2022 Ocean Cargo Roundtable: Navigating the waves of unpredictability

The fluctuating nature of the ocean cargo market continues to mirror the state of the global economy. This simple fact is evident in things like rate and contract volatility, unprecedented levels of port congestion, as well as continued service issues and capacity imbalances. These factors, all driven by elevated consumer demand levels, continue to present a challenging environment for shippers at a time when some stability would be welcomed.

Joining us in Logistics Management’s Annual Ocean Cargo Roundtable to assess these continued challenges and take a closer look at the current state of market dynamics are three of the industry’s foremost ocean cargo experts: Jon Monroe, president of Jon Monroe Consulting; Sarah Banks, managing director and global freight and logistics lead at Accenture; and Philip Damas, director and head of the supply chain advisors practice at London-based Drewry.

Logistics Management (LM): How do you view the prospects for a 2022 peak season? Or are we now in a period where peak is not the annual occurrence that it used to be?

Jon Monroe: Nothing is as it was since the beginning of the pandemic, least of all peak season. The volatility of container vessels due to blank sailings has caused a massive asset imbalance. Combine this with the surge caused by the change in consumer spending due to the shift to a “work at home” life along with the massive stimulus and it’s no wonder that we’ve had a surge that has lasted for two years.

With that, I don’t expect peak season this year to be as robust as 2021. To a certain extent, importers moved up their seasonal shipping and have already shipped products that are normally shipped in the traditional peak.

Sarah Banks: This year is seeming again to be a year of “extended peak” in the North American ports due to continued import volumes and associated port congestion. As we have not yet experienced a stabilization period following the pandemic chaos, it would be difficult to classify 2022 peak season as a normal, annual occurrence. That being said, I do expect that we’ll see a normalization going into 2023, where the peak season will resemble what we have typically experienced in the past.

Philip Damas: There are very mixed signals about how strong the forthcoming peak season will be in the container shipping market. We know that some top retailers have reported excess inventories and that many companies have shipped early to the United States to reduce the risk of delays. This suggests a weak peak season.

However, we also hear that other importers and the National Retail Federation expect cargo volume to remain high as we head into the peak shipping season. Last year saw an exceptionally strong, chaotic peak; this year could see a weaker, smoother peak season, but this is not certain.

LM: Inflation is stubbornly remaining at 40-year highs, retail sales remain steady, and U.S. ports are largely reporting solid monthly import levels. That said, are we looking at a situation in which inflation could put a major dent in consumer demand and subsequently affect import levels and freight flows in the coming months?

Banks: The combination of inflation and pockets of increased, stabilized inventory levels should reduce the current import levels and freight volumes. Consumer demand is already dropping in certain sectors, but what isn’t certain is how much of a dent will be created and if this dent may actually help calm the freight market to more consistent and serviceable patterns.

Damas: There are certainly a number of economic headwinds, which will reduce consumer demand in the U.S. and therefore container imports. In the Drewry Container Forecaster, we forecast year-on-year trans-Pacific volume growth of just 1% in the third quarter of this year and -2% in the fourth quarter. This doesn’t mean that port congestion and over-capacity will end then, though.

Monroe: I agree with both Sarah and Philip. Yes, if inflation continues to climb, consumers will spend less and import volumes will be affected.

LM: How do you view the current state of ocean contract rates and pricing? Are rates sticking more now?

Damas: Spot rates have been declining slowly, but steadily every week since February. On some routes, spot rates are now below contract rates, and some importers are starting to ask ocean carriers and NVOCCs [non-vessel operating common carriers] to reopen [i.e. reduce] previously agreed freight rates.

To our knowledge, carriers have mainly refused to do this and contract rates are mainly sticking. However, people with long memories know that market swings and a divergence between spot and contract rates have historically resulted in either party renegotiating rates or walking away from some contracts.

Monroe: Rates have dropped more than 50% when compared to their peak last year. Whether this will stick or not depends largely upon the ocean carrier’s reactions and how aggressively they pursue blank sailings. Demand dropped in May and June, which prompted the rate decreases by the carriers.

In many cases, carriers implemented short-term contract amendments, allowing customers to use the reduced spot rates. This meant that the carriers could keep existing contracts and rates rather than renegotiate their contracts. The ocean carriers have initiated blank sailings to stabilize rates. Whether or not we’ve reached bottom yet will depend a lot on the demand.

Banks: Ocean contract rates have always been a bit negotiable, as carrier and shippers will seek alternative paths to get rates in their favor, whether that’s a shipper taking advantage of a spot rate or a carrier applying an uptake charge to access a specific sailing.

So, while these patterns will likely continue, there’s certainly more awareness and appreciation now for the stability that a contract rate, and corresponding commitment, affords both a carrier and a shipper. What I think will evolve along with the rates is a higher-level commitment between the carrier and the shipper to the contract, which provides more certainty in the utilization and service level delivered.

LM: Do you think that ocean carriers will be able to sustain the current high-rate structure?

Monroe: That remains to be seen. They would like nothing more than to keep rates up. It will depend upon the demand versus blank sailings. They will have massive headwinds in 2023, when the first of the vessel newbuilds are introduced.

Banks: Simply put—no. The market softening and stabilization that’s forecasted into next year, along with heightened regulatory interventions, will continue to push rates down.

Damas: Sarah and Jon both make good points, and I would add that current freight rates are so elevated now only because of chronic port congestion and insufficient ship capacity.

Once either or both issues are resolved, rates will fall. The question, of course, is by how much. On this, Drewry discussions with carriers and shippers, plus our forecasting models, lead us to conclude that rates will not go back to low 2019 levels.

LM: Do you expect shippers to leverage volume for favored status?

Banks: Yes. This is not a new notion, but in the earlier point around the benefits a contract structure can provide to a carrier and a shipper should reinforce that with committed, higher volumes should come not only favorable rates, but favorable access to the needed capacity.

Damas: Based on our discussion with shipper customers, they are not, although some shippers are positioning themselves as a ‘shipper of choice’ for the carriers in return for more secure access to capacity.

Shippers nowadays are asking how they should position themselves in a changing ocean market, how to plan and secure shipping capacity, and how to develop long-term relationships with the more reliable ocean carriers. These are discussions focused on balanced, mutual commitments from carrier and shipper and on avoiding the previous shipping chaos.

Monroe: I’ll add that shippers will attempt to leverage their volume whenever they can. It will depend upon the market. Throughout the pandemic, volume was a non-starter. That is to say, volume could not be leveraged. Will this change? Possibly. But it’s simply a matter of capacity versus demand.

LM: With the China shutdown looking like it’s coming to an end, what may be in store for U.S. ports in terms of what many are calling an incoming glut for inbound cargo?

Damas: The expected rebound of Chinese exports to the rest of the world post lockdown has been very limited, to date. Our contacts in China are not seeing a glut of inbound cargo into the United States.

Monroe: Keep in mind that China still maintains its Zero Tolerance policy, but they have changed the scope. Now rather than shut down a city when infections are found, they shut down the building. As to the incoming glut so to speak, we expect volumes to tick up in August, closer to the end.

And given that many importers moved their shipments to an earlier window this year, we don’t expect anything like the surge we had through 2021.

This doesn’t mean that port congestion is a thing of the past. As I have said many times, we’re dealing with an extreme asset imbalance, and this will continue to cause congestion problems through the end of the year.

Banks: It’s not clear that this one event changes the overall congestion picture. If anything, the end of the China shutdown will be a continuation of the congestion the ports have been dealing with since the start of the pandemic disruption. Shipping lines, ports, and other partners including rail, truck, and warehouse providers will need to continue to execute their playbook to deal with the disruption.

LM: Now that the ILWU and PMA did not reach a new labor deal by the end of June, what happens from here in terms of getting a deal done? Can we expect to see more shippers trying to leverage East and Gulf Coast ports?

Monroe: Anything can happen, but it looks like the PMA will give in to the ILWU and it will be settled without too much drama. Shippers are already leveraging East Coast and Gulf ports and have been doing so for some time.

Those companies that could, began leaving the West Coast for alternate ports months ago. This is precisely why we see congestion along the East Coast. If there’s a snag on the West Coast, we will see the carriers moving their services to other ports.

Damas: There’s actually a lower risk of port strikes than in 2015, but we can’t exclude the possibility of ‘go slow’ actions by unions, which would extend port congestion and affect the flow of goods. Many shippers had already diverted to the East Coast ahead of the July 1 deadline to reduce risk. The problem is that now the East Coast ports, particularly New York, are even more congested than the West Coast ports.

LM: How do you view the current state of service in terms of carriers being able to deliver on promises?

Banks: Shippers are continuing to face vessel delays, rolled bookings, and overall extended transit times. This definitely falls short of a carrier’s delivery promises. There are some improvements in pockets, with certain trades globally that are seeing stabilization of the demand to the availability capacity.

However, until carriers can deliver a reliable product with committed sailings and on-time arrivals, this will remain elusive. If we can achieve stabilization in the medium-term, which is expected, 2023 may be the year of carrier service performance.

Damas: Carrier service reliability has finally improved since January. Port congestion in North America, the most congested region, has halved from 20 times the norm to about 10 times the norm, based on the Automated Information
Systems vessel data verified by Drewry.

Trans-Pacific eastbound best-case transit times—from the last port in Asia to the first port on the West Coast of North America—have shortened from about 34 days in January to 20 days. This is not yet ‘back to normal,’ but we can start to see light at the end of the tunnel after two years of chaotic service levels in the global ocean transportation market.