Executives at three of the largest container lines say most, if not all, their available ships are on the water now, thanks to unexpectedly high demand from US shippers. Despite that, shippers still expect high spot rates, cargo rolls, and tight chassis supply to persist through the fourth quarter.
Container shipping is seeing a V-shaped recovery after the COVID-19 pandemic forced factories and businesses to close and ocean carriers to cancel many sailings in the first half of 2020. Now the right side of the V is going even higher thanks to store reopenings, low retail inventories, and the consumer shift to ecommerce, said Nick Fafoutis, senior vice president of CMA CGM.
“All the things that have driven the market since May and June are persisting,” Fafoutis said during a panel talk this week sponsored by the Maritime Association of the Port of New York and New Jersey. “In my 30 years, I have never seen a market this dynamic and fluid. For lack of a better term, this is crazy.”
“When we look at the forecast for the fourth quarter, we are getting a similar vibe from the market,” he added. “October is looking strong.”
Containerized US import volumes from Asia rocketed 91 percent between March and August, according to PIERS, a JOC.com sister company within IHS Markit. By comparison, inbound shipments from Asia grew 36 percent in the same period in 2019. Total US imports in the five-month period increased 102 percent, compared with a 47 percent expansion in the March-August period in 2019.
For US retailers, the inventory-to-sales ratio, a closely watched demand indicator for steamship lines, fell to a seasonally adjusted 1.22 in June 2020, an all-time low, according to the US Census Bureau. For July, the ratio barely improved to 1.23.
Fafoutis said inventory replenishment has been driving the market since summer. Ahead of the holidays, retailers now want even more stock for surprisingly resilient US consumers. “Now that we are done with September, it really hasn't changed,” Fafoutis said. “When we look at the forecast for the fourth quarter, we are getting a similar vibe from the market.”
The better-than-expected demand is one reason spot container rates on the trans-Pacific doubled from what they were in the first half of 2020. Likewise, capacity cuts by the container lines in the pandemic’s early days also helped rates rocket higher.
Rates from China to the US West Coast for the week ended Sept. 30 rose slightly to $3,863 per FEU, up 190 percent from a year ago, according to the Shanghai Containerized Freight Index (SCFI), published in the JOC Shipping & Logistics Pricing Hub. Rates to the East Coast slid $3 to $4,622 per FEU, but are up 97 percent from the same time last year.
Uffe Ostergaard, president of Hapag Lloyd America, said his company was trying to inject more capacity over the third quarter due to US demand. While Hapag-Lloyd was largely able to meet shippers’ needs in September, he said ship supply in the fourth quarter will be tight.
“Volumes are essentially back to where they were last year, if not slightly higher,” Ostergaard said. “Looking at the idle fleet, there is not a lot of additional capacity sitting idle that can be pumped in on short notice.”
“We are pumping in all the ships we can,” he added.
Indeed, Alphaliner noted this week that “usable” weekly capacity on the Asia to North America trade was 523,000 TEU as of Sept. 1, a new record and up almost 12 percent from last September. The demand surge is mostly in the trans-Pacific thanks to the shorter sailing time from Asia. Ostergaard said trans-Atlantic and north-south trades have not yet staged a full recovery, but should over time.
“Once the situation stabilizes, we do expect to see the US East grow faster than the West Coast” in volume, Ostergaard said. The cuts earlier in the year in weekly container service rippled through the landside with rails and trucking firms taking out capacity. Now with the demand rebound and higher ocean rates, shippers should expect to pay more for landside moves, said Allen Clifford, executive vice president of Mediterranean Shipping Co. USA.
“Trying to get a container on the rail or on a truck, you are paying premium prices,” Clifford said. “This is a surge we are not used to. Although we may still have a bit of a contraction, the fourth quarter of this year is going to be a great quarter, not only for the carriers, but for the third-party logistics providers and shippers as well.”
Shippers say capacity still tight
Bob Fredman, director of global logistics for retailer Big Lots, said even with lockdowns easing, consumers continue to spend on items for entertaining and working at home. Adding in back-to-school, demand for personal protective gear and cleaning supplies, and the holidays, he says the demand forecast is healthy. But it will be tough to find space on ships.
“As we sought to bring in more, we still had failures from a majority of our carriers in providing the space we needed,” Fredman said. “There are not a lot of ships available to really increase the capacity that is needed to support demand.”
Clothing and department stores were hit hard during the pandemic, but they, too, are starting to recover, said Sara Mayes, chief executive officer of Gemini Shippers Group, the non-profit logistics corporation for apparel companies. Mayes said many retailers delayed orders until the last minute as they assessed demand, but those orders now face delays getting from Asia. Gemini is advising shippers to book space on a ship up to three weeks ahead of when they usually would.
“Chassis shortages everywhere,” she said. “Trucking availability and rates are also a challenge. The drastic decline in shipping in early spring has clearly reversed, and many shippers are struggling to build up their inventory.”
Mayes said demand through October looks strong, but November and December are murky due to the potential of another COVID-19 wave and the possible subsequent lockdowns on the US economy. Even so, she says demand will remain strong thanks to growth in online shopping. She said online sales increased nearly a third in the second quarter of 2020 compared to the first quarter of 2020, and are up over 44 percent from a year earlier.
“Warehouse inventory will increase, although not to full capacity, to respond to ecommerce,” Mayes said.
US-China uncoupling charts new future for container shipping
When China joined the World Trade Organization on Dec. 11, 2001, container shipping was already a well-established system, ready to unleash the output of China’s emerging industrial machine onto world markets.
As Daniel Yergin, the Pulitzer Prize-winning author, energy expert, and IHS Markit vice chairman writes in his well-received new book “The New Map: Energy, Climate, and the Clash of Nations,” containerized shipping enabled China’s meteoric rise and that of globalization writ large, but with geopolitical tensions flaring, the industry will be confronting a future less hospitable to global trade and far-flung supply chains.
“How China’s extraordinary economic surge came about is the result of many things. But it would not have happened without a revolution that was born in the US port of Newark, New Jersey, a revolution that would change the map of global trade and prove transformative for the world economy — and for China,” Yergin writes.
That revolution, of course, was sparked by the April 25, 1956 departure of Malcom McLean’s Ideal X, a surplus World War II tanker bound for Texas with 58 truck trailers (minus the wheels), representing the first sailing of a container ship.
The radical concept, which drove down cargo handling costs and greatly accelerated the speed of vessel loading, gained traction despite fierce resistance from dockworkers. It gradually replaced breakbulk on the world’s major trade lanes and began to find opportunities in emerging markets.
As Yergin notes, McLean, leading United States Lines, launched the first container service to China in 1980, the year when economic reform began under Deng Xiaoping. Today, seven of the world’s top container ports are in China and the country typically accounts for 40 percent of global container volumes. Container ships, Yergin writes, “are the vessels that have carried China’s economy into its current position in the global economy and world trade.”
But if container shipping rode the wave of China’s emergence, set in motion by the global consensus around trade represented by the creation of the WTO in 1995, the industry must now confront a potentially very different geopolitical future taking shape with almost daily developments chronicling a deterioration in US-China relations.
“If containerization really underpinned growth of the global economy, one of the themes of the book is the risk to globalization that comes from rising geopolitical tensions, particularly involving China and the US, which in the past few months have really accelerated,” Yergin, who was the keynote speaker at the 2019 TPM conference, said in an interview with JOC.com.
“There was the famous saying of Deng Xiaoping concerning Hong Kong and China as ‘One Country, Two Systems.’ There is now the specter of ‘one world, two systems,’ where there will be a US-led economic bloc and a Chinese-led economic bloc. And the world has a growing concern that they will have to choose between them,” Yergin said.
Companies have diversified sourcing
To a great extent, the trends Yergin identifies in “The New Map” are already well under way and seen clearly in container shipping data. The breakneck pace at which China came out of the gate as a manufacturing powerhouse after its entry into the WTO has long since slowed. Average global container growth rates decelerated to less than 1 percent between 2015 and 2020, versus nearly 9 percent between 2001 and 2005, according to data from IHS Markit, parent company of The Journal of Commerce. Container lines have responded by drastically scaling back ship ordering and rapidly cutting back capacity in response to changes in demand, which has contributed to the bottlenecks seen in recent weeks at major ports such as Felixstowe, Los Angeles, and Long Beach.
As companies have diversified their sourcing, China, although still the dominant source country for consumer goods, has steadily slipped as the origin of US containerized imports as manufacturing migrates to Vietnam, Indonesia, Bangladesh, India, and other countries in South Asia. The percent of Asia-origin containers arriving in the US from North Asia (including China, Japan, and Korea) versus South Asia has dropped from 86 percent to 76 percent since 2005, as trade with South Asian nations has expanded, according to IHS Markit.
But the forces working against the landscape of globalization in which container shipping has thrived are growing stronger. “Momentum towards a more collaborative world order that rested on an increasingly connected global economy … is now going in reverse,” Yergin writes. “The world has become more fractured, with a resurgence of nationalism and populism and distrust, great power competition, and with a rising politics of suspicion and resentment.” “Globalization doesn’t go away, but it becomes more fragmented, and more contentious, adding to the troubles along the already troubled path to economic growth.”
Trans-Pacific container lines boost October capacity
Trans-Pacific container lines will boost capacity by at least 25 percent over the next three weeks, but continued elevated imports will still force some US shippers to pay more for guaranteed equipment and priority loading.
According to Sea-Intelligence Maritime Analysis, space availability on vessels leaving Asian load ports this month will improve as carriers deploy extra-loaders and reinstate blank sailings, increasing capacity 26 percent to the West Coast and 31 percent to the East Coast compared to same four-week period a year ago. The capacity increases cover the four-week period that began with Golden Week in China on Oct. 1.
Container lines and forwarders, however, expect Asia imports to remain elevated through November, even if volumes may have peaked in September. US imports from Asia have increased steadily since late June as the economy reopened from the lockdowns implemented during the early days of the coronavirus disease 2019 (COVID-19).
Imports from Asia increased 91 percent between March and August, according to PIERS, a JOC.com sister company within IHS Markit. Total US imports increased 102 percent during that time, compared with a 47 percent gain in March-August 2019.
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Imports of personal protective equipment (PPE), home office furniture, computer equipment, building materials, and now holiday season merchandise are driving the import surge. Also, big-box and home improvement retailers are replenishing stocks that had been depleted this summer.
“The inventory-to-sales ratio is extremely low. There’s still some catching up to do,” Christian Sur, executive vice president of sales and marketing at the non-vessel-operating common carrier (NVO) Unique Logistics International, told JOC.com Monday.
Although capacity in the eastbound trans-Pacific is increasing, space on most vessels leaving Asia remains tight, Sur said. “The premium payer gets on first,” he said.
Container shortages a factor
One of the factors that allows carriers to charge extra fees on top of record-high spot rates of $3,700 to 3,900 per-FEU to the West Coast is a widespread shortage of containers, especially 40-foot and 40-foot high-cube containers.
“All the major carriers are experiencing equipment shortages at Asian ports, with 40-foot high cubes in particular short-supply at Chinese ports,” Container xChange, an online logistics platform, said in a statement accompanying its Container Availability Index (CAx). “Some carriers have started to introduce a ’box priority fee’, which secures equipment availability and is payable at the time of booking.”
A rate and equipment sheet provided by a second NVO listed shortages of a variety of container sizes — 20-foot, 40-foot, 40-foot high-cube and 45-foot — at more than a dozen ports in China and four ports in Southeast Asia. The rate sheet listed charges of $500 to as much as $1,950 per container for priority equipment and guaranteed loading of a container on a specific voyage.
Shippers paying more to guarantee services
Sur said in many instances, carriers quote a “freight-all-kinds” rate at the current spot rate, but with no assurance that the container will be loaded on the voyage that is booked. The carrier will also quote a higher rate that assures the customer the shipment will not be rolled to a subsequent departure.
“Do you want a FAK rate with no roll, or with a [likely] roll? That’s the question you have to ask,” Sur said. Spot rates appear to have stabilized after China’s Ministry of Transportation and Communication (MOT) and the Federal Maritime Commission in the United States in mid-September expressed concern over a series of general rate increases that pushed the West Coast spot rate from $1,678 per FEU on May 22 to $3,863 per FEU last week. The East Coast spot rate increased during that time from $2,543 per FEU to $4,625, according to the Shanghai Containerized Freight Index that is published on the JOC.com Shipping & Logistics Pricing Hub.
Managing director of the NVO JUSDA, Jack Chang, said that since China’s MOT issued its statement, rates out of Chinese ports have stabilized in the $3,600 to 3,800 per-FEU range. He said current spot rates from Southeast Asia are generally $3,800 per FEU or higher.
Sur noted that owing to strong demand from Southeast Asia and the Indian sub-continent, space is tight at transshipment ports in the region. “It’s a struggle to get on the transshipment vessels,” he said.
Driver hiring lags despite September surge in US truck orders
New truck orders may be surging, but trucking employment is not — especially compared with hiring in other transportation sectors. Unadjusted for-hire trucking employment numbers rose by 3,200 jobs in September, a month when FTR Transportation Intelligence says Class 8 truck orders hit 32,000, the highest level of new heavy truck orders since October 2018.
“The Class 8 truck market continues to recover faster and better than expected,” Don Ake, vice president of commercial vehicles for FTR, said in a statement Monday. “This strong order volume suggests fleets believe there will be steady freight growth going forward. Rates have improved, so carriers have the cash, and now they also have the confidence.”
Hiring, however, is lagging in for-hire trucking, although the gains have been bigger than seasonally adjusted numbers indicate. Trucking companies are chipping away at the job deficit created by the implosion of the US economy in March and April, but they are still short of pre-COVID-19 employment numbers and even more critically, year-ago numbers.
Significant job recovery
For-hire trucking companies — local and long-distance, truckload, less-than-truckload, and specialized — have recovered 55,600 of the 88,800 jobs lost between February and April this year, according to provisional non-seasonally adjusted data released Friday by the US Bureau of Labor Statistics (BLS). That is 63 percent of the trucking jobs lost to the recession.
Year over year, an even bigger gap remains: Unadjusted, for-hire trucking has 73,200 fewer employees than in September 2019.
The most recent seasonally adjusted data show a bigger drop from February to April — 96,700 jobs, and a recovery of only 23,800 jobs. But that data, adjusted to remove the influence of predictable seasonal trends, skew the employment picture during an unpredictable, rapid, and deep recession. In particular, the adjustment has depressed the size of job gains.
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That is most evident in the employment numbers in September for the transportation and warehousing sector, which includes truck, air, rail, and water transportation, as well as couriers and warehousing workers, among others. Seasonally adjusted, transportation and warehousing firms added 73,600 jobs in September. Unadjusted, the gain was 154,500 jobs.
Unadjusted warehousing employment increased by 37,500 jobs from August, a result of rising e-commerce shipping, higher US imports, and pre-holiday preparations. Warehousing and storage companies have added 73,200 employees, unadjusted, in the past two months. Seasonally adjusted numbers show an increase of 32,200 warehouse jobs in September.
A large gap between adjusted and unadjusted job numbers is not uncommon in September, when seasonal adjustment pulls the trendline down to account for a predictable surge in seasonal transportation employment as the pre-holiday shipping machine shifts into higher gear. This year the difference is more dramatic, though, thanks to the severity of the recession.
The JOC For-Hire Trucking Employment Index, based on seasonally adjusted numbers, rose to 100.5 in September from a revised reading of 100.2 in August. That indicates trucking employment was basically at the same level it had reached in the fourth quarter of 2006, before the freight recession and Great Recession of 2007-09, after dropping to 98.8 in April.
The good news for carriers, perhaps, is that those new trucks will not arrive for months, giving them time to try to pump up their payrolls. But large carriers have told logistics executives contacted by JOC.com that they are now seating fewer trucks — sometimes as much as 5 percent fewer — than they were when freight demand began to rise in May and June.
The surge in September truck orders reported by FTR — a 55 percent increase from August order numbers and a 160 percent jump from September 2019 — could benefit shippers, not just by relaxing capacity constraints but also by easing pressure on rates. That is if those truck orders are fulfilled. Orders for September could become cancellations, if the economy shifts again.
Carrier profits to surpass H1 2020, but 2021 outlook uncertain: analysts
The container shipping industry appears on its way to deliver an even more profitable second half of the year than the first as spot rates surge and volumes rally, but analysts disagree if the strength will hold into 2021.
A rapid recovery in post-lockdown demand has driven up volume on the trans-Pacific and Asia-Europe trades, with the latest available data from Container Trades Statistics (CTS) showing global volume rose for the first time this year in August, up 1.5 percent year over year.
On top of the strong demand growth, a series of general rate increases on the trans-Pacific pushed the Asia–US West Coast spot rate from $1,678 per FEU on May 22 to $3,863 per FEU last week, according to the Shanghai Containerized Freight Index that is published on the JOC.com Shipping & Logistics Pricing Hub. The East Coast spot rate increased from $2,543 per FEU to $4,625 per FEU during that time.
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Spot rates from Asia to Europe soared to five-year highs last week, with the Shanghai–North Europe rate hitting $1,168 per TEU, up 100 percent year over year. Shanghai–Mediterranean rates reached $1,211 per TEU, up 67 percent from the same week in 2019.
There is little doubt that the third-quarter earnings to be released over the next two months will see carriers take another highly profitable step toward reporting the industry’s best annual financial result in years, predicted by Sea-Intelligence Maritime Analysis to be about $9 billion if rate levels can be maintained.
For instance, Zim Integrated Shipping Services late last month predicted it will have its best two quarters in a decade thanks to the “positive impact of seasonality” through the second half.
But the robust rates are being achieved at a time when economies and consumers are being roiled by the coronavirus disease 2019 (COVID-19), and the extreme uncertainty over the sustainability of this demand is leading to different outlooks from analysts and ratings agencies.
‘Stars aligning’ for carriers?
Patrik Berglund, CEO of rate benchmarking and market analytics platform Xeneta, said after many years of on and off financial struggle, the carriers now had the opportunity to “make this a golden age.”
“I am bullish for the second half,” he told JOC.com. “Demand and rates may cool down from these extreme levels, but from a historical perspective the carriers are very well off, and they have proved they are far more capable of balancing supply and demand than in the past.
“On top of that, the carriers are more capable of holding clients accountable for their MQCs [minimum quantity commitments], so when they over or under deliver, they are moved to the spot market,” Berglund added. “Or the cargo is rolled and still ends up on the spot market.”
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Berglund predicted that demand would slow through 2021, but would not fall as dramatically as in the second quarter of this year during COVID-19 lockdowns in Europe and North America.
Financial services company Jefferies believes “the stars are aligning” for container shipping, with a faster-than-expected recovery in demand and rational capacity management leading to high rates. The investment firm is expecting “imminent guidance upgrades” from the carriers for the 2020 financial year. The better-than-expected performance of the carriers in H2 has prompted Jefferies to upgrade its ratings for Maersk, Cosco Shipping, OOCL, and Hapag-Lloyd.
“For the third quarter, Maersk and Hapag-Lloyd are guiding for a mid-single digit volume decline, but this expectation is now looking relatively conservative after a faster-than-expected recovery on East-West trades, with a 2 percent volume recovery on Asia-Europe in July, and 14 percent volume increase on the trans-Pacific in August,” Jefferies noted.
“For the fourth quarter, various industry sources are suggesting container demand continues to look favorable, after an expected temporary dip during the Golden Week holiday period early October in China, supported by record-low retail inventories in the US and a recovery on the Asia-Europe trade lane,” the firm added. “As a result, financial year 2020 container demand is now expected to fall by only 5 percent, versus the expectation of a 10 percent drop four months ago.”
Ratings revised upwards
Also with a positive outlook was Standard & Poor’s. The ratings agency upgraded Hapag-Lloyd’s rating by one notch, and revised its rating for CMA CGM from negative to positive.
S&P cited Hapag-Lloyd’s stronger-than-expected profitability this year in its upgrade, pointing to the first-half earnings before interest, taxes, depreciation, and amortization (EBITDA) that increased 47 percent to $770 million.
“Furthermore, S&P recognized that Hapag-Lloyd has outperformed its cost-reduction targets, enhanced its operating efficiency, decreased cost per container shipped, and improved its profitability,” the ratings industry noted. “As a result, Hapag-Lloyd has posted above-industry-average EBITDA margins over the past few years. The positive outlook reflects S&P’s view that Hapag-Lloyd has the capacity to further reduce leverage and to increase credit quality.”
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S&P is expecting CMA CGM to report a significantly higher EBITDA in 2020, “due to a less severe decline in global trade volumes than we previously forecast, stringent capacity deployment by container liners, lower-than-expected bunker fuel prices, and CMA CGM's effective measures to steadily reduce costs.”
S&P said it could upgrade CMA CGM further in the next year, provided the carrier did not “embark on any unexpected significant debt-financed fleet expansion or mergers and acquisitions.”
The expectation from rival ratings agency Moody’s Investors Service for container shipping was far less optimistic. “The outlook for the container shipping segment remains negative,” Maria Maslovsky, vice president and senior analyst at Moody’s Investors Service, said in a statement. While conceding that capacity management has kept rates above last year’s levels despite a significant decrease in the bunker price, Maslovsky gave a grim assessment of the container shipping sector. She said the positive rate development could be challenged by a resurgence in COVID-19 infections, endangering fragile demand for finished and semi-finished goods in advanced economies in North America and Europe. “We expect the supply of new vessels in 2020 to be slightly lower than last year with further postponements and cancellations likely, but still exceeding the lackluster demand,” she said. “The recovery is likely to be slow and uneven.”
Mega-ships in the pipeline
Alphaliner estimates that the top nine carriers have 86 ships of 10,000 TEU and above on order, representing almost 1.5 million TEU. “The fact that the global container ship orderbook has dropped to a historic low point with an orderbook-to-fleet ratio of only 9.4 percent does not mean that the introduction of all newbuildings will go smoothly,” Alphaliner noted in a recent newsletter.
Moody’s expects global trade to contract by about 11.9 percent this year on the back of a coronavirus-induced drop in consumer demand and investment in the second quarter, and disruptions along supply chains and shipping routes as a result of ongoing coronavirus lockdowns.
“Consumer demand will recover only gradually in the second half of the year,” Maslovsky noted. “In addition, the pandemic will complicate and possibly delay US-China phase two trade negotiations, and UK-EU, and US-EU negotiations.” Also expressing caution in his container shipping outlook was Lars Jensen, founder and CEO of SeaIntelligence Consulting, who highlighted the extreme volatility of both rates and demand in the industry in the latest Freightos Baltic Exchange monthly report.
“The volatility in demand exceeds any seen previously in container shipping,” Jensen said. “Whereas there was indeed a sharp decline during the financial crisis in 2009, the development both down and up was slower paced and more gradual than what we saw in 2020.” Jensen said the underlying drivers of the volatility would not change anytime soon, with continuing shifts in consumer preferences, rapid swings between deep recession and recovery, ad-hoc sudden implementation of government stimulus packages, and shifts between opening countries and shutting them down again.
“This, in turn, also means that the volatility stemming from these factors will continue to impact the container freight markets, not only for the remainder of 2020, but also into 2021,” he said. “As a consequence, that also means that freight rate stability is not something which should be considered as a baseline outlook for the immediate future.”
Peak season congestion underscores need for ‘buffer’ capacity at LA–LB
Los Angeles and Long Beach marine terminals are increasingly restricted in their ability to dig out of an ongoing surge of imports, signaling weeks — if not months — of congestion until inbound volumes significantly slow.
With the ports of Los Angeles and Long Beach operating at peak utilization over the past three months, marine terminals are struggling to provide the surge capacity needed to accommodate record import volumes expected to continue throughout the fall months.
Those conditions are limiting the ability of terminal operators to foster cargo-handling enhancements such as dual transactions and dray-offs that help truckers increase their productivity. In the longer term, this could be an indication that even with expansion projects scheduled for completion in the next few years, such as this week’s opening of the Gerald Desmond Bridge, marine terminals may continue to be challenged in handling unusually large import surges, according to port planners and marine engineers.
Marine terminals in Los Angeles–Long Beach appear to be operating at 80 to 85 percent utilization, “which means on peak days they are operating at 105 percent of capacity,” said Dan Smith, principal at the Tioga Group. “It’s killing everybody up and down the supply chain.”
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The import surge that began in late June as the US economy emerged from the lockdowns implemented during the early days of the COVID-19 pandemic continues unabated. US imports from Asia moving through Los Angeles–Long Beach in September increased 22 percent from September 2019, according to PIERS, a JOC.com sister company within IHS Markit. Asian imports in September were up 101 percent from March, when shipments plummeted following Lunar New Year factory shutdowns in Asia and demand destruction in the US caused by the coronavirus disease 2019 (COVID-19).
The operational impact of the current surge in imports on cargo-handling at the LA–LB terminals should not be underestimated, said Larry Nye, vice president in charge of port planning at Moffatt & Nichol Engineers.
“It’s a pretty significant increase,” he said. “The impact on the delivery of containers is hard to recover from.” Nye noted the entire supply chain suffers when container terminals become congested.
LA–LB terminals losing their buffer capacity
Terminal planners and marine architects say the LA–LB ports have more than enough capacity to handle cargo flows during much of the year. This buffer allows them to flex up during peak periods in the fall and the pre-Lunar New Year cargo surge each January.
However, the peak season this year differs from previous years. It began in late June with an unexpected surge of personal protective equipment (PPE), home office furnishings, computers, and exercise equipment, as retailers concentrated those imports into Southern California.
Also, non-vessel-operating common carriers (NVOs) told JOC.com retailers shipped holiday merchandise earlier than usual this summer, and the big-box home-improvement stores have begun to ship spring 2021 merchandise early, concerned that vessel space will be unusually tight in January and February before factories in Asia close for the Lunar New Year celebrations.
“This is all happening on the same acreage, with the same number of RTGs (rubber-tire gantry cranes), the same number of top-handlers, and the same number of longshoremen,” said a marine architect who did not want to be identified. The terminals were overwhelmed by imports, forcing equipment operators to stack containers higher and wider in the yards, which limited the maneuverability of the RTGs and resulted in more rehandling of containers to retrieve imports for delivery to truckers, he said.
As the LA–LB terminals reached and then exceeded the preferred level of 80 percent utilization, their “static capacity” for storing containers was compromised, which in turn reduced their “dynamic capacity” to move containers from the terminals to inland distribution centers and rail ramps, Nye said.
Key performance indicators point downward
Key performance indicators at the terminals confirm this analysis. Container dwell times at the terminals in August increased to 3.25 days, up from 2.8 days in July and the highest dwell since February, according to the Pacific Merchant Shipping Association, which represents shipping lines and terminal operators.
Truck turn times have deteriorated all summer, according to the truck mobility report published by the Harbor Trucking Association. Average turn times increased each month from a record-low 58 minutes in June to 77 minutes in September. More disconcerting, the average number of trucks taking more than two hours to complete a transaction was 21 percent, up from 18 percent in August and 14 percent in July, and the highest percentage since February 2019. Such lengthy turn times contribute disproportionately to supply chain congestion, according to Weston LaBar, CEO of the trucking association.
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The terminal congestion this fall is a stark turnaround from the winter and spring months when year-over-year imports each month declined by double-digits from the same months last year, according to PIERS. Space at the terminals was so plentiful that several operators offered to rent it for beneficial cargo owners (BCOs) who could not move their containers to import distribution centers. Those warehouses were filled to capacity with merchandise they could not ship to the stores that were closed because of COVID-19.
Space is still tight at the 1.8 billion square feet of industrial warehouse space in Southern California, said Jon DeCesare, president of WCL Consulting. Productivity within the warehouses is lower because of COVID-19 safety procedures and labor shortages. Also, there is not enough over-the-road truck capacity needed to move merchandise out of the warehouses to retail outlets across the country, he said.
Laden import containers, and the chassis they are sitting on, are dwelling at the warehouses an average of 6.9 days this week, according to the Pool of Pools website maintained by the three major intermodal equipment providers (IEPs) that operate the pool. IEPs say that when street dwell times exceed four days, chassis availability in the region suffers.
With all of these bottlenecks in the Southern California supply chain, truckers are finding it difficult to make appointments for the return of empty container/chassis units to ports when they go there to pick up inbound loads, LaBar said.
“Most truckers still see a large percentage of single transactions,” he said. “We need these reservations to become guaranteed appointments for empty returns and dual transactions.”
Carriers throwing capacity at booming trade lanes
Carriers since July have been rapidly reinstating high levels of capacity blanked in the second quarter as demand began to return rapidly, most notably on the trans-Pacific where US imports are setting records.
The capacity management strategy that has kept freight rates at record levels is being tested by the rapid recovery in demand on the trans-Pacific and Asia-Europe trades, and carriers are being stretched to the limit.
“We have virtually no ships in our fleet that are not at work right now,” Vincent Clerc, chief commercial officer at Maersk, told Supply Chains Reloaded, a webinar put on by Kuehne + Nagel and Maersk, Thursday. “We are managing hand to mouth now to make sure we provide as much speed, capacity, and reactiveness for customers.”
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That was echoed by Hapag-Lloyd CEO Rolf Habben Jansen, who told reporters at a press briefing earlier Thursday the carrier began reinstating blanked weekly capacity on the trans-Pacific in June. By August, the capacity was “well above” what was deployed in the same month last year, he said.
According to Sea-Intelligence Maritime Analysis, space availability on vessels leaving Asian load ports this month will improve as carriers deploy extra-loaders and reinstate blank sailings, increasing capacity 26 percent to the US West Coast and 31 percent to the East Coast compared with October 2019. On the Asia-North Europe trade, capacity will be up almost 14 percent year over year, and 6.5 percent higher on the Asia-Mediterranean routes.
The continued heavy import demand from the United States and Europe has exacerbated a shortage of containers at load ports in Asia. According to online logistics platform Container xChange, equipment shortages across Asia and port congestion in various European and US ports has increased over the last few weeks. Importers in Europe and the US are battling to return empty containers to Asia after the prolonged spike in imports that began in late June following the reopening of their economies after weeks of COVID-19 lockdowns.
“Many of us are struggling with the availability of equipment because we don’t have all the equipment in the right places,” Habben Jansen said. “Equipment is very tight. We have seen the traditional trade patterns disturbed in the past few months that have affected our ability to get containers back to Asia.”
Clerc said Maersk has also been having a hard time repositioning containers to Asia, with congestion at destination ports such as Los Angeles and Long Beach and a shortage of trucking capacity in the US. Imports from Asia through the Los Angeles-Long Beach gateway increased 22 percent year over year in both August and September, according to PIERS, a sister company of JOC.com within IHS Markit.
Volumes from Asia to Europe have also rebounded since the doldrums of April and May, with shipments ticking up 1.6 percent year over year in August, the first month of positive growth since October 2019, according to the latest available data from Container Trades Statistics (CTS).
Higher rates, lower reliability
This surge in import demand from North America and Europe continues to surprise — and challenge — those managing the container transport supply chain.
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“Talking to a lot of shippers in March, they were predicting volume would drop by 50 to 60 percent, especially in April and May,” Otto Schacht, head of sea freight at Kuehne + Nagel, explained during the Supply Chains Reloaded webinar. “But volume came back very quickly, which no one had predicted. When we look into the next few quarters it is difficult to predict anything, and all this uncertainty is having a huge impact on the supply chain. The name of the game now is flexibility.”
Clerc also emphasized the need for flexibility to serve the changing needs of shippers. “The whole conversation with many customers during the second quarter was [about] how to slow down the goods. The whole conversation now is ‘how can you speed up?’ and ‘how can I increase my space allocation?’” he said. “We have moved from putting on the handbrake to putting the pedal to the metal, and this need for flexibility and agility will continue so we can cope with the volatile demand.”
However, accompanying the rising demand are high rates and a sharp decline in schedule reliability by the carriers. On-time performance for carriers on Asia-North Europe in August declined 11 percent compared with July, while Asia-US West Coast on-time performance fell 13 percent in August to 62.2 percent, according to Sea-Intelligence.
The deteriorating service levels were not appreciated by the logistics director for a major global clothing retailer, who asked not to be identified. “August was the worst month for schedule reliability we have seen in a long time, and you can complain — we certainly have — but nothing happens, and rates continue to rise,” the source told JOC.com.
Weekly rates have hit record levels on the trans-Pacific and multi-year highs on Asia-Europe. Average spot rates on the China–US West Coast fell slightly this week to $3,848 per FEU, still up 193 percent year over year, according to the Shanghai Containerized Freight Index (SCFI). Pricing from Asia to the US East Coast remained flat at $4,622 per FEU, double the rate during the same week last year.
China–North Europe rates were also down slightly to $1,142 per TEU, but still almost double the rate this time last year, while China–Mediterranean spot rates were up 66 percent year over year at $1,202 per TEU. The weekly rate movements are tracked at the JOC Shipping & Logistics Pricing Hub.