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An unexpected surge in Asian exports to the United States in late May, causing cargo rolling at Asian ports and a spike in spot rates, warns of future pockets of tight capacity as shippers cautiously increase volumes and carriers plan blank sailings into August.
Tensions are rising as shippers charge that carriers are intentionally restricting capacity and overbooking vessels in the eastbound trans-Pacific in order to push freight rates higher. For their part, carriers blame the tight capacity on shippers’ inability to accurately forecast demand during the COVID-19 crisis. Regardless of the cause, the tensions speak to larger trends in the container shipping industry, namely carriers’ successful management of capacity to meet future volumes and general uncertainty among importers of just how much restocking is needed as the North American economy recovers from the pandemic. These conditions are expected to continue in the coming months.
Carrier executives said that the tight outbound capacity at Chinese ports resulted from an unexpected late-May spike in US imports. Volumes are increasing as retailers begin to replenish inventories of merchandise that have been moving out of warehouses to store shelves as the US economy begins to reopen.
As a result, spot rates from China -US West Coast are unusually high right now, up 1.7 percent from the previous week and 48.2 percent from the same week a year ago. The China-US East Coast rate was basically flat from last week, and 9.4 percent higher than the same week a year ago. This indicates that the import surge has been greatest to the West Coast.
Blank sailings reduce capacity in eastbound trans-Pacific
Shippers, however, charged that the spike in the West Coast spot rate is due mostly to carriers restricting capacity from South China to the ports of Los Angeles and Long Beach through blank sailings. Carriers this past month have blanked 36 sailings in the trans-Pacific; at the same time, import volumes have increased the past two weeks as some regions of the country reopened businesses that were closed during COVID-19 lockdowns.
For weeks 23-24 (beginning June 1 and June 8), vessel capacity in the Pacific Southwest services from South China to California is “extremely tight,” one industry consultant said. “All steamship lines are overbooked now.” The consultant further described space on services to the Pacific Northwest and all-water strings from China to the East Coast as “tight.”
What’s more, one shipper said, “Carriers are taking full advantage of the situation and charging a premium for guaranteed loading or expedited services.” Carriers said vessels leaving some Chinese ports the past two weeks were booked at 110 percent of capacity. Some shippers with Fixed Rate agreements with carriers were reportedly told that due to vessel overbooking their shipments in excess of their Minimum Quantity Commitment would be rolled to subsequent voyages unless they paid premiums equalizing their freight rate to the prevailing spot rate in the respective trade at the time.
Carriers have ‘zero visibility’ into retail demand
Carrier sources dismissed the statements from shippers and said their decisions to cancel sailings at Asian ports, which were announced three to five weeks in advance in order to give customers time to adjust their supply chains, are based on feedback they receive from their customers. A second carrier stated that in March and April they [along with other carriers] made good-faith supply-demand forecasts in a volatile market that has been roiled by COVID-19. “There was no premeditated plan to prop up rates,” the executive said.
When US containerized imports from Asia plunged in March and April, carriers were planning their sailing schedules a month or so forward, the carrier executives said. Because they were given no insight into retailers’ plans for replenishing their inventories in May, they determined that in order to control costs, they would have to cancel sailings.
Anticipating a slow start to the peak-shipping season that runs from August through October, trans-Pacific carriers since April have cancelled more than 120 sailings into July.
Retailers likewise are expecting a slow summer shipping season. Back-to-school merchandise traditionally represents the second busiest period of the year for imports from Asia, but this year, many school districts across the US have yet to determine whether students will return to the classrooms in the fall or study virtually from home. This uncertainty is impacting back-to-school imports, which normally enter the country in May and June in order to be on store shelves immediately after July 4. Carriers say this has added yet another layer of uncertainty to the supply chain.
Strong Trucking Volumes Again – Up 7% Year-Over-Year
Outbound tender volumes posted the highest June 5th total in the three-year series history, while this doesn’t match the surge seen in March due to pre-stocking, for this time of year, it is telling how aggressive the volumes are. Volumes have made a huge climb over the past few weeks and there isn’t much to point towards a slow-down. Capacity is reacting very slowly to the volume surge, but the Outbound Tender Rejection Index (OTRI, the measurement of carriers’ willingness to accept loads) has finally broken the 5% threshold. Spot markets have come alive in the past couple weeks, but rates remain significantly below where carriers would expect them to be in normal times.
The Outbound Tender Volume Index (OTVI) has roared out from the Memorial Day disruption and now sits at 10,996. This is the highest June 5 value in the three-year series history. Due to the holiday, weekly comparisons are skewed, but OTVI is up 7% year-over-year. The agricultural hubs along the West Coast and in the Southwest and Southeast continue to be strong sources of volumes. In May, the Midwest and Great Lakes area also became a source of outbound freight as much of the country’s manufacturing and industrial economy came back online.
On the positive side, all 15 of the major freight markets tracked were positive on a week-over-week basis. This ratio soared this week relative to last week’s tepid ratio but the strong levels have been mostly consistent in recent weeks. The markets with the largest gains this week in were Laredo, Texas (37.34%), Houston (30.88%) and Savannah, Georgia (30.14%).
Tender rejections continue to improve with volumes
Outbound tender rejections have increased week-over-week for the fifth week in a row after tumbling for the six weeks since the OTRI peak of 19.25% on March 28. Capacity has tightened as volumes began to fill markets throughout May. Considering we are just four weeks removed from the lowest point in OTRI’s data history, any movement toward the upside should be welcomed by carriers.
Although there are pockets of tightening capacity in the Southeast, on the West Coast and Northern Plains, capacity remains relatively loose across the country. If volume throughput remains near this level, rejections will adjust upward in the coming weeks.
Cristobal Poses Flooding Threat After Moving Inland, Port NOLA Closed
Tropical Storm Cristobal crashed into the Gulf Coast over the weekend, making landfall near Grand Isle, Louisiana Sunday evening. Steady winds of 50 mph lashed the coastline and pushed Gulf of Mexico water onshore.
The U.S. Coast Guard restricted traffic over the weekend in and out of the Port of New Orleans (Port NOLA) due to high winds. The Port NOLA Container Terminal are closed today, June 8, as well as all breakbulk terminals. Normal business operations will resume Tuesday, June 9. The New Orleans Flood Protection Authority closed the floodgates in and around New Orleans. Shipments destined to or traveling through New Orleans will be impacted.
While the ports and terminals appear to have not sustained any damage, the storm surge plus heavy rainfall flooded roads from Louisiana to near western Florida. Some areas may remain flooded today, and sections of some highways are still closed as of this morning, including US-90.
Few, if any, major disruptions in surface transportation and freight movement have been reported as a direct result of Cristobal.
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