Date: Thursday, February 11, 2021
With global supply chains buckling under huge order volumes and a confluence of disruptive forces, shippers should prepare for 2021 to be a perpetual peak season across all transport modes, logistics experts warn.
Competition for freight space is so fierce that companies will need to pay exorbitant premiums to get on planes and vessels and apply more flexible shipping methods to avoid delays.
And the unusual move to keep factories open during the long Chinese New Year holiday means freight transportation systems won’t have a chance to draw down shipments stacking up at ports and loading docks.
“There will be no slack season this year,” said Brian Bourke, chief growth officer at Chicago-based SEKO Logistics, during a video briefing for reporters on Monday.
How upside down is the market? With container vessels overbooked, shippers paying record rates and surcharges to secure space, and congested terminals forcing vessels to wait days for a berth, SEKO’s ocean freight sales team is now selling airfreight as an alternative mode for customers that need goods quickly, he said.
And airfreight, which is normally about eight times more expensive than ocean transport, is no panacea. Demand is expected to grow by double digits after recovering from the depths of the coronavirus crisis last summer, while cargo capacity remains about 20% below 2019 levels because of the extensive reduction in passenger flights.
On major trade corridors, planes are flying full and rates are two to three times higher than normal. Load factors on a key trans-Atlantic route, for example, were higher in January — above 80% on average — than in November and December, typically a much busier shipping period, according to CLIVE Data Services. So many flights are full that some carriers are telling customers they cannot guarantee capacity commitments.
Port congestion ripple effects
The import/export bottlenecks are all related to the COVID pandemic.
Companies are building up inventories that diminished when the global economy locked down last spring. Demand for medical supplies from China to combat the virus remains high. Meanwhile, consumers have shifted spending from services to things they can enjoy at home or outdoors while observing social distancing rules. Hot items on e-commerce platforms include treadmills, hot tubs, TVs, surround-sound systems, bicycles and ski equipment.
The U.S. Congress is also preparing a new coronavirus stimulus package, with more unemployment benefits and $1,400 checks for people making $75,000 or below, which is likely to spur another round of robust e-commerce purchases for goods made in Asia.
The V-shaped recovery in container shipping, with some 5 million twenty-foot equivalent units (TEUs) pushed from the first half of the year into the second half, has strained the industry’s capacity to the limits. Industry analysts say every available vessel is deployed, but it’s not enough to handle such a quick shift in volume.
Meanwhile, COVID infections and quarantines have reduced the number of available longshoremen in the Los Angeles-Long Beach port complex to work ships and get containers on trucks, leading to massive port congestion. Ships are falling behind schedule as they wait more than five days for a berth. It can take another five days to get containers through the terminals to surrounding warehouses or onto trains, with drivers waiting up to two hours to enter the gate.
There are currently 31 container vessels anchored offshore, with an estimated 310,000 TEUs worth of stranded goods, according to the Maritime Exchange of Southern California.
East Coast, European and U.K. ports are experiencing similar challenges, to varying degrees.
On-time reliability for vessels has dropped to 45%, according to Denmark-based maritime research and advisory firm Sea-Intelligence ApS. And the latest monthly report from Ocean Insights shows record-breaking rates of containers being rolled from a scheduled vessel to a later departure, with industry leader Maersk posting a 14% increase in January year-over-year.
Vessel delays and a shortage of containers are having a corresponding effect in China, where shipments are also piling up.
Normally, shipping volumes hit a lull in late December, tick up for a few weeks in February and early March to make up the slack following the Lunar New Year and then ease back until late summer as companies stock up for back-to-school and the holidays.
Factories typically close during Chinese New Year for more than a week as people flock from coastal cities to inland provinces to celebrate with their families in what is considered the largest human migration in the world. Ocean carriers temporarily pull many vessels from their schedules to avoid sailing half empty. When businesses reopen, there is huge transportation demand to move postponed shipments. The schedule puts pressure on businesses to tightly manage inventory, production timelines and shipping deadlines to make sure they can deliver during the seasonal rush before and after the holiday window.
No shipping lulls
But the Chinese New Year holiday, which begins Friday, won’t provide much breathing room for transport providers this year. Chinese authorities are discouraging “nonessential” travel to contain a new wave of the coronavirus. Many manufacturers have announced they will continue production through the holiday period to clear backlogs of orders.
Congestion problems are expected to persist without the normal pause to help clear out shipments.
Last year, ocean carriers cut 112 vessel departures at Chinese ports, or about 20% of capacity. Through Monday, there were only 63 blank sailings announced for the holiday period, and the primary reason was because of the huge rotation issues, not a decrease in demand, said SEKO’s Akhil Nair, vice president of global carrier management and ocean strategy.
Air backlogs could also grow because a large number of freighter flights were canceled weeks ago in anticipation of a dead shipping period, according to Flexport, a San Francisco-based freight management company.
Chinese COVID safety measures are impacting freight transport in other ways too.
Truckers arriving at coastal ports from western provinces have to pass three different levels of COVID testing along the journey and the outbreaks have raised fears that domestic travel could be completely locked down by the government like it did a year ago, said Nair, who is based in Hong Kong.
Truck capacity is also scarce in logistics hubs because there was a large exodus of drivers who left before the Lunar New Year in anticipation of possible travel restrictions. Ocean Insight reported the truckers are subject to mandatory quarantine by traveling home and in some regions, especially the south, up to 95% of truckers will be unavailable.
And shipping along the Pearl River delta is disrupted after barge and small-vessel operators that feed the deepwater ports stopped accepting cargo for 10 days or more because of additional COVID testing in South China and Hong Kong. The entire region is switching to trucks to try and move cargo all the way to the Yantian International Container Terminal in Shenzhen and the Port of Hong Kong.
On Sunday, the Yantian terminal increased the cutoff time for deliveries to container yards from two days to a week before vessel departure in an effort to reduce truck queues that stretch for miles.
Meanwhile, there are no empty containers for trucks to take back because shipping lines only plan to release them five days before vessel departure. With nowhere to go, cargo is piling up in warehouses.
“You have a chicken-and-egg syndrome. If you get a container, you can’t get it back in for the ship. And if you don’t get a container anyway, which you were waiting for, you can’t move your cargo out,” Nair said.
He predicted the confluence of transportation woes — terminal restrictions, driver shortages, continued factory production and limited vessel supply — will reach a crescendo next week.
“These conditions will choke factory-port connectivity starting in about two weeks, with inventory backups lasting for months,” Ocean Insight said.
And that’s not all.
Vietnam’s Tet holiday coincides with Chinese New Year and many Chinese-owned factories there plan to keep operating this year, which will lead to large backlogs because shipping lines prioritize putting empties first in China. Intra-Asia feeder routes that carry raw materials and semi-manufactured goods for assembly plants also get second-class treatment so shipping lines can use scarce boxes for the high-yielding transoceanic markets.
Nair said if the equipment shortages continue in Vietnam and other countries, orders that left China when U.S. tariffs increased during the Trump administration could temporarily pivot back to China.
“Post-Chinese New Year is not going to be a recovery but a continuous elongation of this situation,” Nair said. “We’re not going to see a big spike in bookings because the bookings are already there, but we don’t have the equipment or the trucks [to ship goods] or the port won’t let them in.”
The situation underscores how China’s ports are intertwined with those around the world.
“It’s the first time in my career that I’ve seen almost every trade area in a peak,” Nair said. “Latin America, Africa, the Middle East and India — everyone is peaking at the same time, so no carrier’s equipment ratio is going to be OK and cover this type of continual peak.”
Some retailers are suggesting their ordering may normalize by June, but even so, logistics providers say there will be a strong shoulder season until the volumes start building in August for holiday in the West.
“It looks like there may be issues all year because you get to a certain point and then you get back into peak again,” Jim Monkmeyer, president of transportation for DHL Supply Chain North America, said in an interview. “I don’t think we’re going to catch a break.”
Pay the piper
Until very recently, ocean shipping was a commodity business with carriers undercutting each on price for market share. But ongoing financial hardship led to massive consolidation and capacity discipline, with some carriers offering differentiated services.
Last summer, carriers offered guaranteed vessel loading or terminal discharge for $800 to $1,750 per box. Today, the definition between standard and premium service is blurred on the import side. Just getting cargo on the ship requires a premium and those slots are going for $1,750 to $4,000, said Chris Capodanno, SEKO’s vice president of product development and strategic client solutions.
U.S. exporters, who normally enjoy lower rates because of less backhaul demand, are also forced to pay premiums to secure a box because carriers are so keen to get empties back to China as fast as possible. Agriculture producers and other shippers, often located far inland for ports, are crying foul, saying the carriers are violating shipping law by abandoning service commitments.
U.S. domestic intermodal and rail shipments out of Southern California are also experiencing heavy delays. DHL’s Monkmeyer noted that transit times to the East Coast could take a week longer than normal, which is impacting several technology companies that manufacture in the region or across the border in Mexico.
Railroads, much like parcel companies did during the pre-Christmas rush, are capping how much volume shippers can send through the system and charging a $1,500 surcharge for any containers above their limit, Monkmeyer said.
The latest TEU tender forecast on FreightWaves’ SONAR freight data platform shows imports into the Port of Los Angeles declining over the next month and increasing in Long Beach. The data suggests the conditions for greater congestion and tight truck capacity continuing, or even increasing, since Long Beach typically handles freight going out via long-haul truck and rail. And total outbound loaded rail container volumes out of the ports and Inland Empire are elevated as well, according to SONAR, which may partially explain why outbound truckload volumes have trended down in the past couple of weeks.
SEKO Logistics is managing the chaos with a number of efforts. At the top of the list is accurate forecasting.
Capodanno said the freight forwarder is partnering with customers to conduct rolling four- to eight-week demand forecasts and adding new digital tools to manage the entire booking process, from price quote to allocation. The company also closely monitors suppliers’ production schedules at origin to nail down cargo-ready dates for pickup at the port.
When the 40-foot containers arrive on the West Coast, they are immediately trucked to a cross-dock, sorted by destination and loaded into 53-foot domestic containers for expedited truck transport to other cities across the country.
Shipping lines are beginning to divert traffic to other ports and logistics providers like SEKO are helping customers find alternate routes, but the ports of Oakland and Seattle-Tacoma are also forcing vessels to wait as back ups begin.
Express shipping services have become a popular middle options between airfreight and standard multi-port schedules, but their value is decreased if there is no room to unload.
Peloton (NASDAQ: PTON) last week said it would spend $100 million to address supply chain bottlenecks that are slowing delivery of its bike equipment, including for airfreight and fast-ship services.