Weakening trans-Pacific belies second-half capacity risk
Asia-US container spot rates in recent weeks have fallen to levels not seen since spring 2020, despite carriers’ efforts to blank capacity to better balance with fast-falling imports. Importers, frustrated with service levels and stinging from two years of paying sharply higher prices, both spot and contract, could understandably feel emboldened heading into 2023-24 contract talks. They no longer feel the pressure as they did in late 2021 and early 2022 when many were willing to pay whatever it took to secure capacity. In the end, importers agreed to rates between $6,000 and $8,000 per FEU from Asia to the West Coast, and many signed deals that extended beyond the traditional 12-month duration.
But if importers push too hard to secure the contract rate levels they desire this time around, they risk seeing their cargo rolled and paying elevated spot rates in the second half of the year if demand rebounds strongly.
“This is not a 2023 about predicting, ‘What the rate is going to be.’ This is a 2023 where you need to contemplate, ‘What is my risk management strategy that I want to pursue long-term?,” Lars Jensen, head of Vespucci Maritime and a Journal of Commerce analyst, told a Journal of Commerce webcast on Dec. 1. “Longer term rates are going to stabilize and they’re going to stabilize at levels higher than what you’re used to pre-pandemic.”
The next few months don’t look good for the eastbound trans-Pacific, giving some shippers the false sense that they hold all the cards as overcapacity returns to the trade lane. US retailers, as tracked by Hackett Associates, are forecasting double-digit decreases in their imports through April. But the health of the second half, when US retailers historically restock for winter holiday shipping, rests on one question: How will US consumers — hit with higher prices due to inflation, but still generally highly employed — spend? Unemployment was at 3.7 percent as of November, the most recent reading available, but US central bankers predict the rate will rise to 4.6 percent by the end of 2023.
Inflation will still bite American consumers this year, but the pinch will ease, according to an S&P Global forecast, released Dec. 21. The consumer price index will expand 4 percent this year, compared with an 8 percent jump last year, according to S&P, the parent company of the Journal of Commerce.
There’s a risk that if the market rebounds strongly and quickly, carriers will be unable to deploy new vessels fast enough, leading to capacity shortages and a rate surge, similar to what was seen in 2010 in the rebound after the financial crisis, according to Alan Murphy, CEO of Sea-Intelligence Maritime Analysis.
“Shippers should therefore pay heed to the carriers’ actions in the coming months,” Murphy said. “If we begin to see carriers placing vessels in lay-up, then the scene is already set for a rate surge on the backside of the recession.”
There’s too much capacity in the trade now, said Dominque von Orelli, head of ocean freight at DHL. “But demand will pick up, thus we expect the first half to be slow but in the second half of the year we’re going to see an increase in the volume,” he said.
China and COVID
The extent to which the pandemic rips through China’s manufacturing force may also impact outbound flows. Forwarders such as Patrick Fay, co-founder and CEO of Boston-based BCO International, are already bracing for delays at origin.
“I believe the volumes and reopenings will come back, but not until at least Q2 when herd immunity and increased vaccinations start to kick in,” Fay said.
China’s abandonment of its zero-COVID policy pulled manufacturing output in December to the lowest level since September, according to the Caixin purchasing manufacturing index (PMI). China’s employment fell for the ninth month straight, and lagging delivery times persist, according to the Caixin China General Manufacturing PMI report.
“In the short term, infections are expected to explode, which will severely interfere with production and everyday life,” according to the report.
A strong second half could keep space tight on the trans-Pacific. And too low a contract rate coupled with modest allocations could make a container needed for Black Friday sales ripe for rolling, when carriers prioritize higher-paying spot cargo for a sailing.
Importers are often under pressure to secure lower contract rates, particularly as the C-suite points to lower spot rates. But they need to balance that with getting certainty that their cargo is going to get loaded, especially when there is disruption on the trade, said Becky Wu-Lee, senior manager of global logistics procurement at PepsiCo. Some shippers may have also burned bridges with carriers when they simply failed to honor contract rates to chase lower spot rates when the latter went into freefall in late August, rather than working with carriers to find a middle ground on prices, she said.
“We wanted to take advantage of the really cheap spot market, but we also need to make sure that … whatever short-term decisions that we’re making aren’t going to impact our long-term strategies,” Wu-Lee told webcast attendees. “You just never know when the next COVID event could potentially hit your supply chain and what [that] kind of disruption is going to look like.”
Source: Journal of Commerce (JOC)
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