It’s hard to imagine in looking at the reports of slack demand and plentiful capacity on the trans-Pacific over the summer that a squeeze on shipping space is imminent, but that possibility is looming over supply chain planning this fall. Some shippers in recent weeks voiced concerns that carriers suffering from weaker rates and financial losses will respond by withdrawing trans-Pacific vessel capacity. This in turn could set up a repeat of the chaotic period in late 2009 and early 2010 when ships and equipment were in short supply, rates skyrocketed and relationships frayed.
“It may not be a good thing” for trans-Pacific carriers to drop the peak-season surcharge and keep cutting base rates if that means strings will pulled from the market, said Pat Moffett, vice president of international logistics for Audiovox.
The idea of a late cargo surge this year is one some are taking seriously. The U.S. economy, even as it sputters through the post-Great Recession doldrums, is showing signs of improving in the second half of the year. Lower oil prices, higher exports and the restored flow of automotive parts following the March earthquake in Japan suggest gains in automobile sales, CIBC World Markets Chief Economist Avery Shenfeld told The Journal of Commerce Canada Maritime Conference last week in Montreal.
Many economists are highly skeptical that the U.S. is heading toward a double-dip recession, forecasting instead a lengthy period of halting growth as the political impasse in Washington limits the ability to push a new stimulus into the economy. “We don’t think we’re in a recession today,” Shenfeld said. “We are looking at a couple of years of sluggish economic growth.”
For the trans-Pacific in coming weeks, the looming question concerns consumer demand in the upcoming holiday season. Consumer confidence is weak, even scary, yet the most recent reports on actual sales in stores look reasonably strong. The disconnect is fostering uncertainty, and that threatens to push whatever peak season remains deeper into the latest possible weeks of the holiday shipping window for ocean transportation
“Since January, I have maintained that 2011 would be a late peak season. (This is) partly because I expected low growth in the first half of the year and slightly higher growth in the second half,” said Walter Kemmsies, chief economist of port engineer Moffett & Nichol. Added Jonathan Gold, vice president for supply chain at the National Retail Federation: “This year, retailers have the luxury of importing holiday goods later than last year, which better ensures their inventory levels will accurately meet consumer demand.”
The NRF’s monthly Port Tracker forecasts a surge in late-year containerized imports, saying volume will rise nearly 12 percent in September, 9.5 percent in October and 8 percent in November before growth trails off into the early months of 2012.
Bloomberg picked up on the idea of a late-season surge early this month in an assessment of the possible upside for air cargo carriers FedEx and UPS that concluded, “Retailers may face a last-minute rush to restock their shelves if household spending improves as it did in the 2009 holiday season.”
It’s hardly certain a trans-Pacific capacity crunch will materialize during the rest of this year. With many consumers focused on reducing personal debt rather than spending, joblessness high and the housing market in the tank, retailers are cautious about the holiday season. Bloomberg quoted J.C. Penney Chairman and CEO Myron Ullman, for example, as noting at a Sept. 7 conference that the company has “pulled back a bit” on projections for the holiday season.
Despite fears that carriers will withdraw vessel strings, that hasn’t happened yet. Asia-North America capacity has been drifting downward in recent months but is still up 1 percent from September 2010, according to Alphaliner. Despite first half losses for most container lines, some analysts believe there is no groundswell among carriers to sideline capacity, and there might not be going forward.
Investment analyst Johnson Leung of Jefferies wrote in a recent report, “The carriers may not idle their capacity as quickly as they did in 2009, in our view, because: 1) the freight rates are still 25 percent above the 2009 trough; 2) not all carriers are burning cash; and 3) the lesson learned from 2009 is that idling capacity short term could be costly. We believe idling capacity may be a solution for the sector, but would not expect the carriers to act that fast.”
With the largest carriers stepping up with huge ship orders, such as Maersk Line’s 18,000-TEU Triple-E class ships, carriers’ focus in 2011 has been on market share rather than cash preservation — the very situation that drove them to idle significant capacity in 2009 and set up the capacity squeeze that created such bad memories.
Still, one shipper last week said he experienced his first rolled container in months, and immediately wondered if it was a sign of things to come. If anything, people are on edge.