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Trans-Pacific peak season set for tight capacity    12/07/2019
The Trans-Pacific route could see a second straight peak season roiled by the US-China trade war

While front-loading won’t likely rock the peak season like it did last year, expectations of a weaker than usual peak, coupled with meager capacity expansion and carriers’ increased willingness to trim capacity further via blank sailings, are likely to keep US importers from Asia on edge.

The eastbound trans-Pacific is highly susceptible to capacity management by carriers, as the trade learned last year when carriers used a mix of blank (canceled) sailings and extra-loader vessels to match supply with demand and force spot rates to five-year highs. Importers have few if any tools at their disposal to counter blank sailings in a highly volatile market caused by Trump administration tariffs on imports from China. Alan Murphy, CEO of SeaIntelligence Maritime Consulting, said in this week’s Sunday Spotlight that the trade should brace for a second straight peak season roiled by the US-China trade war.

“It would be safe to assume that given the current 25 percent tariffs on almost half of the US imports from China, carriers would adjust capacity on the trans-Pacific trade to cater to a potential loss in volumes,” Murphy said. 

Capacity correlates with spot rates

In addition to affecting available capacity in the eastbound trans-Pacific, the blanked sailings serve to push spot freight rates higher, and this directly affects importers’ transportation costs, said David Bennett, president of the Americas at Globe Express Services. “The biggest issue is that they were expecting a specific cost,” he said, but suddenly the cost has increased.

For example, the spot rate from Shanghai to the West Coast increased from $1,382 per FEU on June 21 to $1,720 on June 28, an increase of 24.5 percent. The East Coast rate jumped from $2,404 per FEU to $2,789 on June 28, a 16 percent increase, according to the Shanghai Containerized Freight Index published on the Shipping and Logistics Pricing Hub. “The market doesn’t warrant those types of increases,” Bennett said.

Furthermore, the threat of some front-loading of imports to avoid low sulfur fees ahead of the Jan. 1 global mandate that could add $300 or more per TEU to transportation costs in the eastbound trans-Pacific will only add more volatility and uncertainty to the trade in the fourth quarter.

Carriers will have to drydock any vessels not fitted with scrubbers for at least a week to flush out the heavy diesel oil and replace it with the low-sulfur fuel mandated by the International Maritime Organization (IMO). Beneficial cargo owners (BCOs) know carriers have the option of extending the drydock as a means of managing capacity and boosting spot rates.

“Capacity availability at the end of the year when the carriers are prepping for the IMO rule. That’s the big issue I’m hearing about,” a non-vessel-operating common carrier (NVO) executive said. “If capacity is down, spot rates go up.” On the other hand, individual carriers will be cautious about how much capacity they remove at any given time because they could lose market share, which is something most carriers fear more than anything, he said.

Bennett added that each carrier brings its own business model to the table. Some carriers are more transparent and consistent than others, and once they agree to a price, “they keep their word,” he said. Others will capitalize on a capacity crunch by rolling cargo or pushing a peak-season surcharge. When conditions change several months later and space is plentiful, those same carriers will have “complete amnesia” and act like nothing happened, he said.

BCO options are limited

BCOs don’t have much recourse in the current environment because they have no control over carriers’ decisions on managing capacity. If they front-load imports too early, they could negate any savings in freight rates through higher inventory carrying costs. Since the US-China trade war began last summer, importers have found various ways to cope with the tariffs, the head of logistics at a home improvement store said. “Everyone is looking for loopholes, without doing anything illegal.”

Strategies include immediately entering imports into the US commercial market, rather than shipping in-bond to beat a tariff deadline. Some retailers attempt to get vendors to be the importer of record, so they get hit with any tariff rather than the retailer. And some of the retailers that remain the importer of record are asking vendors for discounts. Retailers are meeting with “some success” in these endeavors, but on a case-by-case basis, he said.   

Erratic capacity changes 

Carriers, meanwhile, can blank sailings on an ad-hoc basis when forward bookings are weak. They have already taken the unusual step, with the peak season approaching, of announcing three blank sailings in June and three for July. If not for extra loaders planned, that would reduce capacity by about 66,200 TEU, or about 1.8 percent, compared with a 3.8 percent capacity reduction in the entire third quarter of 2018. 

Cosco Shipping, Maersk, and Mediterranean Shipping Co. will deploy six extra-loaders in July and August, focusing on the Asia to East and Gulf coasts, maritime analyst Alphaliner said in its weekly newsletter. The four announced extra loaders will inject about 22,366 TEU of capacity, though, the capacity of the two extra loaders for late July and early August isn’t yet known. Through its enhanced partnership with the 2M alliance of Maersk and MSC, Zim Integrated Shipping Services will add new loops from Asia to the Gulf Coast, adding between 10,000 and 11,000 weekly TEU capacity. 

Factoring out blank sailings and extra loaders, carriers this year will increase scheduled weekly capacity to the West Coast only 0.6 percent, compared with a 2.4 percent increase last year. On the East Coast, carriers last year increased scheduled weekly capacity a rather large 9.4 percent. This year, total capacity is scheduled to increase 3.4 percent to the East Coast, according to SeaIntelligence.

Carriers this year have responded early and aggressively to the soft eastbound market. Imports from Asia in the first half of 2019 increased only 1.4 percent from the same period last year, about half the compound annual growth rate of 3 percent since 2015. Imports from China declined 5 percent, compared with a 1.7 percent compound growth rate since 2015, according to PIERS, a sister company within IHS Markit. This confirms fears within the industry that the Trump administration’s tariffs on more than 50 percent of US imports from China are having an adverse impact on trade between the two countries.

The six blank sailings announced for June and July are mostly to the West Coast, as it took longer for Los Angeles-Long Beach than for other ports to reduce the inventory overhang from the front-loading of late 2018. All-water services from Asia to the East Coast also tend to fill up earlier than to the West Coast loops, carrying lower-value cargo that is not especially time sensitive. As the peak season progresses, West Coast vessels begin to fill up with higher-value, time-sensitive shipments for the holiday shopping season. 

Trans-Pacific carriers last year used record blank sailings to manage capacity during periods when imports were sluggish. Even so, imports grew 4.3 percent in 2018, faster than the low single-digit growth projected for this year. Therefore, carriers can be expected to cancel sailings in the third quarter of 2019 if volumes do not pick up, Murphy said. “In Q3 2018, with trans-Pacific demand underperforming expectations, carriers used blank sailings extensively. We should keep in mind that carriers still have ample time to blank additional sailings in the peak season, should demand underperform their current expectations,” he said.

When the threat of 25 percent tariffs on imports from China was expected to take effect on Jan. 1, retailers and manufacturers front-loaded a large volume of imports from China in late 2018. The impact was most evident in Los Angeles-Long Beach, and the 1.5 billion square feet of industrial space in Southern California became a giant warehouse for storing 2019 spring merchandise. A former logistics executive at a large retailer said that inventory has been burned off by now, and 2019 peak season imports should begin arriving soon.

However, eastbound volumes are not expected to spike this fall. Rather, the trade will return to the “normal cadence” of steady growth through the peak season that was experienced in past years, an industry consultant told

The ‘calm before the peak season storm’

Scott Weiss, vice president of business development at Port Logistics Group, said import volumes in early July were beginning to build in Los Angeles-Long Beach, but marine terminals and warehouses were handling the growth without the congestion problems that plagued the largest US port complex from late 2018 through March 2019. “No one is out of space,” he said.

Coming into the July 4 weekend, import volumes on both coasts were steady, not yet at peak-season levels, although space on vessels departing Asia was beginning to tighten, said Kevin Krause, vice president of ocean services at SEKO Logistics. “Now is just the calm before the typical peak-season storm,” he said. SEKO is telling BCOs not to wait until the last minute to book shipments, but rather to give two to three weeks advance notice to secure space.

The long-threatened 25 percent tariffs on imports from China finally took effect in May. The Trump administration has delayed penalizing the remaining $300 billion of imports not yet under tariff, but regardless of what happens next, most BCOs have placed their purchase orders with manufacturing plants in China and imports will grow toward peak-season levels.

Daniel Hackett, partner, Hackett Associates, which publishes the Global Port Tracker with the National Retail Federation, said the projections made in the June issue for the peak season were made with the assumption that the tariffs on the final $300 billion dollars' worth of imports from China would not be implemented. Global Port Tracker is projecting a “subdued peak” this fall. Consumer confidence appears to be strong, and despite declining growth in US manufacturing, “there is some distance to go before we reach contraction,” he said.

Given how late it is in the ordering cycle, and the fact that some importers this past year have shifted a portion of their sourcing to other countries, especially Vietnam, Global Port Tracker is sticking with its peak-season forecast made last month, Hackett said. That forecast was for year-over-year increases of 1.1 percent in July, 3.3 percent in August, and 0.9 percent in September. Global Port Tracker projected a decline of 4.4 percent from the record imports in October 2018.

Import volume growth from Asia so far this year is lagging that of recent years. The 1.4 percent growth seen through June compares with 4.3 percent in January-June 2018, and 6.4 percent in  2017. Additionally, it noticeably less than the 3 percent average growth in the first six months of 2015-2019, according to PIERS. 

While imports from China are down 5 percent in the first half of 2019, imports from Vietnam shot up 30.5 percent year over year. Imports are also up 12.8 percent from India, 11.9 percent from South Korea, 10.7 percent from Taiwan, 19.6 percent from Thailand, and 11.5 percent from Indonesia, indicating that retailers are shifting sourcing away from China.

Judging from carriers’ blanked sailings in the eastbound Pacific in previous years, carriers will not hesitate to cancel sailings if they believe future bookings could cause spot freight rates to drop. Carriers in the first quarter of 2019 voided 73 sailings, according to SeaIntelligence. Over the past six years, carriers  blanked 128 sailings in calendar year 2013, 128 sailings in 2014, 121 sailings in 2015, 115 sailings in 2016, 80 sailings in 2017, and a recent record of 136 sailings in 2018.

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