Data emanating from the global ocean container transportation area again indicates important trend shifts that industry supply chain teams need to continue to monitor.

In our last transportation industry update published in mid-May, Supply Chain Matters observed that ocean container carriers now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to changed routings, nuances, and carrier network forces. 

Since our last update, the revised three major ocean container carrier networks went into operational effect beginning in April, and service routings have now permeated across major global trade routes. Industry and business media have been homing in on both global volumes and specific U.S. West Coast and East Coast port data for May that is reflecting the impacts of the new carrier networks.

Data we have observed would indicate the overall container shipping volumes are up from a global basis. The benchmark Port of Singapore operating data reflects a 5 percent rise in first quarter container volumes, from the year earlier period. The demand for container transportation capacity has reportedly cut the percentage of idle ships to 3.5 percent in the first quarter, compared with double that amount in the fourth quarter of last year.

The Wall Street Journal and transportation industry media observe that the Ports of Los Angeles and Long Beach, which traditionally manage the largest volumes of container traffic, experienced a pullback in overall inbound container traffic in May. While the ports experienced volume increases of 26 percent in March and 12 percent surge in April, May was reported as a mere 2.5 percent increase.  In contrast, the two largest port operators on the East Coast reported import volume growth of 8.8 percent and 13.5 percent each in May.

The WSJ observes that the three consolidated networks are dispatching larger container vessels to the three major U.S. West Coast ports with fewer port calls. Cited is Drewry data indicating that megaship coverage on the Asia to U.S. West Coast routing has doubled since the beginning of the year. At the same time, the networks have scheduled similar larger vessels on the Asia to U.S. East Coast routing, via the Panama Canal, hence the building east coast volumes. Some of this shifting routing is obviously shipper motivated while some has to do with the new strategies being deployed by shipping lines.

The implication for industry supply chain teams is the existence of fewer sailings than prior scheduling, which implies less flexibility for shippers along with added exposure to inventory-in-transit. The larger megaships require added unloading and loading turnaround times, especially for ports that are not prepared for the larger megaships and their added logistics implications. That is going to present added challenges for time-sensitive transit of goods such as agricultural and food related products.

It is our Ferrari Research Group belief that the new network routing strategies are an effort by ocean carriers to capture more of the transportation cost dollars from shippers, avoiding the need for a U.S. surface trans-shipment. It further supports the strategic goal among carriers to expand into added third-party logistics services through broader control of container movements. Further, the industry as a whole is shifting away from shipping line and service differentiation towards network-centric scheduling and global leverage.

As we also noted in our prior commentary, freight rates continue to climb for shippers over previous very low rates dating back to 2015. One rate benchmark for May cited by the WSJ reflects a $1390 average TEU rate for Asia to the U.S. West Coast, and a $965 Asia to Europe rate for respective segments. This is despite a continued capacity imbalance where new megaships continue to enter service chasing single-digit capacity growth. The existing scrap rate for older, less efficient vessels lags the reality of global market demand.

With the scheduling under three global alliance networks now pooling capacity for over 90 percent of major global trade routes, influences for rate hikes have shifted toward a seller’s market.  That defies supply and demand logic, but then again, we are describing an industry that seems to defy logic. Most carriers are forecasting a return to profitability in the current year which implies the threat of continued rate hikes.

The takeaway for industry supply chain, logistics and transportation procurement teams remains one of diligence and constant market monitoring.  Business-as-usual assumptions related to ocean transport no longer hold credence with these dynamics occurring. If management of ocean transportation has been outsourced, make sure that your services provider is communicating an adequate stream of market strategy updates as well as plans to address such factors.

Insure that senior management as well as line-of-business teams understand that ocean container transportation trends are quickly changing with many market forces pulling in different directions. Added transportation cost savings, particularly in the upcoming and often far busier second-half of the year may not be a wise assumption. Service levels, flexibility and added inventory exposure are potential risk areas.

 

Bob Ferrari

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