Supply chain turmoil will last longer than many thought, forcing significant upgrades to container freight rates and carrier profit forecasts, according to Drewry’s latest “Container Forecaster” report.
A longer-than-anticipated period of supply chain disruption has forced Drewry to again raise its forecasts for container freight rates and industry profitability in its latest forecast report.
Port handling
Drewry said while the container shipping network is under intense pressure, a lot of goods are still getting through, eventually. Drewry expects world port handling to increase 8.2 percent this year, or 7.2 percent against pre-pandemic levels in 2019.
This is a downgrade on its previous guidance of 10.1 percent given three months ago. That’s because disruption in the supply chain crisis has worsened as cases of Covid-19 temporarily shuttered some Chinese terminals, while extreme weather events have compounded the problem.
Drewry does not expect to see operations normalize until the end of 2022.
For 2022, Drewry has retained its previous 5.2 percent guidance for global port handling, although rising inflationary pressures, partly as a direct consequence of the supply chain inefficiencies that have supercharged transportation costs, stand out as a downside risk.
Drewry, an independent provider of research and consulting services to the maritime and shipping industry, is predicting that fleet growth will lag behind demand growth this year and next, but that the story will flip from 2023 onward as recent orders start to be delivered. The anticipated mismatch between supply and demand in 2023 presents a risk to carriers of overcapacity returning to the market.
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“The real question is whether they will care,” the report said. “Three years of previously unthinkable and outlandish profits could very well desensitize them to such trifling concerns.”
Freight rates
Stronger-than-expected spot rate movement in the third quarter and a longer supply chain recovery timeline are behind Drewry’s reason to upgrade the outlook for average global freight rates–spot and contract–for 2021 to 126 percent, which is an upward adjustment from 47 percent in its June forecast.
For 2022, spot rates are expected to decline, but there will be a significant increase in contract pricing, leading to an increase in average global pricing of about 6 percent.
One of the consequences of the supply chain imbalance has been record carrier industry earnings before interest and taxes (EBIT), which Drewry estimates topped $39.2 billion in the second quarter, an almost 11-fold improvement from $3.6 billion profit in the same quarter a year earlier.
“Carriers are now expected to make eye-watering EBIT of $150 billion in 2021 and slightly more again in 2022,” Drewry said.
The report noted that carriers have not been sitting on their profits, instead utilizing them in a variety of ways, including debt repayment, shareholder dividends and large scale newbuild and equipment investment.
“While they are unlikely to convince many shippers of their intentions, carriers have to at least demonstrate to regulators that they are doing everything in their power to improve the flow of goods, now and in the future, or potentially face unwanted operational measures being imposed,” the report said. “With regulators breathing down their necks for evidence of unethical activity, lines are on the defensive and recent moves by some to cease further spot rate increases need to be viewed through the prism of a [public relations] war.”
Drewry noted that it is not carriers’ fault that because ports keep them waiting, sailing schedules are in disarray and access to container equipment is limited. Nor is it the fault of ports and terminals that they have become parking lots for ships and containers because Covid made them less able to turn efficiently, and then have them cleared from site quickly due to fewer truck drivers and low warehousing space.
Separately, Drewry reported Thursday that its composite World Container Index (WCI) inched down 2.2 percent to $10,129.72 per 40-foot container or equivalent (FEU) this week, but remains 289 percent higher than a year ago.
The average composite index of the WCI, assessed by Drewry for year-to-date, is $7,056 per FEU, which is $4,593 higher than the five-year average of $2,464 per FEU.
Freight rates on Shanghai to Los Angeles dropped 8 percent, or $999, to reach $11,173 and Shanghai to New York fell 5 percent, or $739, to $15,110 per FEU. Rates on Shanghai to Rotterdam nudged up 2 percent, or $249, and stood at $14,807 per FEU.
Drewry expects rates to remain steady in the coming week.
“Before the pandemic, our customers were getting containers shipped for around $1,500,” Shabsie Levy, founder and CEO of Shifl, said in a report supplied to Sourcing Journal. “Some agents took advantage of the price increases and congestion by buying up capacity, and now they are looking to unload it as quickly as possible. For shippers with inventory still in China, access to capacity at lower rates is great news. But the big question now is whether or not there will be products to fill these containers.”
Levy said rates could go even lower, with Shifl, a freight forwarder, already seeing long-term rates for FEUs from China to the U.S. go below $5,000.
Container xChange’s Container Availability Index (CAx) shows the most expensive average pickup charges for one-way container leasing are seen in China, with a range of $2,000 to $4,500, which indicates the growing difficulties exporters face to ship containers from China to be able to make it for the holiday shopping season.
Europe’s Container Availability Index values have surpassed China. The CAx said pressure on the Northern European ports, such as Hamburg, Germany; Antwerp, Belgium, and Rotterdam, Holland, is now so high that the container availability has exceeded the availability at the Chinese ports.
“We witness slight/marginal dip in container trading prices at few locations like Ningbo, but the broader trend across the ports is that the prices are constantly increasing across the world,” Dr. Johannes Schlingemeier, co-founder and CEO of Container xChange, said. “The CAx values suggest that there is probable container demand at almost every port that we monitor. Blank sailings are on the rise. The situation will stabilize only after the end of next year, according to our forecasts.”
Seroka’s take
Interviewed on CNN International, Port of Los Angeles executive director Gene Seroka pointed out the 30 percent increase in trans-Pacific trade.
“It’s like taking 10 lanes in freeway traffic and moving them into five when the cargo gets into the port,” Seroka said. “Ship and vessel productivity are up 50 percent year on year and the average exchange–load and unload of each vessel that calls here in Los Angeles–is over 11,00 container units. That’s the best in the world.”
“But we’re having difficulty absorbing all this cargo into the American supply chain, and the U.S. importer is sitting on that cargo longer than ever here at the port,” he said.
Roughly 76 container ships are anchored outside the terminals of Los Angeles and Long Beach, Seroka noted, averaging 10 days to get berthing rights at the twin port complex. While the port has extended its hours, 30 percent of truck appointments are going unused, he added. This is due in part to truck driver underutilization, even as dock worker productivity is at all-time highs and warehouses are overflowing with goods.
Seroka said the port has been working with officials at the Biden administration, including Secretary of Transportation Pete Buttigieg, on ways to alleviate the crunch, and noted the considerable funding appropriated for port, rail and road improvement projects in the pending infrastructure bill in Congress that offer long-terms solutions to the congestion and backlogs.
Global Port Tracker
Also on Thursday, the monthly Global Port Tracker report from the National Retail Federation (NRF) and Hackett Associates said imports at the nation’s largest retail container ports should remain at near-record levels this month, but could see a slight dip from last year’s unusually high figures as congestion slows the movement of backed-up cargo.
“The cargo is there for larger gains at several ports, but congestion issues are impacting fluid operations,” Jonathan Gold, vice president for supply chain and customs policy at NRF, said. “Ships will eventually get unloaded, but the pressure is on for everyone to work together to get the containers out as quickly as possible. Retailers are doing whatever it takes to make sure shelves are well-stocked for the holidays, from bringing in merchandise earlier to chartering their own ships. Consumers should be able to find what they need, but it’s always safer to shop early than wait until the last minute.”
Just when people thought things couldn’t get any worse with the logistics supply chain, they’ve been proven wrong, Hackett Associates founder Ben Hackett said.
“From power outages and port shutdowns in Asia to backed-up ships and shortages of truck drivers in the United States, there are few positive signs that the movement of consumer goods or the supply of inputs needed for industrial production is getting better,” Hackett said.
He noted that Covid-19 infections in Asia have slowed the loading of U.S.-bound ships, while shortages of equipment, labor and outbound truck and rail capacity have continued to build congestion at U.S. ports.
Some companies are attempting to circumnavigate the Southern California pileup by rerouting to the Pacific Northwest or East Coast, according to Glenn Koepke, SVP of customer success at FourKites, a Chicago-based supply-chain visibility company with offices in Amsterdam and Chennai, India.
“The challenge is that no port system can take on the volume of L.A.-Long Beach,” he told Sourcing Journal, adding that few if any U.S. ports can handle vessels the size of those that call in the nation’s busiest marine gateway.
Koepke expects the current supply-chain disruption will create a holiday unlike any other. “What we’re going to see is a case where product is not going to be on shelves like we think, or in stores with the availability that we we once knew,” he said. “I do think retailers are going to pass on some of these cost increases to their consumer through elevated pricing, and we’re gonna see a different consumer experience for this holiday season. I just don’t see any way around it, given how big these issues are.” Consumers who believe early-season retail promotions are no more than “false marketing to drive sales” will be in for a rude awakening.
U.S. ports covered by Global Port Tracker handled 2.27 million 20-foot equivalent units (TEU) in August, up 3.5 percent from July and 7.8 percent from a year earlier. That tied March as the second-busiest month since NRF began tracking imports in 2002. May remains the busiest month on record at 2.33 million TEU.
Ports have not reported September numbers yet, but Global Port Tracker projected the month at 2.25 million TEU, which would be up 6.7 percent year-over-year. October is forecast at 2.21 million TEU, down 0.3 percent from the same time last year, when imports surged dramatically as the economy reopened after the first wave of Covid and retailers rushed to meet pent-up consumer demand. The year-over-year decline would be the first since July 2020.
The congestion and disruption come in the middle of the “peak season” for shipping when retailers stock up on holiday merchandise each year, but many retailers began bringing in holiday goods this summer to be sure sufficient inventory will be available, Global Port Tracker said.
November shipments are forecast to be up 2.9 percent year over year to 2.16 million TEU and December is projected at 2.1 million TEU, down 0.2 percent. Looking into 2022, January is forecast at 2.17 million TEU, up 5.7 percent from January 2021, and February is projected to be up 1.4 percent year over year to 1.9 million TEU.
For the full year, 2021 is on track to total 26 million TEU, up 18.1 percent over 2020 and a new annual record topping last year’s 22 million TEU. Cargo imports during 2020 were up 1.9 percent over 2019 despite the pandemic.
Global Port Tracker provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach and Oakland, Calif., and Seattle and Tacoma, Wash., on the West Coast; New York/New Jersey; Port of Virginia; Charleston, S.C.; Savannah, Ga., and Port Everglades, Miami and Jacksonville, Fla., on the East Coast, and Houston on the Gulf Coast.
Additional reporting by Jessica Binns.