One of the lessons that ocean containership operators have learned very well, after pre-Covid years of slack profits, is the importance of aggressively managing capacity—on a weekly, if not daily, basis. By one industry estimate, that focus, coupled with two years of Covid– and e-commerce–fueled volumes, helped the world’s major containership lines generate more profits in the past two years than in the previous 20 years combined.
Moving into the second half of 2022, that focus remains as intense as ever, particularly in the face of rising bunker fuel costs, persistent inflation that’s driving up other expenses, and a demand cycle where capacity is slowly loosening and beginning to swing pricing power back to the shipper.
“It’s a murky picture,” says Lars Jensen, principal at consulting firm Vespucci Maritime. “It does look like the market is softening. The [ship] alliances are very good at managing capacity. I expect they will try and do the same if the market takes a major downturn in demand.” Nevertheless, Jensen adds, “If we were to have a major surge of cargo out of Shanghai, that would lead to upward pressure on rates. China still has a zero-Covid policy, so there is no guarantee that China will remain open; we may still see some shutdowns.”
He notes as well that the makeup of providers working the Pacific trades has changed from what it was a couple of years ago, which likely will influence available capacity—and pricing. “What is different [today] is that we have seen the introduction of a large number of non-alliance carriers coming into the market, with mostly smaller vessels,” he observes. “That’s 30% of overall capacity that’s operating outside of the services provided by the alliances themselves.”
That’s an X factor that could affect rates and the alliances’ ability to blunt the impact of weak demand through blank (canceled) sailings, he notes. In a softening market, “the newcomers will keep those ships going; these are smaller vessels taken on at expensive charter rates. If a downturn occurs, we will see those carriers reducing rates to keep their ships full” while still trying to eke out a profit, he says.
Those on-the-water vessel dynamics add a fresh layer of unpredictability for shippers to manage. Add to that ongoing portside issues, which are exacerbating the overall situation. The amount of time containers are dwelling excessively at ports (typically nine to 10 days or more) is rising again at West Coast ports after moderating in the spring. Delays and congestion at intermodal rail yards, due to lack of equipment and crews, are again a factor.
Warehouses that remain full and can’t get enough workers are still contributing to overall supply chain backups. Drayage resources to move containers to and from the ports remain a challenge as chassis sit in warehouse parking lots with containers waiting to be unloaded. And trucking resources, while seeing some easing of demand (and spot rates sliding in the truckload market) and absorbing higher operating costs, are still holding onto much of their earlier pricing gains.
PORTS GEAR UP FOR THE PEAK
In the meantime, the nation’s ports are preparing for the onslaught as peak season gets underway. The ports of Long Beach and Los Angeles are the gateway for some 35% to 40% of seaborne containerized cargo coming into the U.S. Long Beach also is the top port for containerized U.S. exports. Mario Cordero, executive director at the Port of Long Beach, says June volumes at the port reached 835,412 TEUs (twenty-foot equivalent units), up 15.3% from the same month last year and surpassing the previous record set in June 2018. For the first half of 2022, the port moved 5,007,778 TEUs, up 5.3% from the same period last year. The second quarter also was the port’s best quarter overall, with 2,547,119 TEUs moved from April 1 to June 30, breaking the previous record set during this year’s first quarter.
He’s encouraged by progress getting ships through the port. The number of vessels waiting in San Pedro Bay, as high as 109 in January, had been worked down to 18 in July.
Long-dwelling containers at both the Long Beach and Los Angeles ports had declined by about 25% compared to last October. Yet Cordero notes that the number of excessively delayed containers is again on the rise. As of mid-July, there were nearly 29,000 containers dwelling at Long Beach nine days or more, an increase of 9% from October 2021. That’s a troublesome trend with the next surge just over the horizon as peak season moves into full swing.
On the rail side it’s worse. “Lack of rail capacity is impacting the movement of IPI [inland point intermodal] cargo, those containers earmarked to move by rail,” he says. “That’s a primary concern. The average dwell time is up to about 10 days for a rail container.” Further exacerbating the situation, in late July, both the BNSF Railway and Union Pacific took the extra step of temporarily restricting the number of containers being loaded out on rail from Long Beach and Los Angeles, causing more container backups at the ports.
The port now operates, on average, 16 hours per day during the workweek and has added some weekend and early morning gate hours. In September last year, one terminal started piloting an early morning program, opening from 3 a.m. to 8 a.m. It’s seen some uptake, but better utilization depends on drayage companies doing more to work these operating hours into their contracts and cargo owners being open at warehouses in early morning hours to accept the freight, Cordero says.
Nevertheless, Cordero is optimistic about the remainder of the year. Southern California’s ports move some 20 million containers annually, “and one thing we know for sure is that number is not going to get any smaller,” he says.
Likewise, the Port of Virginia at Norfolk expects trade to remain strong for the next couple of months. May was the best month in the port’s history, with nearly 340,000 TEUs processed. For its 2022 fiscal year ended June 30, the port handled a record-setting 3.7 million TEUs, an increase of nearly 15% compared with fiscal year 2021. “Like everyone else, we are reading about inflationary pressures and how all these impact shipping,” says the port’s spokesman, Joe Harris. “We really focus on what we can control, and that’s how we are performing at our terminals,” he says.
He notes that among other advantages, the port owns its own chassis pool, in which it continues to invest. The port planned to add 600 new chassis a month from June through September, which will bring the total pool to some 16,000 chassis. “When we finish the renewal program, the average unit in the chassis pool will be 3.5 years old,” Harris said.
In May, the port commissioned two new ship-to-shore cranes at Norfolk, increasing lift capacity by some 200,000 units annually, and added 15 new shuttle trucks. Operationally, Harris notes that yard density is in the 70% range, depending on the volume being handled; ships typically are turned in 12 to 16 hours (depending on the volume to be handled), and turn times for drayage drivers “are best in class, less than 40 minutes.”
DESPITE CONGESTION CONCERNS, A BRIGHT OUTLOOK
The Port of Oakland also expects the remainder of the year to be strong, according to Maritime Director Bryan Brandes. “Our outlook is very bright. We did have some congestion issues and some services that bypassed Oakland for a time, but services [calls on Oakland by ship lines] are being restored,” he notes, adding that new entrants are adding Oakland to their strings while some existing ship-line customers are launching additional services.
And while ship lines are, in Brandes’ view, currently doing a good job managing capacity and keeping rates stable, the market has always been cyclical in nature. “My opinion is that the current environment [high rates and record profitability of ship lines] is short-lived. Liner costs are significantly higher. I expect [the market] will balance out over time.”
The biggest challenge for shippers? Outside of securing reliable capacity at reasonable rates, it’s the impact of continued congestion at ports and on the water, Brandes says, noting that ports are stepping up to the challenge. “We are working proactively with the ship lines, terminals, and truckers to reduce container dwell [times],” he notes. “We’ve adjusted free time at the terminals and made tariff changes to incent faster movement of containers.” He believes as well that the port will see a consistent supply of vessels throughout the year. He adds that many of the BCOs (beneficial cargo owners) he has spoken with say they are spreading out their volumes over the remainder of the year “so they won’t get caught short in peak.”
A “STAGGERING” INCREASE
Beth Rooney, recently promoted to the top job of director, port department, for the Port Authority of New York & New Jersey, said in a recent press briefing that the port today is handling a full 33% more containers than in the same, pre-Covid period in 2019. “That staggering increase … is a picture of what it is that the entire supply chain and all of the various nodes and links are trying to handle and absorb,” she noted. It’s certainly not been without its challenges, she added.
In May, some 107 ships had to wait at anchor for a berth. The average wait time was 4.5 days, up from the year-to-date average of 3.8 days. Container dwell time remains an issue, with some import containers sitting in the terminals two and three times the three- to four-day average. “Empties are piling up at the terminals,” she added. “Ocean carriers are working to reduce the number of empties in the facilities, but it’s not enough and it’s not fast enough.” The port’s trucking partners are sitting with empties with no place to return them, “so the chassis is not available to pick up the next import container,” she said.
One unusual factor Rooney says has likely contributed to the port’s volume growth: shippers rerouting freight from the West Coast out of concern about potential labor disruptions there. Rooney notes that by her staff’s calculation, 6.5% of the port’s growth through May represented cargo rerouted from the West Coast. “When you look at the total import volume growth of 11.5%, that’s a good chunk,” she noted.
Rooney emphasized that the port is moving aggressively to address the challenges. Weekly meetings with terminal operators and the New York Shipping Association focus on matters of fluidity and capacity, safety, and security. Terminal practices that are having positive results are identified and shared. And the port is getting creative in finding off-terminal space for empty containers. One new empty container depot was created by relocating automobiles formerly stored there. Another was developed by consolidating multiple areas where commodities were staged into one, freeing up more space for empties.
Ship lines have added more empty loaders as well, with 13 coming into service through May. “It’s a concerted effort by ocean carriers to evacuate the empties, but they need to do more,” she says. Additionally, Rooney and her team have successfully convinced some of the ship lines to do more load balancing. Under this practice, for example, “if a ship line takes off 1,000 (loaded import) containers, it will put on 1,000 (loaded exports and empties),” she explained, thereby lessening the amount of port space those empties take up.
One area of disappointment: insufficient use of weekend and extended weekday gate hours. “About 4.5% of total volume is moved out of the terminals on Saturdays,” Rooney explained. “All that is doing is taking a little bite out of the activity that would normally be handled on Monday.” The additional gate hours not fully utilized are “an opportunity for improvement, a great one,” she stressed. “We need to see all the hours the terminals are providing used and used consistently,” she notes.
PULLING OUT ALL THE STOPS
What can shippers do to survive and compete in these unsettling times? “Be prepared to change your script” in terms of process, practice, and working with suppliers and customers, advises Nicholas Najjar, director of transportation and distribution planning for dairy products cooperative Land O’Lakes.
“We’ve pulled out all the stops to see where we have success,” he says. “Everything is moving so fluidly, you have to stay on top of it daily.” Najjar and his team have rewritten processes, adopted new tactics, taken over some activities once done by their forwarders and customers, and offloaded others to those partners with an eye toward more collaborative, efficient, and timely execution.
Nevertheless, even in a disrupted market, Najjar still adheres strongly to a shipper-of-choice mentality. “We have always embraced a strategy that we will move with the market. We want our contracts to be in line with the market, and we will hold to our commitments with our strategic partners, using the spot market to handle variability.
“We may reset with more frequency, but that will not impact our mix, our focus on shipper-of-choice fundamentals,” he adds. “All those values will remain regardless of where we are in the market cycle.”
Gartner, Inc.