December is usually when carriers in eastbound Pacific lanes suspend services and lower freight rates for the winter slack season, but in a year that has been anything but usual, the calendar is proving an unreliable measure of the market. Shipping lines this season are keeping capacity constant and even announcing peak-season surcharges to take effect on Jan. 1.
Even as container lines project a pullback in volume ahead of the Feb. 3 Chinese New Year celebration, many industry executives expect carriers to implement only selective capacity cuts for several weeks until volume picks up again in March.
It’s the latest sign of a shipping market that has seemingly come unmoored from familiar seasonal patterns, one where railroads were waiting for the steep slide in boxcar and intermodal volume that usually comes as temperatures fall, where air freight rates were falling heading into the peak season and where domestic truckers were waiting for their own big boost in business from the recovery.
The market has been the most unpredictable of all in container shipping, where carriers and ports were still reporting volume growth into November and vessel operators were announcing rate increases even after spot pricing slipped backward in the early fall.
Capacity is remaining on the seas in part because demand is there, but industry observers say carriers also want to avoid the scrutiny their capacity-slashing actions attracted last winter from the Federal Maritime Commission. The FMC is wrapping up an investigation into carrier capacity cuts of about 10 percent in late 2009 that caused overbooking of vessels and sent eastbound freight rates soaring in early 2010.
But U.S. imports from Asia this year have remained strong into November, and it appears volume may increase in January as factories in China work overtime to fill orders before they shut down for the two-week Lunar New Year celebration that will fall relatively early in 2011.
APL last week reported its global container volume grew 3.5 percent in the four weeks ending Nov. 12 over the previous four-week period. The Port of Baltimore set a record for automobile trade in October, Port Metro Vancouver set a container volume record that month, and the Georgia Port Authority said container imports grew nearly 12 percent from September to October.
“Potentially, there is enough cargo in the market that no one wants to pull ships,” said Alan Baer, president of cargo consolidator Ocean World Lines in Lake Success, N.Y.
For carriers, the market in early 2011 may bring an early test of their resolve to stick by statements that they are prepared to pull ships at short notice if demand turns downward.
For shippers, the carrier decisions to keep vessels deployed means they are unlikely to face the major ocean capacity headaches of early 2009. But strong demand in the first quarter could pressure some domestic distribution networks, particularly rail, if capacity there doesn’t keep pace. And the rapid-fire rate increase notices from Maersk Line, Mediterranean Shipping and CMA CGM signal carriers are resolved to keep prices moving upward.
Side Bar: Westbound Market Exports Confidence.
Cargo volume in 2010 has exceeded most analysts’ expectations.
According to PIERS, a sister company of The Journal of Commerce, U.S. trans-Pacific imports grew 18.2 percent in the first nine months of 2010 over the same period last year, including 21.9 percent growth in the second quarter and 18.9 percent in the third quarter. The depressed trans-Pacific import market, which fell 21.6 percent at its low point in the first quarter of 2009, finally turned the corner in this year’s third quarter, with containerized imports exceeding the total in the same three-month period of 2008.
The Global Port Tracker published by the National Retail Federation and Ben Hackett Associates projects U.S. imports from Asia for the entire year will be up 15 percent over 2009.
Many industry analysts believe the early surge in imports was caused by retail industry restocking following the 2008-09 recession and moves by importers to pull goods across the Pacific earlier to avoid potential capacity shortages after vessel space was strained early in the year. Many predicted import growth would fall into the single digits in the second half of the year as consumer spending tailed off.
But consumers haven’t curtailed their spending — far from it. Retail sales over the Thanksgiving weekend increased 6 to 7 percent, according to retail industry reports, after a paltry 0.5 percent increase in November 2009.
Also, according to the Retail Industry Leaders Association, consumer confidence this November was up, and retailers are carrying higher inventories compared to last year in anticipation of strong holiday season sales.
Global Port Tracker noted retail sales for November would be up 9 percent year-over-year. Inventory-to-sales ratios edged up in November, but the ratios are nevertheless at a 10-year low. This suggests “extremely tight supply chain management” by retailers, Hackett said, and should open the door to growing imports early next year as retailers move to rebuild their inventories.
Carriers seek to profit in this environment by keeping capacity in line with projected cargo volumes. Only one weekly service from China to the U.S. West Coast, operated jointly by Evergreen Marine and China Shipping Container Line, is officially scheduled to be suspended during the winter months.
Ship sailings, of course, are only part of the capacity equation these days. Trans-Pacific carriers are likely to manage capacity by slow-steaming their vessels and in the winter months will pull vessels on an “ad hoc basis,” such as when factories close for the Chinese New Year celebration, said Frankie Lau, director of marketing at Orient Overseas Container Line. The ad hoc capacity cuts shouldn’t be long enough or extensive enough this winter to significantly affect the market, Lau said.
But carriers believe the drive to ship early before the Chinese New Year celebration will trigger a mini-spike in cargo volume in late December through January. They are responding by announcing general rate increases or peak-season surcharges for January. “Literally everyone has announced increases, including the non-TSA (Transpacific Stabilization Agreement) lines,” Baer said.
|The announcements provide the required 30-day advance notice of rate increases by filing the rate hikes with the Federal Maritime Commission and generally add around $400 per 40-foot container to base rates, though some carriers are asking for as much as $600. Carrier executives say if volume indeed spikes as they believe, the rate increases will stick. If strong volumes don’t materialize in January, there probably will be no rate hikes. With more capacity in service, however, carriers likely will be more anxious to make up for the added winter operating costs with higher charges later in the year.
Bob Sappio, senior vice president of Pan American trade at APL, said customers aren’t giving them much visibility into their projected order books. This uncertainty appears prevalent throughout the supply chain. The only certainty is that retailers and manufacturers don’t want to be caught with bloated inventories the way they were in late 2008 and early 2009.
That’s why even strong holiday sales this year aren’t likely to push a big spike in imports early next year, Hackett said. He predicted a “slight surge” in imports prior to Chinese New Year and modest growth in imports when the factories return to operation in mid-February.
Despite the relatively positive sales numbers and improving surveys of consumer confidence, the nation’s high unemployment numbers, which unexpectedly jumped to 9.8 percent in November from 9.6 percent, and the depressed housing market leave too many uncertainties for the year ahead. Retailers are looking at those broader economic indicators as they plan their inventories, said Jonathan Gold, vice president of supply chain and customs policy at the NRF.
Carriers are responding to these uncertain market conditions by announcing proposed freight rate increases for 2011 service contracts that are modest compared to past years.
The TSA, the discussion agreement of 15 of the largest lines in the eastbound Pacific, announced voluntary guidelines calling for a $400-per-FEU increase on shipments to the West Coast, and $600 to inland destinations and to the East Coast. The TSA also proposed a peak-season surcharge of $400 to run from June 15 to Nov. 30, 2011. Proposed increases were twice that in past years when carriers believed the market would be strong,
Ronald Widdows, NOL Group president and CEO, told the Textile and Apparel Importer Trade and Transportation conference in New York last month that cargo volumes in the eastbound Pacific are projected to increase 6 to 10 percent in 2011 over this year. Container availability, a serious problem early this year, shouldn’t be an issue in 2011, he said.
Industry research analyst AXS-Alphaliner projects global vessel capacity will grow about 10 percent next year. If carriers manage capacity by removing ships during slack periods, and they slow-steam their vessels as they did last year, there could be relative supply-demand equilibrium in the eastbound Pacific.
Rate increases at the level proposed by the TSA also would restore financial equilibrium to carrier balance sheets. Carriers collectively lost $15 billion in their global operations in 2009, but they will earn about $13 billion this year, according to Alphaliner. The proposed rate increases in 2011, which take place on May 1 for many contracts, should wipe out the losses from late 2008 through 2009.