Date: Tuesday, October 5, 2021
Supply chain woes and port congestion are now getting attention at the central-bank level, given their effects on inflation. Federal Reserve Chairman Jerome Powell recently lamented, “It is frustrating to see the bottlenecks and supply chain problems not getting better. In fact … [they are] apparently getting worse.”
Powell foresees supply chain woes “continuing into next year, probably, and holding up inflation longer than we thought.”
But could shipping logjams last even longer, into 2023, propping up inflation even longer than central bankers expect?
Industry experts speaking to American Shipper, as well as other market players and analysts, are increasingly talking about a scenario in which high ocean shipping costs and congestion could persist throughout next year, if not into the following year.
Timing the top: A guessing game
The Golden Week holiday is now underway in China. At this time in 2020, some market watchers expected spot ocean freight rates to peak just after Golden Week, then fall back. Asia-West Coast spot rates, as measured by Drewry, are triple what they were when those predictions were made, despite a recent dip.
“Timing the top” predictions have slid from Golden Week 2020 to year-end 2020 to Chinese Lunar New Year 2021 to midyear to year-end 2021 to sometime past Lunar New Year 2022. Liner companies have persistently proven far too conservative in their forecasts. Maersk has upgraded its guidance three times this year; current 2021 earnings guidance is more than twice initial expectations.
Timing the market peak appears to be little more than a guessing game amid the unchartered territory of the COVID outbreak and massive fiscal stimulus. As Maersk CEO Soren Skou put it back in February, “Who knows what happens when you get out of a pandemic? I don’t think any of us alive have been in this situation before.”
‘Whole of 2022 may be another peak season’
Nerijus Poskus, vice president of global ocean at digital freight forwarder Flexport, told American Shipper, “We have been in a never-ending peak season. In my opinion, peak season is when there is less supply than demand and there is a backlog building somewhere. And I think we have been in it ever since COVID hit.
“I would say that the shippers that don’t have enough inventory at this time are going to sell out prior to Christmas because of all of the delays,” Poskus said, adding that the current lead time for cargo from Asia to inland U.S. points using non-premium ocean and rail can now be over 100 days.
“I think this chaos will last well into 2022. [Shippers] should expect that the whole of 2022 may be another peak season,” he said, adding, “Importers should expect the spot market to remain high for 2022.”
Container-equipment lessor Textainer (NYSE: TGH) recently held meetings with investors and analysts. The ocean carriers are Textainer’s customers. According to a report from investment bank KBW, “TGH’s customers are saying the congestion is worse than what they were expecting.” KBW quoted Textainer CEO Olivier Ghesquire as stating that “shipping-line customers expect the market to stay intense through 2022.”
Last month, Deutsche Bank analyst Andy Chu predicted that ocean-carrier earnings would actually be higher next year than in 2021. “We feel that there is a material positive surprise to 2022 and 2023 forecasts [for carriers] that is yet to be factored into consensus forecasts,” he wrote.
Port of Los Angeles Executive Director Gene Seroka told American Shipper, “We see a very strong market through the end of this year into Lunar New Year, which is early next year, in the first week of February.
“Then, the major retailers are telling me that after Lunar New Year, we’re going to see a very strong focus on replenishment of inventory. Our inventory-to-sales ratio is the lowest it’s been since the pre-recessionary days. The replenishment concept may take us through the second quarter into the summertime. And if it goes a bit longer than that, we may pivot again into peak season next year.”
The U.S. inventory restocking cycle could be further dragged out by power constraints in China. Output from factories is being curtailed by widespread electricity rationing due to a shortfall of natural gas and coal supplies — making it even more likely that the U.S. inventory replenishment cycle will persist well into next year.
Labor contract negotiations ahead
If the import wave lasts through H1 2022, as expected, a major variable comes into play: The current labor contract between the West Coast dockworkers union and the association representing terminal employers expires on July 1, 2022.
Prior to COVID, the last major congestion crisis in Los Angeles/Long Beach resulted from contentious contract negotiations between the union and employers in 2014-15, leading to a surge in container ships at anchor in Q1 2015.
Using data from the Marine Exchange of Southern California, American Shipper compared 2015 anchorage numbers to congestion figures for 2020-21, measuring from the time anchorages started to fill in each case.
The current anchorage situation has now lasted over three times as long as the 2015 pileup caused by the labor dispute and has already put 4.8 times as many container ships at anchor. The fear going into 2022 is a worst-case scenario of labor-contract-related congestion layered on top of import-driven congestion.
How this could end: Shipping demand factors
The congestion crisis would abate if transport demand declines, either suddenly due to some sort of crisis, or gradually, due to normalized American consumption.
On the demand front, Seroka said, “If we look a little bit deeper into the future, we make it past the delta variant and the mu variant, there will come a day when we start moving more of our discretionary income back into the services sector. We’re not quite there yet. We’re still spending a lot of our money on retail goods. But when we get there, I think we’re going to see a leveling off of imports. It’s not going to go off a cliff, but we’ll see money go back into the services sector.”
Poskus noted that shipping demand could be pared as importers are priced out by transport costs. The longer freight rates stay high, the more U.S. importers — especially importers of low-margin goods — could halt orders as transport costs erase profit margins. “You actually have some importers that will potentially stop ordering because the price is too high,” said Poskus.
Shipping demand could also fall if China’s electricity shortages curb its manufactured-goods export potential. This risk now appears to be weighing on container-shipping stock sentiment. Shares of ZIM (NYSE: ZIM) plunged 12% on Friday and another 12% on Monday.
“The potential for a slowdown has created some apprehension that even a slight easing in Chinese exports could create enough slack in the system to bring freight rates lower,” said Clarksons Platou Securities.
How this could end: Shipping supply factors
The congestion crisis would also abate when transport supply expands enough to exceed shipping demand. The supply side of the equation relates to container equipment, container ships and land-based cargo-handling capacity.
In terms of container equipment, Textainer estimates that Chinese factories will produce a record 6 million twenty-foot equivalent units of new containers this year, triple the pre-COVID output in 2019.
“Olivier believes that production levels in 2022 will see a natural pullback,” reported KBW. “The first signs of this are showing up, and it is not due to lack of cargo demand — that is still at record levels — it is due to the fact that there are limited slots on ships.”
As for new container ships, orders have surged since Q4 2020. The ratio of tonnage on order to on-the-water tonnage is now over 20% for the first time since 2015. But according to data from Maritime Strategies International (MSI), the vast majority of tonnage on order (excluding those for smaller feeder-class ships) won’t be delivered until 2023-24.
Even when new ships are delivered, that won’t solve land-based capacity issues. Indeed, the problem today in the trans-Pacific is not a lack of ship capacity — it’s that there are too many ships arriving for terminals to handle, particularly given limitations of trucking, rail and warehousing.
According to Poskus, “How long will this last? Until effective capacity can start going up, until we start removing some of the bottlenecks at the ports — be it chassis, drivers, etc. — I think this will continue.”
Seroka believes that there will be a new normal, with lessons learned during the current crisis informing future strategies. “I don’t see this ever returning to any semblance of normalcy again,” he acknowledged to American Shipper, referring to pre-COVID normalcy.
“We’ve got to learn to pivot, to scale up and down depending on seasonality and the flow of cargo. The learnings we take away from this episode will make us more resilient. And I think a lot of this is going to be about information sharing [so] we can see upstream better and look around the corners and anticipate things much better than we’ve done so far.”
Shipper contract negotiations ahead
If elevated congestion and spot rates persist through 2022, that brings up yet another concern for shippers. Not only does it bring the longshore contract negotiations into the timeline, it brings the 2022 annual contract negotiations into play.
Annual contract rates rose sharply this year and are expected to increase yet again in 2022. “I think contract rates have only one way to go: up,” said Poskus. That would add to transport-cost inflation and also drive shippers to sign more multiyear contracts with carriers.
Clarksons Platou Securities said, “Contract negotiations between liners and retailers have begun to take shape for 2022 and increasingly there is talk of retailers seeking to secure freight contracts for up to three years. Increased demand for multiyear contracts indicates that liners may very well have a stronger-for-longer earnings profile than previously expected.”
Shipping consultant Jon Monroe called this “a smart move” for carriers because “that would take them through 2024 and get them through the excess capacity available when new ships are introduced.”
According to Poskus, “I think a large portion of the market, maybe 15-20% of the trans-Pacific market, is likely to go for enforceable contracts or multiyear contracts in 2022. You will get significantly better prices than if you signed for just one year. That will obviously be good for your business in year one, but in year three, in 2024, when a lot of new capacity comes in, you have to make sure you’re prepared for potentially high losses.”