Month: September 2019

The introduction of new U.S. tariffs on Chinese exports could finally put airfreight markets on an upward trajectory ahead of the traditional peak season later in Q4 as shippers rush to beat the deadline.

“We expect demand to pick back up leading into the Oct. 15 tariff deadline,” said Neel Jones Shah, executive vice president and head of airfreight at Flexport, adding that capacity ex-Asia is currently available on most primary lane segments, with backlogs minimal.

Predicting what happens during air cargo’s traditional peak season ahead of the holiday season later in the fourth quarter is more difficult. “While U.S. consumer spending is still strong, the impact on peak season and holiday shopping toward late November, early December isn’t clear yet,” he said. 

“Currently, we lack visibility beyond the next two weeks, which is rare for this time of year.”

Indeed, forecasting where freight markets might move has proven unusually difficult throughout 2019, both at sea and in the skies. “Overall air cargo rates and demand haven’t been as robust as last year and it can best be described as choppy,” he said.

“Across the board we’ve seen that everyone is being cautious with airfreight planning. Unrest in Hong Kong, a potential no-deal Brexit and renewed Middle East hostilities all on top of the ongoing tariff war is making it much harder for carriers and shippers to plan accordingly.”

He is clear, however that shippers, as reported in FreightWaves, should expect higher fuel bills to be passed on by carriers after crude oil prices spiked last week following drone attacks on Saudi Arabia.

“Airlines will be heavily impacted as oil prices increase,” he said. “In turn, they’ll likely be passed onto shippers.

“Right now it’s too early to tell how long lasting the recent oil price hike will be and is almost completely dependent on how quickly Saudi Arabian Oil Co. thinks it can return to full production.”

Flexport Asia was briefly banned from using Lufthansa Cargo flights earlier this month after an incident involving dangerous goods. The order was revoked last week after it was found that a shipper had incorrectly declared a shipment and Flexport had not been at fault.

“Flexport worked very closely with Lufthansa on their investigation into our dangerous goods procedures and training at our Hong Kong facilities,” said Shah. “This resulted in an exceptionally quick resolution and immediate lift of the embargo.”

U.S. and European importers are heavily reliant on critical and high-value cargoes uplifted at Asia’s primary hubs, including Hong Kong International Airport (HKIA). Disruptions due to protests at HKIA and reduced slots at some Chinese airports have added complexity to an already volatile 2019. Shah said the “choppy” demand evident globally was equally apparent in Asia.

“We saw a ‘mini peak’ at the end of August ahead of the Sept. 1 tariff deadline. Since then, things have cooled down,” he explained.

“What’s interesting is that this year we’re seeing a much slower return to normal from the mid-autumn festival in China where many flights were canceled over the weekend. Demand hasn’t returned to a steady state as quickly as in past years.

“The impact of even short holidays is a bit more pronounced this year.”

One bright spot has been Southeast Asia, where demand has been relatively stable as shippers shift production to escape the tariff war affecting exports from China.

“However, yields are still a challenge and many freighter carriers are still having a hard time making direct Vietnam flights work without stopping in another city before continuing on to a transfer hub,” he added.

More FreightWaves articles by Mike

Ever since the Paris Climate Agreement, there have been incessant debates on the transport industry’s mammoth impact on the uncontrolled rise of global carbon emissions to date. This led to the industry being inundated with regulations directed at curbing its carbon footprint. 

Local governments have also tried cajoling the transport industry to adopt low-emission vehicles and alternative fuels by providing tax benefits and grants for companies developing greener technology. One such scheme prevalent across several countries is the low tax rates for trucks that burn liquified natural gas (LNG) as fuel – based on the understanding that LNG pollutes less than diesel.

However, findings from a recent study conducted by Transport & Environment (T&E), a European NGO, show that the trucks powered by LNG do not fare better in terms of carbon emissions when compared to diesel trucks. The study examined three recent and popular LNG truck models – Iveco Stralis Hi-road, Volvo FH420, and Scania G340 – and compared their emissions to that of an average diesel truck in the market. 

“The three LNG trucks tested emit two to five times more poisonous NOx than the diesel truck with the lowest test result when driven in a combination of urban areas, regional routes and motorways,” said the T&E report. “When driven in towns and cities, the gas trucks release two to 3.5 times more NOx than the tested diesel truck with the lowest emissions. Trucks powered by biomethane (biogas) would have the same air pollutant emissions as trucks running on fossil gas because the fuel characteristics are the same.”

The results are startling, as governments have largely been conducive of LNG-powered vehicles, with policymakers approving tax breaks and subsidies for businesses willing to move towards LNG trucks.

Apart from being a lot more caustic to air quality, LNG trucks also emit particulate matter – volumes that are comparable to diesel trucks. Though no contributor to global warming in itself, the microparticulate matter can get lodged within the lungs when inhaled, thus causing complications and in some cases, death. 

Curbing NOx emissions is critical in Europe, especially in the wake of the Dieselgate scandal, which is estimated to have caused enough damage to air quality for it to result in 5,000 additional premature deaths annually across the continent. Most of the air quality deterioration happens in urban spaces, which also are more densely populated compared to the countryside. 

Then there is the issue of people migrating towards industrialized regions in search of work and better living conditions. In Europe, roughly three in every four Europeans live in an urban setting, and the numbers are only going to increase as we move forward. Municipalities are realizing the issue and are bringing in sweeping reforms that include splitting cities into zones and banning old and highly polluting vehicle models from driving within central and highly traffic prone zones.  

The research study on LNG trucks was carried out by Dutch applied science research organization TNO, which reported that in urban driving conditions, NOx emissions from all the three tested LNG trucks measured to be 39% to 117% higher than an average diesel vehicle tested earlier at the site. 

These findings directly negate the claims of automakers, who argue that LNG trucks have negligible carbon emissions compared to diesel trucks. “The TNO reports show that these claims are not true. In fact, the Scania and Iveco trucks tested emitted quite large numbers of particles per kilometer during urban driving conditions,” said T&E in its report. “These emissions during urban driving are particularly worrying as they can have a significant impact on air quality in towns and cities.”

The EU policies see LNG to be a cleaner alternative in transport systems, which when the recent findings are accounted for, may not be not the case. The Alternative Fuels Infrastructure Directive (AFID) supports the development of infrastructure for alternative fuels, and it lists LNG to be one of the primary alternative fuels that can replace diesel as fuel for trucks. This has resulted in European truck manufacturers receiving up to €17 million in funding via various EU research grants for perfecting LNG powertrains. 

European countries struggling to reduce carbon emissions despite massive tax cuts and regulatory measures, will need to wake up to the emissions reality of LNG trucks and look to cease schemes that encourage its adoption within the transport sector. 

As delegates from 192 nations gather in Geneva Sept. 24 and 25 to determine the fate of global postal commerce, a compromise has been advanced to let the U.S. Postal Service (USPS) significantly increase the rates it charges foreign postal systems for processing foreign-origin parcels and mail.

The proposal, if it passes muster, would keep the U.S. in the Universal Postal Union (UPU), the 145-year-old governing body that the Trump administration plans to leave next month unless UPU delegates vote to approve the changes it has demanded to the global postal cost structure. It would also dramatically increase the postal rates paid by businesses and consumers from nations that have benefitted from a half-century of artificially low rates on U.S-bound shipments. Notably, Chinese merchants and consumers could see postal rates more than double because China Post would be charged a much higher rate by USPS to process postal shipments.

According to two industry sources, the compromise, crafted by Germany and France and informally agreed to by the U.S., would permit the U.S. and any country doing business with it to “self-declare” their international postal rates by July 1, 2020, at a rate effectively equal to 70% of what UPS would charge to handle a domestic parcel or mail shipment, a fee system that has been known as “terminal dues.” That is much higher than the dues now paid by many so-called developing countries that use the USPS. In the case of China, still classified a “developing” country under UPU guidelines, China Post pays USPS about 35% of what it costs USPS to process a postal shipment within its borders, estimates Alex Yancher, co-founder of Passport, a U.S.-based international parcel delivery firm who has been closely following the saga. 

The proposal would establish a phase-in period for countries operating under the current UPU system to migrate to a self-declare model where their costs would rise after decades of paying artificially low dues, the sources said. The shift would begin in 2021 and run through 2025, the sources said. Terminal dues increases would max out at 13% in 2021 and increase by 10% each year after that, the sources said. This would ease many governments’ concerns about the impact of price shocks while aiding cost-recovery efforts of destination postal systems.Terminal dues account for up to 60% of the cost of a typical international mail shipment, according to Yancher.

The matter will come to a head Sept. 25 when the delegates will vote on one of three options related to the terminal dues structure. One option keeps the status quo while permitting a small increase in terminal dues. A second, which has been proposed by the U.S., allows for all nations to shift to self-declaration by mid-October, which would immediately end the terminal dues structure. The third would allow the U.S. to self-declare and establish a self-declaration phase-in for other countries. The latter two options would keep the U.S. in the UPU. The vote will be a simple majority–50% plus 1.

Peter Navarro, President Trump’s assistant for trade and manufacturing policy and the administration’s point man on the U.S-China trade dispute, wrote in a Sept. 11 op-ed piece in the Financial Times that the U.S. is amenable to the latter two options. However, the first option, which maintains the status quo, will result in the U.S. leaving the UPU on Oct. 17, Navarro said. The administration has framed the postal issue as another example of China gaming the global trade system and how the administration is hell-bent on stopping it. Navarro is expected to attend the special UPU “Congress,” only the third such meeting in its history. In a Sept. 11 op-ed published in the Financial Times, Navarro

At that point, the U.S., which handles about half the world’s mail, will move to negotiate bilateral agreements with each of its postal trading partners. This scenario could create enormous turmoil in the market since so many shipping protocols have been established through the UPU’s multilateral framework. Neither the State Department, which oversees the U.S. role in UPU, or USPS have articulated a post-exit plan, which has reminded some observers of a postal version of Brexit, where a majority of British citizens voted for the nation to leave the European Union (EU) only to discover that there was no viable post-exit strategy to implement. 

USPS has assured mailers it will remain in the international mailing business even if the U.S. exits the UPU. In addition, third-party providers like integrated communications R.R. Donnelley & Co., (NYSE:RRD) said they are standing ready to assist customers with a post-exit transition. The question, though, is whether USPS can serve any country which the U.S. has not negotiated an agreement. “Some of the bilateral agreements could be reached quickly enough to maintain relative continuity, but I suspect some may be protracted due to trade disruption already occurring,” said Matthew White, strategist for consultancy iDrive Logistics, a consultancy that is working with clients with exposure to the issue. 

In theory, companies like FedEx Corp. (NYSE:FDX) and DHL Express would benefit because their rates would be more competitive with the adjusted pricing. Freight forwarders could conceivably benefit if they are able to consolidate foreign mail shipments, clear them through U.S. Customs and induct them into the USPS network. However, much of what comes from developing countries are low-value goods that satisfy Americans’ seemingly insatiable desire for cheap imports. Higher shipping prices from fully private businesses could result in less ordering activity.

If one of the administration’s endgames is to move production of low-value merchandise back to the U.S., that’s unlikely to work, according to one of the sources. Few, if any, U.S.-based producers would be able to turn a profit making the stuff at low price points that U.S. consumers are accustomed to, the source said.

A different world

For more than 100 years, it was free for one post to have another post deliver its letters domestically. UPU member countries set up the terminal dues system in 1969 to compensate one another for delivering international mail within their borders. The dues were based on how developed a country was in delivering mail. Developed countries like the US would charge lower dues, while developing countries would charge higher dues. The system worked well when international mail was mostly flat letters because the incremental cost of delivering a latter is nominal. However, the dues system of the time did not foresee the surge in small, low-cost packages originating in nations like China and the higher costs incurred by USPS in processing those shipments without losing money on them.

The original formula remained until 2016 when the UPU, under pressure from the Obama administration, approved a 20% increase. But that wasn’t enough to satisfy critics. Postal systems like China Post, which was part of a developing economy at the time, still pay very low rates for USPS’ services, a situation that critics said has led to USPS losing $1 for every shipment from China that it processes, and that fails to reflect China’s modern-day status as an advanced and wealthy trading nation. More than half of business-to-consumer parcel traffic entering the U.S. comes from China.

For example, it costs more to ship a parcel via USPS between New York and Boston than from Beijing to Boston because of artificially low dues paid by China, a factoid that no one appears to dispute.

The current system puts U.S. companies at a competitive disadvantage against foreign businesses, and creates opportunities for dues “arbitrage” that digs an even deeper hole for USPS, according to Yancher, For example, shippers who fulfill international orders placed on the website of Chinese e-commerce company Wish.com, will ship goods from China to countries like Tajikistan, which has even cheaper rates to ship to the U.S., and then have the Tajik Post deliver packages to the U.S. for final delivery, Yancher said. “The extra cost of shipping from China to Tajikistan is worth it in order to capture the low rates offered by the Tajik Post,” he said. Wish.com has built a billion-dollar business largely on the backs of cheap postal transactions, he said. 

Fed up with the purported inequities, the administration notified the UPU last October that it will leave the group after a mandatory one-year waiting period unless it is able to immediately self-declare rates and bring terminal dues up to levels that match USPS’ cost to serve.

Angela Merkel, the Chancellor of Germany, unveiled an ambitious climate package to the tune of €54 billion, buoyed by public protests on Germany’s inability to hit its upcoming emissions target of 2020. The frustration of not reaching its climate targets is of great annoyance to Germany, as the country is considered a flag bearer in the fight towards reducing global carbon footprint. 

In 2002, Germany promised that by 2020, it would reduce its carbon emissions by 40% from 1990 levels. However, even after the country’s sweeping climate-related reforms – including phasing out coal, providing tax-cuts for low and zero-emission vehicles, increasing fuel surcharge, and regulatory requirements for driving diesel vehicles within city vicinities, Germany has only managed a 32% reduction in emissions from 1990 levels. 

The new €54 billion package has been unveiled at a juncture where the voice of climate activists are at a historic high, with over a million people taking to the German streets in September during protests organized by the “Fridays for Future” – a movement popularized by Swedish teen-activist Greta Thunberg. 

Though the new climate package does come with elaborate tax subsidies, incentives for buying electric vehicles, the introduction of carbon prices on transport, and added tariffs on domestic flights, climate experts believe the package is not ambitious enough as it is too little to douse the demand for fossil fuel. 

The pledged €54 billion will be allocated between 2020 and 2023, increasing from €9 billion in yearly funding for 2020 to €16.5 billion in 2023. Then again, the German government is clear that it will not be accruing debt to enforce the package. This is in line with the German policy of delivering a balanced yearly budget that looks to tip towards less spending and higher revenue, rather than taking up debt to revitalize the economy.

However, there is a definitive economic downturn in the picture. The German purchasing managers’ index (PMI) registered a reading of 47.0 this September, down from 54.6 in the same month in 2018. The consistent PMI reduction is a concern as the index measures the activity level of purchasing managers in the manufacturing sector. Anything below 50 on the index signifies a downturn in the manufacturing economy. 

Germany has a lot to ponder about in the context of providing a fiscal stimulus to the market if it continues to slide. The German government might have to consider letting go of its traditional balanced yearly budget and look to take up some debt to revitalize the economy. 

But if Germany remains adamant in not considering the option of a deficit budget, and if push comes to shove, the German government will, in all likelihood, look to prop up its automotive sector rather than focus on climate goals.

Diving into the intricacies of the climate package, it talks of a “CO₂ price.” The specific details on the price are still hazy, with the Federal Ministry for the Environment commissioning a study to determine the level of CO₂ pricing. Germany will have to be careful with added carbon taxes, as it was the same tax that fueled the yellow jacket protests that raged in France for several weeks. 

Then again, gasoline and diesel will be getting more expensive in Germany from 2021, when three cents will be added to every litre, with an increase of 15 cents expected in the years that follow. Meanwhile, the commuter allowance will be increased for people who transit longer distances for work every day. The implementation of this needs to be scrutinized, as the allowance applies to everyone irrespective of the means of transport they use – thus providing impetus to even the people who use private cars as transit. 

The package pointed out that vehicle taxes will be revamped, with new registrations paying vehicle taxes based only on CO₂ emissions per km and not based on volume displacement – a parameter which was used as a category before. This is advantageous to electric cars, as they would pay zero vehicle taxes due to zero emissions.

Container ships are setting new records, but for all the wrong reasons, as the vessels become an increasingly popular way to smuggle drugs.  

As FreightWaves’ Mike King reported, the Maersk Gibraltar, which can carry the equivalent of 5,000 common shipping containers, was the site of the U.K.’s largest drug bust as authorities found about 1.2 tonnes of heroin, valued at $148 million. 

The September bust shattered the previous U.K. record set in August of $50 million worth of heroin found in a shipping container.

That same month, Germany set its own record bust of 4.5 tonnes of cocaine found onboard an unidentified container ship at the Port of Hamburg, while another seizure of 1.5 tonnes of cocaine was made less than a week later at Hamburg.

The European Monitoring Center for Drugs and Drug Addiction said in a June 2019 report that the number of cocaine seizures and volumes coming into the continent are at an all-time high. A kilo of cocaine in Europe can fetch 25 times its wholesale price in South America, the report added.

Aside from the smugglers, innocent shippers also get caught up in seizures due to delays and the resulting investigations, said Sherhina Kamal, product director for DP DHL Group’s risk assessment unit Resilience360.

She said shipments coming from South America and other high-risk origins are likely to receive extra scrutiny, as will the carriers are unwitting accomplices in carrying drugs.

“With additional events like these taking place, there might be more checks on ocean freight coming from Latin America,” Kamal said. “The delays are minimal at this point, but given the scale and the frequency of seizures, it may change.”  

The issue of cargo delays will be more critical as trade between the Euopean Union and South America is set to expand, particularly for perishable and time sensitive cargoes such as fresh fruit and agricultural goods. 

The European Union, already the largest importer of fresh fruit in the world, will get even more such shipments from South America as part of a new free trade agreement signed in June.   

Europe is not alone in this problem as demonstrated by the U.S.’ largest cocaine seizure taking place on the MSC Gayane in the Port of Philadelphia in June, netting $1 billion worth of the drug. 

The U.S. Attorney’s Office for Eastern Pennsylvania charged its first member of the MSC’s crew, Nenad Ilic of Montenegro, with conspiracy to distribute cocaine. At least five crew members were arrested as part of the bust.  

The seizure caused MSC to be suspended from U.S. Customs and Border Protection’s C-TPAT program, which provides expedited cargo processing in return for outlining how they deal with risks such as smuggling. 

MSC has since been readmitted to C-TPAT. But the active involvement of a ship’s crew in smuggling, as opposed to drugs being unwittingly loaded onboard, also heightens the risk for shippers, Kamal said, as those carriers’ vessels then become targeted for increased inspections.

“What is more concerning for shippers is these major carriers being implicated in the process,” Kamal said. “If they have their preferential treatment taken away, that will add to time to clear cargo at the ports.”

CMA CGM caught in Mexico smuggling operation

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NYK claims carbon-neutral shipping first

Japanese shipping line buys 5,000 credits from Indian wind farm as offsets. gCaptain

West Coast ports say US is not winning the trade fight

Ports ask President Trump to reach accord with China. gCaptain