you’ll see why these indicators are important and what they mean to you. Understanding these metrics can help inform your assessments in planning your transport mix.

Now, let’s drill down into these key indicators.

Purchasing Manufacturer’s Index (PMI) -Manufacturing: The first indicator we’ll review is the PMI for manufacturing.  Investopedia defines and describes PMI-M as follows:

“PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions… are expanding, staying the same, or contracting.

In short, the PMI offers useful information about current and future business conditions.

With that let’s drill down into the most recent numbers.

For the next 6 months the PMI is forecast at 7.2% . That reflects an increase of 0.3% from March’s forecast. By comparison, the percentage for 2020 was – 1.3%. That increase suggests favorable business conditions for 2021 pointing to significant growth.

Also, surveys of all 18 sectors the of the PMI suggest revenue growth. With all 18 sectors reflecting upward trends, this suggests strong growth. Notably, the PMI for March 2021, breaks a record going back 38 years to 1983.

In addition, the capacity rate was 88.3% , exceeding December’s rate of 85.7%. The last time capacity utilization was this high was in 2016.(SCMR)

With projections showing strong growth, we will see continued upward pressure on shipping prices. Spot rates, for example, are close to or at record highs. That applies to both Asia-West Coast and Asia-East Coast rates.

Let’s now look at the latest number for PMI-Non-Manufacturing (or services).

PMI-Non-Manufacturing: The primary difference between this and PMI-M is that this index “… is an economic index based on surveys of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives”. (Investopedia)

This indicator shows a mix of rising and falling estimates. The capacity utilization rate in March was 89.4%. Services revenues show an increase 5.4% compared to December’s estimate of 1.6%.

Services production capacity declined from December’s projection by less than 1 %. December’s forecast was 3.2% and March’s came in at 2.3%.

The services capital expenditures (capex) indicator also declined from December’s projection. Here the decline is more marked, dropping to 5.7% from 12.7%.

These declines suggest a more realistic outlook from December’s lofty forecasts. In any case, March’s numbers point to strong and steady economic growth.

Finally, the forecast for commodity prices increased from December’s forecast of 3.5% to 4.9% in March. This suggests some price inflation, which will put upward pressure on prices.

Baltic Dry Index: According to Investopedia, “…the Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel”.

The BDI comprises three sub-indices that measure Capesize, Panamax, and Supramax dry bulk carriers.

All in all, the trend for the BDI has been upward, reflecting rising commodity prices. And that’s likely a sustained trend as demand for commodities is not expected to top out until late 2021 or 2022. (Hellenic Shipping News)

Bloomberg reports the composite index at 2,754 points. That’s an increase of 80% since January 2021. It’s also the highest reading since September 2019. But, in the latest release of data, Hellenic Shipping News reports the index dropped the last week of May by 9.5%.

Last week’s drop reflects disruptions due to holidays in Asian and Atlantic markets. This suggests near-term shipping prices may soften.

Also, forecasts signal the dry bulk carrier fleet won’t increase. In fact, it might contract as shipping liners take vessels out of service selling them for scrap. With no signs of growth in the dry bulk carrier fleet, long-term shipping prices should hold firm at current levels or increase.

Spot Rates vs. Contract Rates:  Finding the right mix of shipping rates can be a difficult process. Based on the current data, ocean shipping rates are at record highs. Moreover, they will likely continue to rise or level off at record or near-record highs.

To ensure long-term rates don’t get out of hand, both Chinese and U.S authorities have commented on rising rates. In 2020, China’s Ministry of Transport “requested” major carriers expand their ship capacity. Likewise, in the U.S., the Federal Maritime Commission stated it would “actively” track rates.

China’s and U.S.’ comments are telling, revealing their concern about future rates.

Planning your shipping for the rest of 2021, will likely be challenging. Spot rates in some cases are more favorable than long-term rates. But, with today’s capacity constraints, you won’t be able to rely on shipping all your cargo using spot rates.

So what’ the best course of action you can take?

 

Next Steps in Navigating Todays’ Rising Rate Environment

The release of pent up demand indicates strong and steady future economic growth. More specifically, three key economic indicators predict economic growth and rising rates.

The PMI-Manufacturing, the PMI-Nonmanufacturing, and the Baltic Dry Indices suggest stable growth for at least three years. That means as a shipper, you can expect sustained upward pressure on shipping rates.

In this environment, your best course of action is to work with a seasoned 3PL partner. The right 3PL partner can help you navigate rate uncertainty and volatility.

Getting the right mix of spot and contract rates requires a nuanced approach. At American Global Logistics, we’re meticulous about getting “fair” shipping rates.

Contact us to find out how we can help optimize your mix of shipping options – no matter where your cargo needs to go.