Slight easing of fragile trans-Pacific masks risks ahead

Slight easing of fragile trans-Pacific masks risks ahead

The ports of Los Angeles and Long Beach have again postponed implementation of an emergency storage fee on long-dwelling containers. Photo credit: Shutterstock.com.

Long-dwelling containers at Los Angeles-Long Beach have been reduced by one-third, resulting in the ports on Monday announcing their third postponement of an escalating fee on those boxes. Sweeper ships are collecting thousands of empty containers for repositioning to Asia, freeing up scarce chassis. With two of the four major trans-Pacific spot indices showing rates falling, and big-box retailers declaring themselves stocked and ready for the holidays, some general business media in recent weeks declared the worst to be over. “The US supply chain crisis is already easing,” read a Bloomberg headline on Nov. 18.

But many transportation executives, citing a highly fragile and capacity-constrained system and ongoing surprises tied to the unpredictable trajectory of the COVID-19 pandemic, are unwilling to go nearly that far.

Even if there are encouraging signs currently, including an easing of West Coast rail delays, many believe any positive trend is precarious at the very least. That is in part because time is short: The system will experience a slow season respite of only a few months in the first half of 2022 before the onset of the next peak holiday season, when heavy volumes could again overwhelm systemwide capacity.

And such temporary relief may never even materialize.

Some believe the strong demand, together with retailers’ need to rebuild very low inventories, could translate into an especially busy stretch leading into the Chinese New Year on Feb. 1, meaning there’s the potential for little or no respite before the onset of the traditionally busier second half of the year. That’s exactly what happened this past spring, when US imports from Asia spiked to an all-time record of 1.72 million TEU in March 2021, according to data from IHS Markit, rather than declining after the peak holiday shipping season, as was typical prior to the pandemic.

“We expect an uptick in the market in December and January. Importers want to beat the Chinese New Year squeeze. Do not expect a lull until after the Chinese New Year holiday,” said analyst Jon Monroe.

Looking further ahead, economists believe the robust consumer spending that is a key driver of gridlock at the ports will end 2021 with strong momentum due to accelerating US wage growth and the stock market near record highs. The new Omicron variant of the coronavirus could change the outlook, but economists last week noted that wage levels in the second and third quarters of 2021 showed robust increases, resulting in “notably more income generated over the last two quarters than previously estimated, and this will support stronger spending going forward,” according to IHS Markit.

“Households enjoy healthy balance sheets and supportive financial conditions, while labor income continues to rise at a solid pace,” according to an IHS Markit advisory on Nov. 22. “High inflation is dampening consumer sentiment, but with little impact to date on spending behavior.”

“We’re not seeing anything from the major customers that we serve that indicates any material drop-off in volume next year, with most forecasting continued growth,” Flexi-Van Leasing CEO Ron Widdows told JOC.com in mid-November.

Carriers announce blank sailings

Further contributing to doubts about near-term easing of supply chain woes is the difficulty of unwinding port congestion and the disarray in carriers’ vessel networks. Liner services thrown wildly off schedule, ships waiting in queues or sailings voided, together with containers sitting at terminals or outside warehouses for longer than usual, has all served to slow the normal circulatory movement ships, containers, and chassis. Carriers last week announced 24 voided trans-Pacific sailings, reflecting continuing port delays. All of this removes capacity; Sea-Intelligence Maritime Analysis reported on Nov. 28 that 12 percent of vessel capacity globally is tied up in port congestion, a figure that has changed little in recent months.

Critically, the system being stretched thin prevents it from recovering when unexpected shocks occur, as has been occurring with greater frequency since the onset of the pandemic.

“Clearly the overall transport chain is pretty fragile,” Widdows said. “The things that caused localized dislocation in the past; a typhoon, an earthquake, a bad snowstorm, a major bridge washes out, now cascade into impacting global flows. It doesn't take much to throw things off kilter, and you're going to have those kinds of events going forward, so it’s reasonable to expect ongoing volatility in the operating environment.”

That highlights the inherent unpredictability that is perhaps the biggest change in the supply chain environment since the onset of COVID-19, making any prediction of a return to normalcy highly dubious.

Pre-pandemic, when shocks occurred there was enough of a gap between them that the system had time to recover. The Japanese Tsunami in 2011, West Coast labor unrest in 2014-2015, the Hanjin bankruptcy in 2016, and the surge in US imports in late 2018 ahead of threatened Trump administration tariffs all disrupted normal container flow, but the system always recovered.

Not so since the onset of COVID-19, when a system already straining to handle record volumes was repeatedly buffeted by setbacks such as the Suez closure in March and the partial Yantian port closure in June, which only dug a deeper hole. The spread of the Omicron COVID-19 variant is all the evidence that anyone needs of continuing unpredictability and the potential for recovery to be delayed further.

The lack of any excess capacity further undermines the ability of the system to quickly steady itself in the face of further shocks. The current very low levels of global schedule reliability show how deep the hole already is; in the immediate pre-COVID-19 years reliability hovered between 70 and 85 percent, but last week stood at 34.4 percent, approximately the level where it has been all year, according to Sea-Intelligence. The record 86 container ships waiting for berths at the ports of Los Angeles and Long Beach on Nov. 13 — pre-pandemic, the number was typically zero — further underscored the extreme state of disequilibrium. As of Friday, there were 57 container ships at anchor and loitering off Los Angeles-Long Beach, with more offshore, and half of them were mega-ships with capacities each of more than 10,000 TEU, according to the Marine Exchange of Southern California.

“I am not seeing stability return and I am not seeing reliability improving, but not seeing it deteriorate either. The congestion that we’re seeing around world is pretty much the same as it was a month or two ago,” said Simon Sundboell, CEO of eeSea, which tracks container movements and schedule reliability.

Warehouse capacity an obstacle

Anyone who doubts how tight capacity is in the face of continuing congestion — and how vulnerable the system remains to further shock — need only look at current spot freight rates. According to Freightos, the spot rate from China to the US West Coast in mid-November stood at $14,100 per FEU versus $3,700 per FEU a year ago, while the China to Europe spot rate is $14,000 per FEU versus $2,200 per FEU a year ago.

There is indication those rates have declined in recent weeks. The Freightos trans-Pacific eastbound spot rate is down more than 30 percent since early September from a high of over $20,000 per FEU, but sources tell JOC.com the reason is more tied to production interruptions and the end of the peak holiday season — i.e., issues at origin — than any greater normalization of flow. There is little evidence that containers, chassis, or ships are starting to circulate more normally, which if and when that happens would release bottled-up capacity back into the market, putting added pressure on rates.

Other factors also argue for caution in predicting an easing of the supply chain crisis. Warehouse capacity was not prepared for consumer spending swinging heavily toward e-commerce in 2020, creating five to seven years of e-commerce growth in a single year, and thus is struggling to catch up to process a new normal of higher volumes. This is due to the time needed to plan and build new facilities, as well as labor shortages across the economy, including in warehouses.

There is virtually no distribution space available for lease in some major markets; the vacancy rate in Southern California stood at 0.8 percent at the end of September, while industrial rents in that market are up 40 percent versus a year ago, according to commercial real estate firm Colliers.

In a total Southern California industrial real estate market of 1.65 billion square feet, one client was looking for a 300,000-square-foot building; there were only two buildings of that size available across the entire region. The tightness is not helped by the longer time it is taking to get distribution centers built.

“Clients are looking for more space,” said Jack Rosenberg, Colliers’ national director for logistics and transportation.

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