It’s been an interesting summer for port and maritime operators. A potential strike among West Coast longshore workers appears to have been averted as management and labor hammered out an 11th hour agreement, which now goes to members for ratification. Drought conditions impacting water levels—and ship passages—through the Panama Canal have moderated, forestalling potential delays and more serious restrictions. And while loose capacity, slack demand, and weak shipping volumes have forced ocean containership operators to park some ships and slow-steam others, some industry watchers believe the market has bottomed out and is primed for a rebound.
“We believe that the container shipping downturn bottomed out in February,” says Bryan Brandes, the Port of Oakland’s maritime director. “Oakland cargo volumes have been on a steady increase for three consecutive months since February.”
At the Port of Long Beach, “the trajectory has been very good,” observes Executive Director Mario Cordero. “Volumes for the month of May, at 158,000 TEUs [20-foot equivalent units], were the highest since August 2022” and represented a 15% increase over April 2023. “We expect by the end of the year for the San Pedro Bay complex to have [more] TEU volume than any other gateway,” Cordero says, adding that the Long Beach/Los Angeles port complex is the nation’s largest container gateway.
The Port of Virginia sees “ocean freight moving in the direction of returning to normal,” says port spokesman Joe Harris, who noted that the Covid-driven surges were an anomaly and that “going forward, volumes are going to be impacted by more traditional factors like inflation, consumer trends, changes in supply chain [sourcing], geopolitical events, and the like.”
The Port Authority of New York & New Jersey was the second-busiest containerport year-to-date, handling nearly 1.6 million TEUs since the first of the year. The seaport moved 676,311 TEUs in May 2023, 5.1% more cargo than in pre-pandemic May 2019. “Things have been soft and below where we would certainly like them to be,” says Beth Rooney, director of the port department for the New York/New Jersey Port Authority. “That being said, we are trending higher than [in the same period in] 2019. We’re in pretty good shape.”
TWO SCENARIOS
Lars Jensen, CEO and partner with consulting firm Vespucci Maritime, sees two possible scenarios for the maritime industry going forward. “One is where the market gets worse—which from a headline perspective, is the easiest argument to make. Why? We still have a lot of extra capacity in the market, rates have been trending downward, and blank [canceled] sailings have been increasing,” he notes. On top of that is the persistent issue of “a continued overhang of inventory that is not being cleared fast enough and that is depressing volumes.”
Yet it’s not a “slam dunk” that a continued downturn is in the market’s future, opines Jensen, who also says “there is actually a legitimate argument that the market is going in the exact opposite direction. History tells us that markets driven by inventory correction, once that is done, typically rebound a lot faster than anyone expects.”
“If the doomsayers of a recession are wrong, then you could see the market snap back very quickly, and we could see a strong peak season,” he continues. “We will eventually hit bottom [if we haven’t already], and once that happens, we will see a rebound, one that could happen quickly to drive demand.”
Beth Rooney makes a similar point about an inventory overhang. “What we have been doing for the last six to nine months is living off the bloated inventory that [has] accumulated. There was so much panic buying during the pandemic on the part of shippers who were afraid of running out of inventory. They bought early and often. We have been living off that excess inventory.”
That reality was reinforced in a meeting Rooney and her team had in June with the largest sporting goods retailer in the U.S. “They were very open that they were living off [bloated] inventory; they bought too much, too soon,” she says.
A common refrain among retailers she’s talked with is that they were faced with the conundrum of liquidating goods that missed their seasonal window, went out of style, or became obsolete. Until they did so, “there was no room at the inn …. Warehouses were full, and they couldn’t bring in the summer outdoor furniture because they were still liquidating snow blowers,” she notes.
LESS DWELL, MORE DIVERSION
One issue that thankfully has no longer been a problem for Rooney as well as her fellow port operators is excessive dwell, or delay in containers moving out of the port. Last year, the New York/New Jersey Port Authority, in cooperation with drayage firms, liner operators, and terminal operators, instituted an empty-container evacuation program to address extended dwell issues.
“It’s gone very well; we didn’t have to charge any of the assessments if carriers did not follow through,” she says. “That helped restore fluidity and got the truckers the opportunity to return the empties that were in the yard, holding up chassis, and preventing the next import from coming in.”
The improvement was dramatic. “In dwell alone, at our worst we were upwards of 21 days average dwell time,” Rooney notes. “Last week, our average dwell was 3.36 days.”
There also continues to be some diversion of cargo from West Coast destinations to Gulf and East Coast ports. Some of that is an outgrowth of pandemic-induced congestion that initially created problems at West Coast ports, exacerbated over the past nine months by shipper angst over labor negotiations. “We continue to gain market share on West Coast ports,” says Rooney. Shippers are telling her that until the West Coast labor contract is fully ratified, “they are not racing to go back.”
Nevertheless, Long Beach’s Cordero points out that while the American shipper has choices for Asia-U.S. cargo movement, “the San Pedro Bay complex remains the No. 1 gateway” for U.S. shippers, and he expects them to eventually make routing changes that will return more cargo to the West Coast. “It will remain competitive,” he says, citing the port’s “billions in capital improvement programs” as a major incentive for shippers and vessel operators, particularly Long Beach’s investments in on-dock rail, efficiency, and cargo velocity.
RECORD PROFITS NO MORE
Ship operators are coming off two years of record profits. As they head into the remainder of 2023 and on into 2024, they are instituting cost-saving moves like slow steaming, resulting in longer transit times and blanked sailings, while idling some capacity and sending other older vessels to the scrapyard. At the same time, they’re preparing for a coming wave of new, larger vessels that will be brought online over the next few years, which will portend still more changes and challenges for operators and shippers alike.
“New vessels are already being delivered,” notes Vespucci Maritime’s Jensen. With deliveries representing 10% of market capacity projected to come online this year and next year, “it’s easy to make the case that we could again be in an overcapacity situation.”
Jensen says ship operators are “slowing everything down,” particularly in the Asia-Europe and European Community trade lanes. “That will absorb quite a bit of the new capacity; they are putting extra vessels on every string.” Another factor impacting capacity is ship operators parking vessels, which he estimates is currently about 3% of the worldwide fleet.
Jensen also expects to see a ramp-up in the scrapping of older vessels, with this year and next year seeing some 70,000 TEUs of capacity exiting the market. High charter rates last year, which kept many older vessels in service, have declined precipitously, accelerating their exit. And last but not least are coming environmental regulations, which will force out many older, noncompliant vessels and will require vessel operators to invest in new ships and push their fleets to run cleaner than ever before.
Stuart Sandlin, president of the North America region for global containership operator Hapag-Lloyd, agrees with others that “on the demand side, import markets have been weaker … [largely] due to a global economic slowdown and unusually high inventories.” However, he adds, “we have recently seen demand start to rise slightly in some selected trades. I would anticipate that demand is likely to remain subdued until the destocking cycle is completed.”
From a supply perspective, Sandlin notes that “a strong inflow of new capacity will be partially offset by an increase in scrapping activities and slow steaming. This will be exacerbated by the International Maritime Organization’s CII regulation, which impacts less fuel-efficient ships. (CII stands for “Carbon Intensity Indicator,” which is a measure of how efficiently a ship transports goods or passengers.) Sandlin goes on to say, “I anticipate that supply will likely outpace demand in 2023 and 2024, making active cost management inevitable.” A bright spot for liner operators: growth in the Asia-to-Mexico trade lane, supported by a rise in nearshoring of manufacturing and production capacity among many industries.
It is a similar story at Maersk, the world’s largest containership fleet operator. The company continues to anticipate that the inventory correction will have run its course by mid-year, “leading to a more balanced demand environment” for the second half of the year, as the carrier noted in its Q1 earnings statement. That projection is beginning to come into focus as Maersk “has begun to see an uptick in cargo flows common to peak season shipping, as the flow of back-to-school, fall fashion, and end-of-the-year holiday goods begins to come into North America,” noted a Maersk spokesperson.
One area Maersk (and other ship operators) is monitoring closely is the draft adjustments announced by the Panama Canal Authority. As of mid-June, “the authority communicated that a maximum draft of 44 feet is in effect for the Neopanamax locks,” explained the Maersk spokesperson. (Neopanamax, or “new” Panamax, is a term that relates to the size of the containerships or other vessels that are able to transit the now-widened Panama Canal.) That reduction is a drop of six feet since restrictions were first announced in March. Low water levels prevent some larger ships from transiting the canal and force ship operators to divert cargo over other routes, such as the Suez Canal.
And while local weather conditions continue to affect the water levels the Panama Canal requires for operation, “in compliance with [current] draft restrictions, we are optimizing our network planning and vessel loading accordingly,” said the spokesperson. Maersk continues to offer multiple sailings per week through Panama.
THE SHIPPER’S PERSPECTIVE
Ocean freight “has not bottomed out. It’s a longer cycle going down and not as fast coming back up,” says Andy Dyer, president, transportation management for AFS Logistics. “There just isn’t enough freight out there. Everyone is hoping for a peak season, but no one is holding their breath.”
U.S.-based AFS operates as a freight forwarder and broker for ocean freight, dealing directly with ship lines on behalf of AFS customers to arrange and route freight. Dyer sees a market “fresh off the crack of the bullwhip effect from Covid,” a seminal market event that’s been longer in duration than anyone expected and whose impact “is still echoing in people’s ears.”
Does he expect a second-half pickup in ocean freight volumes? Maybe. “What really comes into play is material consumption,” he’s observed. “One saving grace is that the consumer has continued to buy, even as we have seen a lot of inflation. There was a big bubble in demand for goods, retailers over-inventoried, [and then] demand from consumers dropped as they switched spending to services. Just look at what’s happened with airline, hotel, and rental car prices.”
With a stable yet relatively tepid economy, Dyer does not expect demand for ocean freight to explode anytime soon. “We’ve been working off a mountain of inventory. And it’s not done yet,” he notes. One lesson he believes shippers have learned: the importance of de-risking and diversifying supply chains and sourcing nodes.
“People are looking at the nodes and flows in their supply chains and realizing they have to change, reduce risk, and improve reliability—as well as manage cost,” he says. “It’s not just the number of suppliers; it’s where they are [and] having reliable secondary sources that can jump in when a primary is compromised.
“Let’s face it, if you were relying on China, as many have for years, just moving to another part of Asia may not always be the best answer,” he notes, adding that people are thinking more broadly.
“Making those types of changes, and then seeing those manifest themselves in freight from new locations, doesn’t happen overnight. Untangling and replacing some of those global relationships can be a years-long process.”
