Shippers seek stability ahead of patchwork COVID-19 recovery

Shippers seek stability ahead of patchwork COVID-19 recovery

With global economic growth screeching to a halt as unemployment surges, shippers will have to throw out the playbook to rebuild supply chains in a world reshaped by the COVID-19 pandemic. Photo credit: Shutterstock.com.

US importers and exporters are cautiously seeking stability — readjusting transportation plans, procurement strategies, and budgets on the fly as the COVID-19 pandemic strips the US and global economies of any measure of certainty for the remainder of 2020. Expectations for capacity, demand, and pricing across transportation modes this year have been shattered amid the rapid spread of COVID-19, resulting in recession.

Contract pricing across modes appears to be flattening or dropping slightly. That does not mean spot prices will not surge periodically and perhaps dramatically in certain modes or in certain regions. However, fractured supply chains are strung back together, revealing gaps in capacity or unexpected upticks in demand. The need for supply chain flexibility and resiliency, long discussed, has been caught in a sharper floodlight by the COVID-19 crisis.

Some shippers are shut down, either by government fiat or because their customers have closed or end consumers are not purchasing their goods. But others, especially manufacturers of essential goods like Procter & Gamble (P&G), which makes a variety of cleaning products as well as hand sanitizer and toilet paper, are running factories at full speed. Additionally, the ongoing e-commerce boom has been turbocharged by homebound consumers.

“There are opportunities to serve as well as challenges,” Jon Moeller, vice chairman, chief operating officer, and chief financial officer of the Cincinnati-based consumer goods manufacturer, said in an April 17 earnings call. P&G’s total shipments jumped 22 percent year over year in March, a month that “was a true test for our product supply planning and logistics organization”, Moeller said.

P&G’s global e-commerce sales grew 35 percent in the first quarter to account for about 10 percent of its total sales. The largest sources of that growth were the US and China, with e-sales in some categories rising as much as 50 percent. “Obviously, the at-home dynamics and the unwillingness to congregate in physical stores is driving a fair amount of that,” Moeller said.

As for a recession in the US, he said, “We’re assuming it’s already here. We may see months of sporadic production suspension due to local quarantines or raw material supply. It’s not just our operations that matter here. It’s those of our suppliers, of contractors, and of our transportation partners. A lot must go right in a very challenging environment, and not all of it will.”

The destruction of demand caused by the reaction to COVID-19 is as immense as it was swift, and for that reason hard to tally. Full or partial lockdown measures to fight COVID-19 affected about 80 percent of the world’s workers, an estimated 2.7 billion out of 3.3 billion people, according to the United Nations International Labor Organization.

In the seven-week period that began Mar. 15, the US unemployment rate has gone from 3.5 percent, a low not seen since 1969, to 14.7 percent, the highest monthly rate on record and just higher than the annual jobless rate in 1940, when unemployment was 14.6 percent at the tail end of the Great Depression. In 2009, at the height of the Great Recession, the jobless rate was 9.9 percent.

Initial hopes that the majority of job losses could be reversed quickly have faded as the difficulty of restarting the US and global economies amid an ongoing and evolving global pandemic become clearer. Supply chain dislocation exists on a strategic and tactical level, with an imbalance in import and export container flow just the first sign of the kind of dislocation shippers and transportation providers face in coming months.

The post-pandemic reorganization of supply chains is likely to see greater diversity in sourcing and more emphasis on regional delivery networks, fueled by a permanent increase in online shopping. That will challenge ocean carriers and shipping alliances, freight forwarders, airlines, and over-the-road trucking operations, especially full truckload carriers.

A patchwork recovery

By all pre-pandemic accounts, 2020 was not supposed to be a recession year. 

In January, IHS Markit, the parent company of JOC.com, expected year-over-year US economic growth to rise from 2 percent in 2019 to 2.1 percent this year. At the time, US business activity was growing at its fastest rate in 10 months. US companies moving goods globally were most concerned by a domestic manufacturing slump, international trade wars, and a potential ballooning of bunker costs under the IMO 2020 low-sulfur fuel mandate.

Then the new and unpredictable coronavirus erupted from Wuhan, China. COVID-19 is still spreading as the US suffers the worst economic contraction since the 1930s, with gross domestic product (GDP) expected to drop 26.5 percent sequentially in the second quarter, according to IHS Markit. US GDP tumbled 4.8 percent in the first quarter, according to the US Commerce Department’s Bureau of Economic Analysis.

Much of the US economy remains shut down, and although some states are reopening for business, a full recovery is distant. “We do not expect real GDP growth to turn positive until the fourth quarter of this year,” IHS Markit said in mid-April. “Economic activity will not begin to improve materially until new US cases of the COVID-19 virus are driven down.”

That leaves importers and exporters tasked with restarting global and domestic supply chains twisted or snapped by the COVID-19 pandemic in a transportation landscape as foreign and confused as if it had been hit by a tsunami, leaving a jumbled mess of assets and ruins in place of the orderly supply lines and relationships they knew as recently as early January.

As COVID-19 retreats in some areas and advances in others, it reveals a tangled web of displaced assets and goods and distressed customers and consumers that will make recovery a long and difficult process. The biggest question for businesses moving goods across the globe is not whether freight capacity will be in short supply, but how quickly demand will return.

A demand shortage for many types of products is developing that will transform the flow of US imports and exports this year, as well as impact available capacity and pricing across transportation modes, from ocean and air freight to trucking and intermodal rail, throughout 2020 and into 2021.

The US economy was shut down state by state, through a variety of restrictions on businesses and individuals to fight the spread of COVID-19, and the patchwork shutdown is starting to give way to a patchwork recovery. Paradoxically, a slower economic recovery may help shippers contain supply chain disruption.

Demand that returns slowly will place less stress on capacity, which may not be in the right geographic location or, in the case of trucks, may have been reassigned to carry more essential commodities during the shutdown.

That would allow carriers, third-party logistics providers, and shippers to reconnect pieces of their international and domestic supply chains more deliberately, with less haphazard haste and missteps than would occur during a more immediate — and much less likely — V-shaped recovery.

Adjusting expectations

Much like the initial outbreak of COVID-19, the economic situation is changing so quickly that it is proving difficult to keep up.

Until mid-April, many importers, port directors, and logistics executives were expecting a powerful wave of imports as ships in Asia began to fill with goods delayed by the closure of factories following the initial outbreak of COVID-19 in China. At the end of April, however, ocean carriers announced more blank sailings and further capacity reductions in May and June.

Imports at US ports now are expected to fall 13.4 percent year over year in April, 20.4 percent in May, and 18.6 percent in June, according to the Global Port Tracker report released on May 8 by the National Retail Federation (NRF) and Hackett Associates. The decline will moderate over the summer, dropping to 9.3 percent in September, the NRF said.

“Volume is far lower than what we would see in a ‘normal’ year,” Jonathan Gold, the NRF’s vice president for supply chain and customs policy, said in a May 8 statement.

Orders for back-to-school merchandise from US retailers, Gold and the NRF agreed, are not as extensive as in past years. That is not surprising, perhaps, with schools in 45 states and the District of Columbia closed for the academic year and no clarity on when they will reopen. Back-to-school is the second-busiest period in the eastbound trans-Pacific after the peak holiday shipping season.

“Shoppers will come back, and there is still a need for essential items, but the economic recovery will be gradual, and retailers will adjust the amount of merchandise they import to meet demand,” Gold said.

“Much will depend on consumers’ willingness to return to spending,” added Hackett Associates founder Ben Hackett.

Retail chains and online retailers selling essential and non-essential merchandise, such as Walmart and Amazon, are still shipping large volumes, but those moving furniture, apparel, and other non-essential goods have all but shut down new orders. The logistics director at a US furniture importer said the company has enough inventory to last until the third quarter and, as a result, expects its import volumes to be down 40 percent this year compared with 2019.

That is exacerbating an equipment imbalance that already has been influenced by blank sailings in the Asia–Europe and trans-Pacific trades. Forwarders warn that containerized cargo flows are becoming more uneven across key markets as the extensive blank sailings further amplified a natural container imbalance between headhaul and backhaul trades.

Equipment imbalances are likely to extend to drayage and trucking as well, especially as carriers change customers; reallocate chassis, tractors, and trailers to accounts still offering freight; lay off or furlough drivers; or simply park their trucks and shut down, as a large number of smaller trucking companies and independent owner-operators are expected to do.

Trucking and logistics executives still say they are expecting a steep contraction in over-the-road capacity that will send truck rates, especially in the truckload sector, up sharply, potentially lifting all surface transportation rates. However, that scenario is based on a strong uptick in freight demand that would depend on a level of consumer confidence that has yet to be seen.

Contract caution

Huge cuts in capacity have helped ocean carriers keep freight rates stable despite the plunge in shipments. Between February and June, nearly a third of all container shipping capacity worldwide was withdrawn from the shipping market, according to Walter Kemmsies, economist and chief strategist for industrial real estate developer JLL.

“When that happens, you start running into supply problems,” he said. Shippers in the US “don’t just import consumer goods, but supplies for manufacturing. A demand shock [caused by a sudden interruption in demand for goods] can produce a supply shock. Government policies to minimize disruption aren’t well coordinated, so this is becoming a real example of chaos theory”.

To avoid as much chaos as possible, beneficial cargo owners and ocean carriers are quickly wrapping up annual shipping contracts with pricing close to last year’s rates, despite the drop in freight demand.

“Shippers are looking for stability in the current environment,” Uffe Ostergaard, president of Hapag-Lloyd America, told JOC.com. 

The consensus is that all-inclusive contract freight rates from Asia this year will be $1,300 to $1,400 per FEU to the West Coast and about $2,300 to $2,400 per FEU to the East Coast. By comparison, the freight rates in the 2019–20 contracts that expired in April were about $1,400 to $1,550 per FEU to the West Coast and $2,400 to $2,550 to the East Coast.

Ostergaard said shippers “don’t want to see too many things shuffle around in their supply chain, and with the high level of uncertainty and volatility, most rely on established partnerships”.

Similar thinking is evident in US trucking contract talks, where many shippers are opting for a continuation of last year’s rates or pushing off decisions until there is more market certainty.

In trucking, “contracting used to be a pretty stable world. You did your annual bid, locked rates in, and let it run on autopilot”, said Ben Cubitt, senior vice president of procurement and engineering at third-party logistics provider Transplace. “But in the last six years, it’s become more dynamic. Instead of looking at the next six months, it’s the next six weeks.”

“You’re not seeing the traditional annual negotiations like you do in ocean shipping in truckload this year,” John Haber, founder and CEO of transportation consultant Spend Management Experts, said in an interview. “There’s great uncertainty about what’s going to happen. What trucking companies are going to be in business” once the economy restarts, he asked.

“If you have good consistent volume that can be forecast, you should definitely be negotiating right now and lock in pricing,” said Haber. “But the problem is volumes are up and down. It’s not great to be negotiating through volume declines, and 80 percent of my clients' volumes are down. Trying to stabilize where you are is the best thing you can do right now.”

Surge before the fall

On land, US truckload spot rates surged in March as demand for essential consumer goods skyrocketed, and then they collapsed just as quickly in April, with no short-term recovery expected. The national average dry van spot rate, excluding fuel surcharges, dropped to $1.50 per mile in the week that ended May 3, a four-year low, according to the load board operator DAT Solutions.

Truckload spot rates in many long-haul lanes plunged as non-essential businesses shut down, cutting business for freight brokers and the smaller trucking companies that often depend on them for volume. Rates below $1 per mile led to accusations of ‘reverse price gouging’ and truck driver protests in Washington, DC, and several state capitals.

Smaller carriers have a bumpy road ahead of them, especially if they depend on spot market loads. In April alone, 88,000 for-hire trucking jobs were lost in the US, according to the Bureau of Labor Statistics, wiping out four years of employment gains in the sector.

Derek Leathers, president and CEO of Werner Enterprises, the sixth-largest US truckload carrier in terms of revenue, is among those who believe trucking capacity will be leaner on the other side of the pandemic. “I think capacity rationalization is going to happen, and it’s happening already,” he said in a recent earnings call. “There are carriers parking trucks or downsizing fleets actively, given where rates have gone, especially in the spot market, so capacity will be leaving.”

Still, demand may not exceed even lower capacity levels for some time. “It’s obvious supply chains are really discombobulated at this point,” said Ed Smith, director of distribution and PortSide services for Cookeville, Tennessee-based less-than-truckload carrier Averitt Express. “I think our large retailers are beginning to ask how robust their inbound supply chains need to be.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.