This article is from the Sea Logistics: Unprecedented Current Conditions and Uncertain Future session during ISRI2021. If you would like to watch this session in its entirety, you can still register for ISRI2021 here. This session, along with others, are available to attendees on demand.
Unprecedented: That’s the term people like Billy Rooney, vice president of strategic development at Kuehne + Nagel, use to describe the current sea logistics operating and rate conditions. In his 47 years in transportation management, he’s never seen such a cacophony of issues including unreliable ships, congestion, asset shortages, extended transit times, and significantly disrupted supply chains.
During the session, Rooney and Steven H. Moss, nonferrous metals broker Stanton A. Moss’ director-at-large, shed light on this complicated puzzle and what the new normal may be for shippers.
Many of the challenges stem from the pandemic and the uneven economic recovery. At the beginning of the pandemic, U.S. spending sharply declined as people stayed home. But spending, particularly product spending, rose quicker than anticipated. Those products required transportation, causing massive volumes of imports into the U.S., Rooney says. Import volumes affected ocean transportation and U.S. exports. Shifting global trade also affected carriers. After volumes fell in the first half of 2020, carriers were caught off guard when trade rose in August–September.
COVID-19’s impact on U.S. retail inventory also affected import volumes. Historically, the ratio of inventory to sales has been 1-to-4. When sales fell early in the pandemic, that ratio increased. As the economy recovered, inventory plummeted, bringing the ratio to 1-to-2, the lowest in 30 years. In response, retailors are working to rebuild inventory which further adds to cargo volume, Rooney says.
Freight Rates and Containers
Historically, containers were considered “almost free,” Rooney says. Customers could hold them for extended periods of time. However the massive volumes of purchased products, and a quicker-than-anticipated increase in global trade, together with ships not meeting their shipping timetables and delays like the recent backup in the Suez Canal has led to a container shortage. The container shortage means shippers worldwide compete for the same limited assets. Shippers don’t want to be knocked out of the market, or have empty shelves, so they’re willing to pay high prices, which in turn affects freight rates, Rooney says.
Rooney shed light on freight rates by referring to the Shanghai Container Freight Index (SCFI), which measures cargo export rates on the Shanghai Shipping Exchange. SCFI rates serve as a benchmark for global freight rates. Rates were steady for years until the pandemic, when rates increased dramatically because of excess demand and shortage of asset supply, Rooney says. “This is what happens when you have a commodity product where rates are driven by supply and demand,” he says.
Delays and Congestion
In March, when Evergreen Marine’s giant container ship Ever Given wedged itself across the Suez Canal for six days, the blockage only added to existing congestion and delays, Rooney says. To ensure the limited containers go to the ports with the most demand, freight companies frequently divert shipments heading to hub ports, where containers are again often delayed for several weeks.
The Ever Given’s blockage at the Suez Canal caused ripples in the flow of goods, delaying shipping vessels’ schedules, Rooney says. Blue Yonder, a company that uses AI to track global shipments, found the blockage added expected delays of two to four weeks to global delivery dates. Delays are expected to continue, he adds, as ships arriving late to a port will be delayed leaving that port. According to Sea-Intelligence’s Global Liner Performance (GLP) report, as of February 2021, carriers have a global schedule reliability of 34.9%. “It’s as good as arriving on time zero percent,” Rooney says. “You can’t plan around it.”
Rooney advices recyclers keep their eyes on several areas. Ocean carriers are ordering more ships, which should mean more capacity. However, ships take two to three years to build, so the industry won’t feel the positive impact for some time. Rooney recommends staying informed on labor issues. In the U.S., the International Longshoreman Warehouses Union (ILWU) supplies all labor on the West Coast to load and unload vessels. Historically, labor talks involving the union have been difficult, and the current ILWU contract expires in 2021.
A New Normal and FMC Response
Rooney believes things will remain uncertain for the first half of 2021. Even if conditions improve later, it’s not likely pre-pandemic conditions will return. A new normal could mean higher rates and a higher probability of congestion.
The Federal Maritime Commission (FMC) is investigating several shipping issues going back to 2020. In March 2020, FMC Commissioner Rebecca Dye headed a fact-finding investigation into ocean carriers’ detention and demurrage practices — as well as the shortage of ocean shipping containers — prompted primarily by complaints from shippers in Los Angeles, Long Beach, and the states of New York and New Jersey.
Earlier this year, the FMC issued demand orders regarding ocean carriers’ and marine terminal operators’ (MTO) detention and demurrage practices. The orders require carriers and MTOs “to provide information on their policies and practices related to container returns and container availability for exporters,” according to the agency.
Rooney and Moss recommend staying updated on news from the FMC. ISRI2021 attendees can bring questions directly to Dye’s attention during the Disruption at the Ports: Congestion to Container Shortages: A Conversation with FMC Commissioner Rebecca Dye session from 2:45 to 3:30 p.m. EDT on Thursday, April 29.