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Ports, maritime operators see tide turning as ocean freight tsunami subsides


The great ocean freight tsunami that swamped the maritime industry from the fall of 2021 through spring 2022—and threw ports and containership lines for a loop—has subsided. In its place has emerged a market slowly returning to some semblance of pre-pandemic normal while facing the prospect of a recession on the near-term horizon, rapidly softening demand, and plummeting rates for container cargoes that have yet to hit bottom—and are foreshadowing rate wars of past years.

“Spot rate levels are back to pre-pandemic levels,” observes Lars Jensen, chief executive officer of consulting firm Vespucci Maritime. He cites two principal reasons. One has been the recovery of ports from congestion bottlenecks through the first half of last year. “High rate levels were partly a function of vessels trapped by congestion. As those eased, more capacity was released into the market,” he notes.

The second was a sudden sharp drop in demand starting in September, “where [the market] collapsed, especially in Asia-to-North America and Asia-to-Europe lanes,” driven by inventory corrections on the part of importers in the U.S. and Europe, he says. It’s a cycle that’s typical of a market bracing for uncertain economic times, and shippers consequently dialing back ordering and more aggressively managing inventory levels. 

Yet there could be a silver lining on the other side, Jensen notes. “Every time an inventory correction occurs, once addressed, you get a wave of cargo on the back side. Consumers regain confidence, and importers need to bring business back to normal levels, which leads to a surge in cargo,” he explains. 

Betting on how deep the decline will be and when the rebound will begin is the challenge for shippers, ports, and vessel operators alike. Ship operators are likely to cancel more sailings in response to weaker demand and the diminished need for capacity. “One scenario is that we are heading into a recession that is short-lived,” Jensen says. In that case, he sees a market continuing to collapse in January and February, then rebounding sometime in the spring.

“If we are heading into a deeper and longer recession, then cargo going back to the normal surge will be late in the year,” he predicts. “That will leave a relatively depressed [ocean freight] market for [most of] 2023.”

PORTS: A RETURN TO NORMALCY?

Ports are feeling the impact as well, although in different ways. The double-digit surge in cargo experienced in 2021 has been considerably dialed back. In October, the Port of Long Beach (POLB) saw a 16% decline in container volumes compared to the previous year. Yet for the first 10 months of 2022, the port was tracking 1.5% ahead of 2021. Mario Cordero, POLB’s executive director, says he expects the full year 2022 to be flat. “For me, that’s not a bad number given that 2021 was a record year of unprecedented surges.” 

He sees the port “on the cusp of normalization.” Where in January 2021, there were nearly 110 containerships anchored outside the port waiting to unload, “today there are zero vessels at anchor and backed up,” he notes. Container dwell, the amount of time a container sits in the port, is down 93% from the worst congestion in November 2021. Today, only 3% of containers dwell in the port more than a few days. On the rail side, “back in July, we had 13,000 rail containers that were dwelling at the terminals nine days or more. That number today is less than 350,” he reports.

Cordero is optimistic as he considers lessons learned from the past two years. “Anytime you move 20 million containers in a gateway, you need to transform your operations,” he says. Looking ahead, Cordero and his team are focused on improving and expanding the port’s infrastructure and increasing productivity and velocity. Over the past decade, the port has invested some $4 billion in its infrastructure. Over the next decade, the port’s plans call for $2.6 billion in capital expenditures, “a lot of that directed toward rail improvements and expansion,” Cordero notes.

One particular issue somewhat unique to Southern California ports is meeting upcoming goals for emissions reduction, notably a zero-emissions goal for trucks by 2035 and for cargo-handling equipment by 2030. “Both of these objectives are very challenging,” Cordero says. The port is getting a helping hand from the federal government, having recently won a $30 million grant to replace diesel-powered yard tractors with zero-emission electric models. “We’re moving ahead with electrification in a socially responsible way sensitive to the importance of the job market.”

DIVERSIONARY TACTICS

The 2021/2022 port congestion issues, particularly on the West Coast, also caused shippers to take a more in-depth look at their supply chains—and where they have import ocean cargoes landing in the U.S. One outcome was a marked diversion of ocean container cargo from West Coast to East Coast ports, a surge that led to congestion issues there, particularly in Savannah, Georgia. Another factor was concern about rail labor contracts and fears of a looming strike, which Congress averted. Some believed that trucking—and to some extent, westbound rail service—would be easier to find from East Coast ports and would reduce their risk of exposure to potentially strike-affected rail service from the West Coast.

A recent survey of shippers by investment firm Cowen & Co. found that while a majority of shippers likely will move much of their freight back to the West Coast, a small but significant portion of that volume will never return. “We believe there may be a [roughly] 10% permanent shift of freight to the East Coast … creating long-term opportunities for Eastern transportation companies,” the report said.

Among the motives the report’s lead author, Jason Seidl, cites for the shift are: the impact on Southern California truck capacity from regulations related to California emission requirements and the impact of AB5, the law that restricts businesses from classifying workers as independent contractors rather than employees; the opportunity for (and increasing interest in) reshoring to Mexico and the benefits associated with potential shifts; reduced political risk; the lower cost of transportation; and the further technology enablement of the supply chain. 

“A LITTLE BIT OF BREATHING ROOM”

East Coast ports have been adjusting to the shifts in business as well. Beth Rooney, director of the Port of New York & New Jersey, noted that of the port’s 10.5% growth in the past year, roughly 85% of that was cargo diverted to New York/New Jersey from West Coast ports. “It has been an interesting evolution,” she says. “All the East and Gulf Coast ports benefited from those shipper decisions.” 

In her conversations with the maritime community about freight diversion, she says, she’s found “it’s more a function of anxiety, what is going to happen with [West Coast longshore] labor negotiations, rail congestion concerns, what’s happening on the drayage trucking side,” and the prospect of California ports losing some 25% of their drayage capacity on January 1, when new laws kicked in. 

More than anything else, shippers are searching for reliability, consistency, and peace of mind, Rooney observes. And that presents opportunity. “We won’t have another 18% increase like we had in 2021, but I don’t think we are going to be flat or losing ground in 2023,” she notes. “We will get close to what we have been, which is 2% to 2.5% compound annual growth.” 

One upside of the softer market, Rooney says, is that “we have a little bit of breathing room. We handled volumes we were not expecting until the 2027 or 2028 time frame [last year].” The slower pace makes this a good time to continue to work on developing capacity and improving fluidity, she oberves.

She also cites the need for increased creativity and innovation. “We are operating as a supply chain participant pretty much the same way as when container shipping started in 1956. And it’s not unique to us. It’s a national issue.”

A MATTER OF CAPACITY

For their part, vessel operators are watching the market and reacting swiftly to address declining demand, rationing capacity to match. That could lead to more blank (canceled) sailings and other adjustments. 

“Our aim is to focus on improving service levels and vessel schedule integrity, which has been impacted by record cargo volumes the past two years,” says Narin Phol, Maersk North America regional managing director based in the U.S. As for capacity, Phol believes that “current fleet capacity will stay the same. And as we retire old tonnage, we will replace it with new, green methanol-fuel ships. We have 19 green methanol ships on order.”

Vessel operator Hapag-Lloyd has also put plans for further expansion on hold. Over the past two years, the containership giant has placed orders for 22 new vessels “with a capacity of more than 400,000 TEUs [20-foot equivalent units],” notes company spokesman Tim Siefert. “We have no plans for [additional] newbuilds at the moment.”

Will rate wars of the past return? “We cannot speculate,” Siefert says. “As usual, it is hard to foretell rate developments in the market when they always depend on the supply and demand balance,” he explains. “A crucial point will be the influx of capacity over the next [several] years. At the same time, we will see more scrapping and fleet modernization programs on the back of environmental obligations.” 

Vespucci Maritime’s Jensen says that while there hasn’t been much scrapping over the past two years, he expects it will pick up. “In a market where you had $20,000 per-container freight rates, it doesn’t matter how rusted or leaky your ship is, because someone will pay you for it,” he says.

Yet between a looming recession, declining demand, new environmental obligations, and operational changes such as fewer vessels in service and slow steaming (the practice of deliberately reducing ship speeds to minimize fuel consumption and carbon emissions), capacity eventually will come out of the industry. He cites consensus estimates of about a 10% capacity reduction over the next year. New capacity is not expected to come on-stream until later in 2023 or 2024. 

At the end of the day, Jensen says, vessel operators are watching closely how deep a “hard landing” will be for the market and how low rates will go ahead of a rebound. “The rule of thumb was if a freight rate goes so low [that] the carrier becomes cash-negative, they’d step away from the brink” to stem potential losses, he says, adding that excessively low rates and negative cash flow would push them toward bankruptcy. 

But vessel operators, reaping the benefits of two years of record profits, are in much better shape today than in the market downturns of the past. “They are all sitting on massive coffers of cash,” Jensen says.



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