The world economy entered a phase of a decade-long recovery after the global economic crisis of 2008. COVID destroyed this idyllic situation creating conditions we have never heard of before.
The world experienced a long economic boom lasting over a decade after the economic crisis of 2008. Low prices, low inflation, and low interest rates ensured sustained growth. Household consumption increased year by year, enabling companies to grow as well. Investment and purchasing power indices reached unprecedented heights. It seemed that this optimal world could only be disrupted by a labor shortage.
COVID-19 hit the world in this idyllic situation, creating circumstances we had never experienced before and impacting both the economy and society. States began spending heavily during the pandemic that began in 2019. With their revenue less than their spending, governments were desperately trying to get the economy back on track. As the world started to slowly rebound, the Russo-Ukrainian war broke out. COVID-19 and its effects still lingered as governments began to build up arms, further increasing their spending. Due to the emerging energy crisis, prices rose unstoppably, and accumulating inflation caused interest rates to increase. This all resulted in stagnating investments and dropping consumer spending. Due to the overall uncertainty, the willingness to borrow also plummeted; earned incomes were invested in savings rather than investments. A global recession was around the corner in 2022-2023. The increase in inflation dragged interest rates, and countries had to face double-digit inflation. Hungary was no exception.
Impacts of the energy price explosion – What can shipping companies do with contracted prices?
What can a shipping company do if they have contracted prices? In certain situations, the service provider contacts the client to inform them about the situation they have encountered. Due to skyrocketing energy prices, fuel prices began to rise as well, making it impossible to maintain previously contracted prices. The solution to this problem was to apply the so-called “fuel clause” in the service provider agreements, which had not been used for years. (The fuel clause means that a base fuel price is compared to a set level. If the current price is either above or below the set level, these surcharges are incorporated into the fees, either increasing or decreasing them). Given the situation, it was the only plausible solution.
Enlarged fleets.
With the outbreak of COVID-19, the automotive industry began to stagnate as the number of orders dropped. Consumer electronics became the main customer for semiconductor production. As the grip of the pandemic eased, demand for vehicles started to grow, but there were no cars available for sale. The automotive industry’s attempts to purchase semiconductors were futile as they were being bought up by consumer electronics manufacturers. The automotive industry had been ailing for a long time, unable to supply the market and could only offer unpredictable delivery deadlines, with delivery times extending to at least 1 or 2 years. This all happened just when the demand for cargo space skyrocketed to unprecedented levels. Shippers were unable to serve clients, even though another golden age seemed to be approaching. Everyone wanted to invest in vehicles to meet customers’ needs.
A second shockwave hit the forwarding and shipping industry in Europe when the volume of goods produced significantly decreased in 2023 due to the economic downturn. No amount of cargo space would have been sufficient in the previous two years. Yet, warehouses were now empty, leaving many businesses unable to operate their newly expanded fleets. By the time the industry recovered, the economy had already begun to shrink again.
Is economic operation safe when shipping is at a definite loss?
As demand for cargo space decreased drastically in 2023 due to the shrinking of the volume of goods produced, freight rates also began to fall. The worsening inflation led to increasing interest rates on leasing and rental contracts, putting many in a difficult situation. Despite record-high inflation in 2023, freight rates decreased nominally compared to 2022, not to mention the decrease in real value. Market freight rates could have led to unprofitable operations in many instances if businesses had not been alert and attentive to their costs. The winners in such situation were those that did not have their fleet on the spot market, but had fixed interest rate contracts and secure orders.
Greening the shipping sector – yet another burden?
By October 2023, it became apparent that the European Union had made a commitment to greening. Greening had reached the transport sector not only in promises but also in action. Considerable toll increases were announced throughout Europe, with the heaviest ones in Germany and Hungary. Tolls increased by 83 percent in Germany and by 44 percent in Hungary. The message is clear: those who burden the environment should pay for it.
Costs were thus increased for shippers, but customers were unwilling to pay high freight rates in the ailing European economy. The Israeli crisis increased uncertainty, and concerns grew about the security of the supply of energy carriers. It affected the market as well as the stock market. Hungary also faced rising fuel prices while the tolls payable for the kilometers travelled did not return 100% for shippers and forwarders. Customers were unwilling to share such a burden in most cases, although shippers and forwarders burden the environment because they transport the products on behalf of the manufacturers, producers, and merchants. Nevertheless, forwarders, shippers, and transporters had to bear the majority of such costs. Solidarity was nowhere to be found.
Cooperation required.
We might say that the market is determined by supply and demand; if there is low demand for cargo space, freight rates will decrease. However, if the law of supply and demand is stronger than the forwarding and shipping sector’s ability to assert their interests, then customers will not pay for legitimately incurred costs (such as tolls). This directly leads to further decreased profit-generating capacities of the transport sector compared to the previous year – and this is still not the end of this trend. Demonstrations and strikes organized by German, Spanish, French, and Polish carriers have occurred, but results have been partial. Cooperation would be needed so that justified costs can be incorporated into the prices.
At the same time, European governments are working to curb inflation, but the significant increase in tolls, which is otherwise justified from an environmental point of view, has proved counter-effective. If tolls were incorporated into freight charges, end-users should pay for such increased costs, which goes against the reduction of inflation.
Even the little things are to be appreciated in 2024.
Prices are volatile, moving both up and down. The forecasted inflation for this year is significantly lower than last year; 4-5% is predicted for this year in Hungary instead of 17.6%. Hopes are high, but reality is not so promising. A rebound is nowhere to be seen yet.
Economic players must strive to increase productivity. Forwarders and carriers must realize: no empty kilometres, no empty cargo spaces are affordable. Processes should be rationalized, work should be more efficient, productivity should be increased, and specific costs should be reduced. Not even one pallet can be empty because it means loss. Every centimetre of space must be utilized, and even drivers must be proactive.
Many people sat back during the period of 2020-2022, since they could get whatever freight rate. This is now a thing of the past, and planning should be rational. Efficiency has to be increased more than ever before, and even small amounts of money must be appreciated. A solid company background with some spare money was enough for survival in 2023. This is not enough in 2024. It is high time for a change.