For importers buying from Asia and the ocean, intermodal rail and motor carriers transporting their goods to U.S. destinations, this is as busy as it’s going to get this year. It’s also about as expensive as it’s going to get.
But don’t blink, because, although the long-awaited seasonal surge in cargo volume has finally arrived, it will be over by Halloween. What transpires next month will determine the direction of the busiest U.S. trade lane for the coming year.
Freight rates on imports from Asia will almost certainly drop as the trade enters the slack, post-holiday shipping season, but if the decline is especially steep, shippers and carriers can expect a repeat of the 2008-09 shipping season.
U.S. imports from Asia fell like a stone late last year, and just kept dropping, infecting retailers as well as every facet of the transportation spectrum. Retailers and motor carriers went bankrupt seemingly by the day. Financial losses in a range of industries were calculated in the billions — that’s a “b” — of dollars. Carriers in all modes parked their ships, trucks, trains and planes by the thousands.
While Asia-to-U.S. cargo volume is down about 20 percent this year, the decline in ocean freight rates was even more precipitous. The rate quoted to cargo consolidators in Hong Kong for shipping a 40-foot container to Los Angeles was about $2,000 per 40-foot container in November 2008; by July, it dropped below $900 per FEU.
Although the Hong Kong spot rates published by Drewry Shipping Consultants do not necessarily reflect service contract rates for steady shippers, they are a good indicator of market trends.
Carriers in the eastbound Pacific this year readily tore up their contracts one or more times and lowered their freight rates to maintain the customers they had.
For now, however, carriers appear to have regained their footing. Vessels are full, a reflection of both the short peak season and carriers’ efforts to cut overcapacity by idling hundreds of vessels, an effort that has spread across the transportation modes.
Truckload carriers in the United States are starting to see rates stabilize after a long decline this year, according to a report from equities analysts at Longbow Research, and air freight carriers are seeking their own “rate restoration” programs after cutting at a double-digit pace this year. Air France-KLM announced last week it would drop 40 percent of the freighter capacity this winter that it ran at the same time last year.
Brian Conrad, executive director of the Transpacific Stabilization Agreement, the ocean carrier discussion group, said he does not expect rates for the container lines to drop sharply in the winter months.
The TSA last week issued voluntary guidelines calling for rates to increase by $800 per 40-foot container and also an additional $1,000 per FEU for intermodal shipments to interior U.S. destinations and on all-water services from Asia to the East Coast.
The TSA also set a peak season surcharge of $400 per FEU effective Aug. 1, 2010.
Shipping lines have not experienced a meaningful return on their assets since 2007, Conrad told The Journal of Commerce’s Canada Maritime conference last month. Carriers in November may waive the peak-season surcharges that have been in effect since September, but shippers should not expect rates to drop precipitously as they did last winter, he said.
This year’s peak season exhibited some of the features of a traditional peak season, at least on the ocean side. Holiday merchandise from Asia began crossing the docks at major U.S. gateways in September, and volumes grew strongly into October. There were reports of occasional “rolling” of cargo as some vessels were overbooked and the shipments had to wait for the next sailing.
That hasn’t been the case on the landside, however, where there has been little or no peak for intermodal rail and trucking companies, and even if it comes, it won’t stretch as long as in recent years. China celebrated its National Day for the entire first week of October to commemorate the 60th anniversary of the founding of the People’s Republic.
That forced U.S. retailers to place most of their Christmas orders by the end of September. Those shipments began to reach West Coast ports last week, and are scheduled to arrive at East Coast ports this week. The peak season will be over by the end of the month.
Conrad is somewhat bullish on the direction of freight rates because of the resolve carriers showed over the past two months. When spot rates dropped below $900 per FEU during the summer, one carrier after another announced general rate increases of up to $500 per FEU. Rates on the Drewry spot index since early August have remained near or above $1,400 per-FEU.
Some carriers called the rate increase a peak-season surcharge. Others called it a general rate increase. Either way, the new rates affected approximately 25 percent of the containerized shipments from Asia in September and October. Carriers have been just as resolute in the trans-Atlantic, where rate increases implemented over the past two months have stuck.
Ken Low, director of strategic planning at Seaspan, a large container ship lessor in Vancouver, British Columbia, said two developments are necessary in the coming months if carriers are to begin working toward profitability. First, they must resist another round of massive rate cutting during the slack season. Second, cargo volumes must pick up at least modestly in the coming year so carriers can avoid the huge overcapacity problem they experienced last winter.
Carriers already have taken strategic steps to match vessel capacity in the trade with demand for space. The lines took about 15 percent of their capacity out of service in the major east-west trade lanes linking Asia with Europe and the United States, said Joseph Lee, general manager of operations at China Shipping (Canada) Agency.
Carriers and shipowners also have delayed delivery of about 40 percent of the new vessels on order to give the market time to recover, Lee said.
Shippers called the moves an artificial reduction in capacity, but they enabled carriers to stem losses with a brief period of rate increases in September and October.
The banking industry completed the task carriers began by withdrawing funding for new vessel orders. “Supply will contract because there is no active funding,” said Peter Shaerf, managing director of AMA Capital Partners in New York.
Because the vessel orders were delayed, rather than canceled, the’ day of reckoning will simply be pushed back a few years, and Shaerf expects the supply-demand situation in the Pacific to remain bleak until 2015. However, by delaying vessel orders, scrapping older ships, laying up capacity and forming vessel-sharing arrangements, carriers hope to maintain a reasonable balance between supply and demand through the slack winter months. They expect cargo volumes next spring to begin to pick up along normal seasonal trends.
Carriers anticipate a modest recovery in the global economy, including North America, next year, said Sokat Shaikh, president of Mediterranean Shipping Co. (Canada).
Shaikh based his optimism on growth in recent months in the Baltic Dry Index. The index, which measures bulk shipping rates in key trade lanes for the raw materials used in manufacturing, is “completely devoid of speculation,” he said. Because raw materials shipments are considered a leading indicator, they should translate to increased manufacturing by mid-2010 and an increase in containerized cargo shipments next summer and fall.
Beginning 2009 at around the 770 mark, the index spiked above 4,000 in June and has since leveled off in the mid-2,300 range. It is far below its record high of 11,700 in May 2008.
Although most retailers this year have ordered only those products they expect to sell during each season of the year, the large discount chains have been performing reasonably well, said John Levin, president and chief executive at Kuehne + Nagel Canada. “It’s cool to be cheap,” he said.
For 2010 to turn out better than this year, consumers will have to spend their money in other sectors of the economy as well, such as at home improvement centers. For this to happen, the financial and housing crises must ease.
It is still uncertain if this scenario will play out. Conrad said TSA member lines are waiting for more definite signals before they plan their capacity deployments for the months ahead. They normally have those plans in place by mid-September, but the picture this year is murky. “The industry is operating in absolutely unchartered waters,” Conrad said.
It is certain, however, that carriers will seek a significant rate increase when they enter service contract negotiations with customers next spring. ”
Retailers and large shippers say cargo volumes in 2010 should increase, but nowhere near the magnitude needed to support such a large rate increase. Shippers would likely walk away from any increase of more than $300 or $400 per FEU.
Contact Bill Mongelluzzo at email@example.com.