Diverging indicators offer no clarity in trans-Pacific

Diverging indicators offer no clarity in trans-Pacific

Spot ocean rates from Asia to the US West Coast have seen 11 week-to-week declines so far this year compared with 12 during all of 2021. Photo credit: Shutterstock.com.

The eastbound trans-Pacific is an increasingly bifurcated container market. While volumes and rates are moderating out of Asia and vessel space is materializing for the first time in months, container flow downstream in North America is slowing further under the strain of a surge in inventory buildup seen clearly in retailer earnings over the past month.

That inventory buildup is resulting in loaded import containers piling up at marine terminals and railheads or sitting unopened outside distribution centers, absorbing chassis and leaving them unavailable for exports or repositioning empty boxes to Asia. Carriers report lengthening stretches between when containers are picked up and then delivered back to them empty, raising concerns about container availability in Asia during the coming peak holiday shipping period.

As one example of the growing dysfunction within the US, a worsening shortage of marine chassis recently forced Norfolk Southern to change how it calculates free time and assesses container accessorial fees in 14 inland cities, putting pressure on drayage truckers to provide trucker-owned chassis to deliver import boxes to cargo owners.

Veteran practitioners say that despite declining US growth — IHS Markit, parent company of JOC.com and part of S&P Global, forecasts real US GDP growth to slow from 5.7 percent in 2021 to 2.5 percent this year — they nevertheless see container flow within the US as deteriorating and unlikely to normalize until 2023. Although some see a modest peak season approaching over the summer months, they interpret a recent easing of trans-Pacific volumes, weakening freight rates, and increased vessel space availability as likely to be reversed in the face of Shanghai’s reopening and peak season volumes beginning to move ahead of the 2022 holiday season.

“In May, carriers were chasing NVOs [non-vessel-operating common carriers] to gain cargo due to falling volumes caused by China lockdowns. Before May, it was more challenging to add named accounts to contracts,” Patrick Fay, cofounder and CEO of Boston-based forwarder BOC International, told JOC.com. “Now we can add them to some of our spot rate contracts and get space under those contracts.

“As China reopens, we see the beginning of an expected summertime surge,” Fay added. “Shanghai has seen increasing rates for the past three weeks. We believe this upward trend will continue and encourage BCOs [beneficial cargo owners] to ship as soon as possible because rates are heading higher because of the China reopening, many blank sailings in June, and the traditional season peak.”

Some believe, however, that the peak season will underwhelm, which will ease pressure to some extent once containers are offloaded in the US, but not significantly.

“We may see a much more muted peak season as a result of the current conditions,” said Kurt McElroy, executive vice president of forwarder Kerry Apex. “The many conversations I’ve had with mid- to large sized BCOs point to a contraction in previously forecast volumes. Many publicized reports on over-inventoried retailers are weighing on much of the market.”

Weak eastbound indicators

Signs of emerging weakness in the eastbound trans-Pacific trade at this point are obvious to market players. James Caradonna of M+R Forwarding observed that spot rates to the US East Coast have seen 16 week-over-week rate declines in the first 22 weeks of this year, compared with just nine sequential declines in all of 2021. Spot rates to the US West Coast have seen 11 week-over-week declines year to date, compared with 12 during all of 2021.

“We are also seeing, for the first time in a long time, carriers start to make weekly rate adjustments — which is a fundamental indicator of oversupply in certain spot markets,” Caradonna said.

Others see a similar situation. “The spot market rates are below the BCO contract rate, and this is always a dangerous position. This circumstance only happens when there is more space than cargo,” said Hayden Swofford, independent administrator of the Pacific Northwest Asia Shippers Association. “We are all waiting to see what the pent-up cargo flow will be from Shanghai as it opens. I don’t think there is a big ... backlog of ready cargo.”

But shippers looking for indications that weakness at origin will translate into fewer delays at destination will likely be disappointed. Many believe it will be months before any such upstream weakness translates into a long-awaited normalization of container flow within North America. A good part of the reason is that volumes — the root cause of the container supply chain breakdown seen since 2020 — have yet to materially ease. US containerized imports from Asia were up 31 percent in the first four months of 2022 versus the same period in 2019, according to PIERS, a sister company of JOC.com within S&P Global.

Contact Peter Tirschwell at peter.tirschwell@ihsmarkit.com and follow him on Twitter: @petertirschwell.