Ongoing and extraordinary disruptions continue to sway the ocean cargo market. For example, in 2022, rate and contract volatility and unprecedented levels of port congestion were key themes. Then, in 2023, there was a notable shift in consumer spending—from goods to services—which led to a decrease in import levels.
Here in 2024, import growth remains strong, albeit the reasons behind it are open to interpretation. Some industry stakeholders attributed this fact to solid consumer demand, while others say it’s primarily related to inventory replenishment efforts. What’s more, ocean pricing remains highly elevated, while there’s sentiment building that the worst may soon be over on that front.
Joining us inLogistics Management’s Annual Ocean Cargo Roundtable to assess these continued challenges and further explore the current state of market dynamics are three of the industry’s foremost ocean cargo experts:
- Philip Damas, director and head of the supply chain advisors practice at London-based Drewry;
- Jon Monroe, president and founder of Jon Monroe Consulting;
- Michel Looten, ocean insights lead, Accenture Cargo.
Logistics Management(LM): Will we see a peak season or are we now in a period where peak is not the annual occurrence that it used to be?
Jon Monroe:Historically, the peak season in container shipping has been defined as the period when importers ramp up their orders to stock up for the Thanksgiving through Christmas holiday season. However, since the pandemic, the uncertainty of container shipping schedules has changed this dynamic. Importers are now moving products earlier to ensure that they have inventory by November.
This year, various factors are influencing shipping volumes. One unexpected factor is what I call ‘forced demand.’ This refers to the surge in shipments from China’s factories, such as solar panels and e-commerce products, to U.S. warehouses to avoid anti-dumping duties and potential changes in thede minimisrule.
Philip Damas:The peak shipping season started early—in May—this year. Usually, it starts in July and ends around September for ocean shipments. Based on discussions with U.S. import customers, Drewry believes that this year’s peak started early because importers were concerned about many things—vessel delays, longer lead times, capacity shortages and higher tariffs—and decided to bring forward purchase orders and shipments for precautionary reasons.
It’s too early to say whether there is a permanent change in the seasonal pattern of shipping. But more frequent shipping disruptions and greater awareness among retailers and manufacturers of the need to have resilient supply chains could mean that peak seasons will now start earlier and be flatter.
Michel Looten:The variability we’re experiencing in 2024 so far will likely lead to container shipping lines frontloading some cargoes ahead of the traditional peak, and the second half of this year could be much weaker than expected. Recent years have shown that annual peaks may not have the traditional pattern of historical peak seasons. However, each year can bring disrupting events outside shippers’ control and contribute to the unpredictability of the container supply chain.
These events include increases in weather impacts, particularly in Asia; unexpected disruptions of key maritime waterways; labor unrest [last year at the U.S. West Coast, now at the U.S. East Coast and Gulf coasts]; and port congestion affecting empty container availability. Shippers are more than ever monitoring all of these factors and adjusting their logistics strategy accordingly, which changes the peak cargo flow patterns.
LM: While U.S.-bound import levels are solid, there’s a sentiment that consumer demand has been reduced, with consumers spending more on services, coupled with ongoing pricing and inflation concerns. How has this affected consumer demand, import levels, and freight flows over the past year?
Damas:Our data shows that Asia to North American container traffic surged 22% to 5.7 million twenty-foot equivalent units (TEU) in the first quarter of 2024 when compared with the same quarter of 2023. Despite the slow growth of consumer spending on durable goods, U.S. imports are buoyant, particularly when compared with the first quarter of 2023, when U.S. imports were very low. It’s clear that trans-Pacific volumes and volumes on several other routes are stronger than a year ago.
According to the National Retail Federation, U.S. containerized imports in May were forecast to reach 2.1 million TEU, an increase of 8% from the 1.9 million TEU of May 2023. We note that back in May 2022, during the pandemic, U.S. imports totaled 2.4 million TEU, so the May 2024 figure is still 12% lower than during the previous troublesome volume peak.
Looten:U.S. imports are stronger compared to 2023, according to our data. However, this growth is mostly the result of shippers pulling inventory shipments forward ahead of traditional peak season due to rising concerns with schedule reliability, equipment availability, and other disruptions, such as labor negotiations—and less so of consumer demand.
Monroe:The first quarter 2024 GDP growth has been revised down to 1.3%. In the second quarter of 2024, consumer optimism declined, as Americans continued to grapple with inflation and economic concerns. With inflation at 3%, consumer purchasing power has decreased. While most analysts are citing high container volumes as evidence of strong demand, I believe it’s the calm before the storm, signaling tough times ahead.
The American consumer is spending more just to maintain last year’s levels. Freight flows are high, but for the wrong reasons. The demand levels we saw during the pandemic are not present, yet we see a cargo surge similar to that period. Early shipments and increased shipping during an election year are the most likely reasons for the sustained high import volumes.
LM: How do you view the current state of inventory levels, and how is the current inventory outlook making an impact on ocean cargo volumes?
Looten:The inventory/sales ratio for the U.S. is on the low side. This likely contributes to the increase in container volumes from 2023 levels, as shippers are pulling inventory shipments forward to ensure stock can be replenished in time for the holiday season.
Monroe:There’s considerable uncertainty about the necessary inventory levels for this year. Many importers have adjusted their schedules to bring goods in earlier to avoid potential anti-dumping duties and, in the case of e-commerce, to circumvent possible changes to the
de minimisrule. This could lead to a
situation of over-ordering once again.
Currently, cargo volumes are strong on the West Coast due to a shift from East Coast routings to West Coast ports. Importers might remain cautious about using East Coast ports until the ILA concludes their contract negotiations. Once again, the company with the inventory will have the advantage. It’s an election year, anything can happen.
Damas:Our U.S. and European customers are telling Drewry that their inventory levels are at normal levels. I don’t think that inventory replenishment is playing a major role in the current demand surge.
LM: How do you view the current state of ocean contract rates and pricing? Are rates sticking?
Monroe:Contract rates have little influence on current ocean container pricing. Carriers are reducing contract minimum quantity commitments to push a shift towards the rising freight all kinds rates. The July 1 GRI increased West Coast rates to $8,000 and East Coast rates to $10,000, which is four-
to six-times higher than the same period last year.
Many carriers have recently announced contract peak season surcharges as high as $2,000, selectively implemented. Unlike during the pandemic, there’s no immediate reason for such high rates. There are no significant disruptions in shipping from Asia to the U.S., and the Panama Canal is returning to normal operations.
While there has been a shift in business to the West Coast, due to fears of an ILA strike on the East Coast, this concern has been ongoing for some time. Carriers are exploiting any disruptions to secure higher rates to the U.S. Meanwhile, shipping lines are reintroducing service strings to the transpacific trade.
Credit: Getty Images
Damas:Ocean carriers did not secure increases in their recent annual contracts, but have taken advantage of the current under-supply and shipping disruptions to impose peak season surcharges on contract rates and big increases in spot rates.
The Drewry World Container Index, a weighted average of spot rates on eight East-West routes, surged 74% between late April and early June. China to Los Angeles spot rates are exceeding $6,000 per 40-foot container for the first time since August 2022—which was the end of the pandemic era’s crazy rates.
Looten:For now, the market has turned in favor of the carriers. Unforeseen events, particularly the Red Sea blockage, with its side-effects of longer transit times and the resulting port congestion and container availability challenges, have driven up prices.
When the blockage disappears and container lines use the Suez Canal route again, spot rates will drop and a return to the rates agreed as part of the typical contracting cycle will occur. What’s not yet clear is if the carriers will subsequently seek to raise base contract rates in upcoming negotiation cycles, recognizing that revenue tied to today’s spot market will go away.
LM:Do you think that ocean carriers will be able to sustain the current rate structure, or do you see things changing in the coming months?
Damas:There are several factors behind the current high peak season surcharges on contract rates and the surging spot rates. For the short term, we expect that carriers will keep surcharges or spot rates high. But, not all factors behind the tight supply/demand balance will continue beyond the end of the peak season. Moreover, the high rate of delivery of new ship deliveries will redress some capacity issues. We expect the freight rate pressures to lessen later this year.
Looten:Should events outside the carriers’ control continue to disrupt the carriers’ service levels, higher rates will remain. The Red Sea situation and other disruptions affect capacity and schedule reliability. If these events diminish over the next few months and the situation stabilizes, rates, including surcharges linked to disruption events, should go down following peak season and drop even further as the influx of newtonnage continues.
Monroe:Multiple sources indicate that bookings in Asia might be declining. It’s become easier to secure space, as carriers have added services and extra loaders to the trans-Pacific trade. This will help clear the backlog of bookings and provide some relief to shippers needing to get containers on vessels.
It appears we may have reached the peak of the current rate structure. Importers are becoming hesitant to continue supporting carriers at these high rates. This doesn’t mean they will stop shipping, but they may become more selective and scale back their factory orders.
There was a time when carriers were sympathetic to market economic conditions, but that’s no longer the case. Shippers are adjusting their import volumes to minimize shipping during periods of peak rates. We may find rates easing post July.
LM: Do you expect shippers toleverage volume for favored status?
Looten:Favored status is helpful to shippers in a capacity-constrained market. Given the continued disruptions in the industry, it helps them access equipment and vessel space. Carriers know volume commitments have lacked teeth in the past and, especially in a downward market, do not drive the intended behavior that would benefit the shipping line.
We maintain that carriers and shippers should move away from this model to one that rewards shippers for forecast accuracy on a shorter cycle, versus a large longer-term contract at higher volumes, which typically are a best-guess effort. Accuracy in shippers’ forecasts would greatly improve carrier service levels and provide more value to both shippers and carriers, versus a volume commitment alone.
Monroe:Currently, carriers are indifferent to volume. While a select few might receive favored status, most carriers are insisting that beneficial cargo owners and non-vessel operating common carriers (NVOCCs) adhere to their minimum quantity commitment.
Some carriers have ceased supporting NVOCCs despite existing contracts. At least one carrier has suspended several contracts for the third quarter of this year, deeming the rates are too low amid the capacity constraints.
LM:With the current labor deal for East and Gulf Coast ports set to expire at the end of September, do you think it will create a situation where shippers move more freight to the West Coast if a deal is not done in time or it goes down to the wire?
Damas:Until recently, most companies did not expect East and Gulf Coast ports to go on strike, but recent statements from unions and the breakdown of contract talks in early June have increased the probability of flash points. It seems like one more reason to ship early this peak season.
Monroe:Shippers have probably already moved what they could to the West Coast. However, there’s growing concern about potential work stoppages—between now and the expiration date of the current ILA-USMX contract on September 30. The situation is more complex than it seems. On June 25, 158 state and federal trade organizations sent a letter to the White House, urging intervention in the negotiations.
It’s likely that the Biden administration will step in to help resolve the issue. As the September 30th deadline approaches without a resolution, shippers are expected to increase their volumes to the West Coast, driving up demand for transload warehouses.
LM: How do you view the current state of service in terms of carriers being able to deliver on promises?
Looten:Carriers struggle to consistently deliver on their base promise of on-time delivery due to schedule and container availability variability. The on-time delivery promise requires vessels to stick to their schedules in terms of port calls and planned port arrival and departure windows, and availability of capacity, not just vessel slots, but also empty equipment.
While most of the factors that affect the carriers’ promise are outside of their control, it highlights their continued inability to anticipate disruptions and quickly execute contingency plans before there is a significant impact on the shippers.
Monroe:What promises? I don’t think the carriers care about promises, and some in the media have even suggested that the carriers don’t need to honor their contracts in this situation. There was a time carriers honored their contracts, but since the pandemic, they have become more concerned with profits.
That’s not to say that they should not be concerned with profits. This concern should be placed when contracts are negotiated. They have tested the waters for rate increases and have found that the shipping public will accept the increases with little or no impact to the carriers.
Damas:Shipping reliability continues to be poor and relatively unpredictable from a service quality viewpoint. There’s also tension around carriers honoring or not honoring agreed contract rates, because ocean carriers can make much more money selling their capacity elsewhere at spot rates. These opportunistic practices are, unfortunately, the same as they have been for years.
