While high consumer demand has consistently driven a worldwide supply chain backlog defined by container capacity shortages and soaring shipping rates, the source of this demand is hardly spread evenly across the globe.
In fact, despite the delays at seaports worldwide, global demand growth for shipping containers only increased by 0.5 percent on an annualized, two-year basis, according to Container Trades Statistics (CTS).
“Globally speaking, demand growth is not outside the norm. We’re not seeing the global demand,” said Alan Murphy, CEO and founder of maritime trade advisory service Sea-Intelligence. “What we are seeing is a North American demand.”
In a recent webinar hosted by information and data services provider IHS Markit, Murphy cited CTS data indicating that on a two-year annualized basis, North America has seen nearly consistent 10 percent demand growth since September 2020. When comparing on a two-year basis from 2021 to 2019 numbers, the demand figures surpass 20 percent.
Since September 2020, North American imports have surpassed at least 15 percent volume growth over the same month in 2019, with February 2021 totals topping out at 28 percent. Of the seven regions measured, only South America and Oceania saw consistent import demands that surpassed 10 percent growth, but both regions are relatively insignificant in size. While North America accounts for 17.4 percent of all global import demand, South America drives just 6.4 percent of demand, while Oceania trails with 2.7 percent.
A shift from spending on services to durable goods is the culprit for this excessive, continuous North American demand, with consumers clamoring for items from motor vehicles and parts, home furnishings and household equipment, to recreational goods and vehicles.
All of these categories contribute to overcapacity in containers and the need for more large vessels out at sea. In March, durable goods spending was up nearly 40 percent over 2019 levels, the highest two-year jump since the start of the pandemic. In May, the spending growth dropped to below 30 percent, according to data from the U.S. Bureau of Economic Analysis.
At the same time, services spending has yet to reach 2019 levels yet, although it is getting closer to normalcy. In 2021, services spending has improved from an 8 percent decline in January to a less than 3 percent decline in May.
“To put it very harshly, when lockdowns prevented the U.S. consumer from spending as much as they used to do on services, the caricature of somebody lying at home on the couch and ordering stuff off Amazon is not entirely incorrect,” Murphy said. “There has been a massive increase in durable goods purchases.”
As far as non-durable goods go, apparel and footwear spending increased nearly 20 percent over 2019 totals in March, before leveling out to under 14 percent growth by May.
Retail inventory-to-sales ratio reaches historically low levels
Murphy called the recent stimulus spending the second-biggest factor behind U.S. demand, but noted that even as the added spending dries up, the supply chain constraints wouldn’t end there because “retail inventories have been drawn down to unprecedented levels.”
In fact, retail inventories have dipped from $660 billion in March 2020 to approximately $600 billion in March 2021, which are similar to 2015 levels, according to U.S. Census Bureau data.
The important “retail inventories-to-sales ratio” has now dropped down to almost 1.0 from 2019 pre-pandemic levels that floated around 1.5, which means that the amount of money being sold is the same that is held in inventory. When putting these numbers in perspective, this is the lowest ratio in U.S. Census Bureau data calculated since 1993.
“We’ve never been this low,” Murphy said. “Never. That needs to be corrected. Inventories are pretty much empty.
“Even if this massive boom in consumer demand ended tomorrow, there would still be three to six months of inventory restocking, which will continue to drive the traffic in the chain.”
Carriers put ‘everything that can flow’ into Transpacific trade
Whether cargo is being shipped to the West Coast or the East Coast, the ships are bound to be filled to the brim with record container numbers. The last four quarters saw 300,000 TEUs (twenty-feet equivalent units) shipped to the West Coast per week for the first time, but this most recent quarter completely surpassed that, soaring to 400,000 TEU shipments per week, according to Sea-Intelligence data.
The East Coast has a similar story, with the previous four quarters seeking an average of 170,000 TEUs shipped per week, before skyrocketing to 225,000 containers per week in the present quarter.
“Everything that can flow is being thrown into Transpacific trade,” Murphy said. “There’s a lot of things that you can be upset with in the moment, but carriers not putting in supply, putting in capacity is not one of them. These are higher levels of supply than we’ve ever seen before.”
As such, the late arrival of vessels has been a common problem since the accelerated consumer demand kicked in during the summer of 2020. Vessels have a lot more work to do to catch up to pre-pandemic levels, which usually varied between 65 and 85 percent schedule reliability from 2015 to July 2020, according to Sea-Intelligence data. As of May, schedule reliability remains slightly below 40 percent, with the average delay for late vessels falling between 5.5 and 6 days per arrival. Late vessels typically had 3-day and 4.5-day delays pre-pandemic.
With limited room, Transpacific contract rates and spot rates have continued to rise, with spot rates gaining more recent attention in reaction to the current market conditions, thus resulting in higher prices.
For example, Murphy cited Xeneta data illustrating that while West Coast contract freight rates totaled nearly $1,250 per FEU (forty-foot equivalent unit) in September 2020—these rates jumped to more than $2,600 by May. But the spot rates were north of $3,400 per FEU in September 2020, and since climbed up to $4,500 in the same time period.
“Recently signed contracts are pulling up quite a bit and we’re not seeing them coming down, which again gives us no indication that this is coming to a close anytime soon,” Murphy warned.
‘Do your homework,’ supply chain consultant urges
Daniel Krassenstein, global supply chain director at sourcing and procurement consulting firm Procon Pacific, advised retailers to build up their inventory when they can, if they’re promising advanced same-day or next-day fulfillment, because “you really can’t predict where the next hiccup is coming from.”
Krassenstein encouraged attendees, whether they were freight forwarders, cargo owners, or importers, to “do their homework” and understand the ocean carrier ecosystem, including which carriers are in which alliances, such as 2M, the Ocean Alliance or The Alliance.
“If you’re trying to ship from Tianjin, China to Tacoma, Wash., or from Nhava Sheva, India to Los Angeles, it behooves you to understand what strings are out there, which alliances have which carriers, which forwarders have contracts with which carriers and build relationships with carriers in each of those alliances,” Krassenstein said. While this doesn’t necessarily guarantee that companies secure a spot on a ship, it increases the chance of beating competitors who also have done their due diligence in seeking extra space, he said.