Market conditions – The absence of predictive indicators that would reflect the start of the highly anticipated second half recovery is troublesome and suggests recovery will be pushed out well into the 3rd quarter. The lack of substantial ordering by U.S. import companies is forcing factories throughout Asia to reduce labor and significantly reduce raw material orders. A typical lag of 30-45 days between placement of orders and sourcing raw materials for production will push the anticipated rebound out further due to the lag between these two activities.
The one positive outcome of the downturn in volume is a nearly 100% recovery on port and rail congestion including a positive impact on chassis availability. A capacity reset back to a pre-pandemic environment should allow supply chains to manage any import surge that does materialize later this year.
Market rates – We are now at the “bottom of the trough” in terms of short-term market rates on the TPEB trade. This excludes many inland rail locations due to the high cost associated with intermodal rail destinations. Delivery of new vessel capacity combined with lack of demand will impose downward pressure on freight rates for the majority of 2023. However current market rates are below breakeven levels for ocean carriers and are likely to increase from the current unsustainable levels.
We experienced similar situations in the past when ocean carriers have implemented general rate increases to prop up rates only to see them fade back down. Due to current market conditions, short-term rate volatility will likely increase through the spring and into the early summer months. We anticipate more short-term rate peaks and valleys going forward until market clarity becomes evident.
The first rebound to short-term market rates will potentially be April 1st or more likely April 15th as ocean carriers push to conclude the annual long-term fixed rate contracts set to expire on April 30th. The fear of a lingering short-term market usually helps to expedite contract signings as shippers try to avoid shipping at higher short-term rates then what is being offered in the contracts sitting on their desk. We do anticipate rate increases to be pushed through with mitigation from tariff filing. How long will it take before downward pressure from lack of demand pushes the short-term market back down? Expect market rate volatility to increase going forward!
TPEB Fixed Rate Contract Negotiations – As ocean carriers look to secure demand for all their freshly painted new vessel deliveries through long-term fixed rate negotiations, rate levels are becoming more transparent in the marketplace. The fixed rates being offered are certainly higher than current short-term market rates however this gap is anticipated to narrow when and if freight volumes rebound. The current gap between short-term market and fixed rates are approximately $500-$700 per 40’ container higher. For this reason, some importers are not as anxious on signing on the dotted line, not because of the current gap, but more due to the uncertainty on whether the current gap will linger for most of the contract season as opposed to a few weeks prior to the holiday shipping season and again before Chinese New Year. Many importers are looking to take advantage of the fixed rates since they are more palatable compared to historical levels and will provide some piece of mind on providing some predictability to their supply chain that has been missing for over two years.
April Blank Sailings – The current low market freight rates will indirectly have repercussions on service reliability that only recently has made great strides on resetting back to pre-pandemic conditions. As ocean carriers carefully attempt to balance capacity with demand to bring ocean freight rates back to compensatory levels, the result is usually a negative impact on service predictability as schedule integrity goes out the window. Ocean carriers are canceling approximately four dozen voyages through April - an ominous sign since blank sailings are scheduled based off customer forecasts.
Ocean Carriers Tariff Changes on Demurrage & Detention – Importers and exporters alike are applauding the announcement by multiple ocean carriers on their new tariff filings concerning demurrage and equipment detention free time provisions. The two largest ocean container carriers MSC and Maersk recently announced changes to their tariffs along with a couple others. These ocean carriers will no longer bill port demurrage when a container is inaccessible due to port closure for whatever reason, regardless if the container is already in demurrage! This is really the big news, as historically a container that eclipses the last free day provided in the governing tariff, will incur demurrage charges regardless if the terminal is closed due to a holiday, weekend or act of god. The FMC has indicated that the original intent of demurrage was to dissuade shippers from utilizing the invaluable terminal capacity for storage, and recently ruled that invoicing shippers for storage charges when the importer and or exporter does not have access to the container is against the intention of the policy.
ILWU & PMA Labor Negotiations Make Little Progress – Lack of announced progress on the ongoing labor contract negotiations has prompted over 200 industry stakeholders to request governmental intervention last week to help mediate an agreement. In the short-term the potential for a lockout by employers or a strike by labor remains extremely low, however the longer both sides work without a contract in place, importers and exporters are in the crosshairs for absorbing the indirect impact of “tick for tack” actions by both parties.
A recent example, due to lack of a contract in place, labor has arbitrarily decided to stop staggering their lunch breaks in some Southern California terminals creating longer queues in the afternoon and fewer appointments to return containers. The result is wait time charges by dray carriers, additional yard storage charges and chassis fees that importers and exporters hold the responsibility to pay since the dray carrier and or chassis provider is not responsible for the delays. The sooner a contract is in place the better. As the one-year anniversary of the expiration of the current contract inches closer to July 1st, the likelihood of additional short-term disruptions resulting in accessorial costs that could otherwise have been avoided in the market increases.
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