With the empty container being the starting point for any shipment, it looks unlikely that the dislocation of assets driven by a coronavirus-fueled drop in Asian volumes will ease until July at the earliest.
While things were looking more favorable just a few days ago, the coronavirus disease 2019 (COVID-19) outbreak is nearing contagion levels and threatens to derail the global container fleet balance for at least another 90 to 120 days. However, with some careful planning and preparation, liner operators and shippers can minimize some of the expected bottlenecks.
The growing risk of equipment dislocation is a function of increased blank vessel sailings, which commenced during Lunar New Year to match lower container demand and will continue through April based on recently published service schedules. This vessel capacity reduction, coupled with frustrated cargo that has been sitting idle at Chinese ports and factories, will have far-reaching implications on getting the supply chain back to a stable state. Some refrigerated (reefer) cargo moving inbound to China, for example, has been sitting idle with little or no movement in the past few weeks. The chronic reefer plug shortage at Chinese ports has further exacerbated the situation, with some reefer cargo being discharged at other ports to prevent round-trip cargo voyages.
Recent congestion at Chinese ports and the lack of cargo movement has had a significant impact on traditional container flows and equipment repositioning. While Chinese factory capacity is estimated to be only at 40 percent of normal output, the expected surge in cargo demand and inventory replenishment could be further impacted by availability of raw materials and labor shortages.
The ‘bullwhip effect’ snaps
Peak surge demand cycles may overwhelm the reduced capacity at the sourcing locations, putting further stress on the equipment supply, which is already scarce due to export-import imbalances and loaded containers not moving to final destination or cargo being offloaded. The blank sailings, while necessary for the ocean carriers to match tonnage with demand, will have a long-lasting supply chain “bullwhip effect” with bulges of cargo demand not being smoothed out in the network until late second quarter or mid-summer.
While most of the equipment availability concerns related to the coronavirus has been focused on China, the US export markets may have similar challenges as result of the lack of inbound cargo moving to the interior export regions. It is anticipated that the lack of inbound cargo may create equipment availability stress points on key export markets such as the US Gulf and Ohio Valley regions.
Further compounding east-to-west repositioning issues, service suspensions along the Canadian National Railway due to pipeline demonstrations have also impacted empty container movement back to the Pacific Northwest from Canada’s interior, which may impact availability in this key export market.
Empty evacuation from the US West Coast to Asia has also been a challenge, with empty containers now building up at most terminals. Most carriers are keeping idle vessels in Asia in preparation for the cargo recovery and empty evacuation not being possible given the lack of fluidity in Asia. Reefer equipment shortages are also expected based on forward-looking forecasts for locations not adequately fleeted for the reefer seasonality.
The production of new reefer equipment is now resuming, but the delivery of new equipment is several months behind original schedules due to reduced capacity and the factories being at only 40 to 50 percent of planned production throughput.
Container production resuming slowly
Container factories in China are only operating at 50 percent of capacity, and some facilities continue to be limited in coming back online due to raw material supplies being trapped in supply chain choke points.
With the spreading of coronavirus and the ensuing container shipping implications, there has been a surge in new container production demand as a result of carriers taking a forward-looking view of equipment planning. This strategy is simply a proactive step to having adequate container supply once cargo shipping returns to normal conditions.
Since late 2019, container production and factories have been reducing capacity by operating one shift, which has further impacted new production availability and has created production backlogs due to recent spikes in requested line time. New production delays and commissioning challenges are expected to extend well through July.
Container demand catalysts have included the upward trend in container pricing and, in some cases, ocean carrier interest in securing equipment positions in preparation for the hyper-surge period. This period is expected to be reached when China resumes to a full workforce and raw materials are back in normal flow cycles. In connection to these container demand catalysts, carriers have been advancing container orders to avoid paying higher prices in the future.
In addition, the demand for run-of-fleet containers, which are short-term master lease agreements with lessors, has also been on the rise. This is a result of carrier initiatives with an objective of being prepared for an export surge in the Americas and exports from Asia.
Easing the pain
Although some have a rather bleak outlook for container equipment balance symmetry over the next few months, there are some proactive steps ocean carriers and shippers can take to be better prepared — and have equipment better positioned — for the deluge of cargo that is expected in the coming weeks.
While several of the lines have taken equipment positions early with manufacturers and equipment lessors, even before the coronavirus outbreak, to avoid equipment shortfalls during the seasonal push, there are still opportunities for lines to take advantage of equipment safety stock to avoid booking shutouts.
Using master lease agreements with equipment lessors to utilize run of fleet equipment also provides a backstop for lines to have proper equipment fleet scale to cover one-way moves or backfill for export from the US to Asia until equipment supply stabilizes. Leveraging master lease conversion leases is also another way for container operators to meet equipment requirements until new production equipment is available. This will avoid delays of new equipment deliveries jeopardizing lost bookings.
Contact Gregory Tuthill at Gtuthill@seacubecontainers.com.