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Global News Early peak season, mixed signals to test Asia-US rate strength

Registration dateNOV 07, 2022

Bill Mongelluzzo, Senior Editor; and Mark Szakonyi, Executive Editor Jun 07, 2022 12:05PM EDT
source : JOC.com (The Journal of Commerce)

Bill Mongelluzzo, Senior Editor; and Mark Szakonyi, Executive Editor
Jun 07, 2022 12:05PM EDT
source : JOC.com (The Journal of Commerce)

Continued US import growth points to summer port congestion Continued US import growth points to summer port congestion The spot rate from Shanghai to Los Angeles last week was $8,704 per FEU, basically unchanged from the previous two weeks but 46 percent higher than June 2021, according to the Drewry World Container Index. Photo credit: Shutterstock.com.

The coming two months will reveal just how much US importers are pulling back on orders from Asia, and the degree to which container lines can adjust capacity as easing vessel space on some trades pulls down spot rates.

Forwarders tell JOC.com they expect a bump in spot rates in the coming weeks when an anticipated early peak season ripples into the trade beginning in late June. But the scale of the rate increase and length of the peak season are unclear, as some shippers are pulling back or even canceling orders, while others are front-loading cargo.

However, the number of orders for Asian imports to the US and Canada has been steadily rising since February and into May, as tracked by Infor Nexus. The number of orders to China in May jumped to nearly 150,000, the highest monthly volume of new orders since November 2021, according to Infor Nexus, a global network platform for direct procurement, origin order management, multimodal freight management, and trade finance services.

The spot rate from Shanghai to Los Angeles last week was $8,704 per FEU, basically unchanged from the previous two weeks but 46 percent higher than June 2021, according to the Drewry World Container Index. The spot rate from Shanghai to New York last week was $10,871/FEU, also flat with the previous two weeks but up 44 percent from a year ago.

Premium rates, which carriers imposed last year when demand exceeded vessel supply in the eastbound trans-Pacific and are intended guarantee that containers get loaded onto ships as booked, have faded. That’s a sign there is excess capacity in the trade for the first time in approximately two years.

“Premium rates are losing a lot of value and are coming closer to FAK [freight all kinds] rate levels. We are seeing slippage in FAK rates, which are fundamentally spot rates, so supply and demand is an issue, and not in the carriers’ favor,” said James Caradonna, general manager pricing/Americas at M&R Forwarding. “Carriers are telling us they’re not seeing an order increase in June.”

Caradonna said that premium rates to the East Coast have come down 20 percent over the past two months from their five-digit highs, even though import volumes have remained relatively strong. Similarly, premiums from base ports in Asia to Los Angeles-Long Beach have come down 15 percent. Retailers cautious amid economic uncertainty Some US retailers are reportedly pulling back on their purchase orders with Asian factories due to uncertainties over the direction of the economy and how well consumer spending will hold up in an environment of high inflation.
Patrick Fay, cofounder and CEO at forwarder BOC International, said some shippers have lowered their projections for imports due to a shift in consumer spending from merchandise to services such as dining out and travel.

“Inflation, [Federal Reserve] interest rate adjustments, stock market direction, and the [potentially] ominous fall COVID situation are all factors that will also have an influence on how the year will unfold,” Fay said.

The logistics director at a mid-size retailer said he is “adjusting” purchase orders with factories in Asia, which he defined as slowing down — but not canceling — orders until the direction of the economy becomes clearer. He sees a later peak season ahead, starting in late summer, “but it will be a short holiday season,” the importer, who asked not to be identified, told JOC.com

While some importers may be considering pulling back on purchase orders, it hasn’t been reflected in the bookings that freight forwarder Farrow is handling, said COO David Bennett.

“I’m not seeing it yet,” Bennett told JOC.com. “My sense is this is potentially a temporary softening unless inflation becomes a long-term trend.”

US imports from Asia increased 2.7 percent in January through April compared with a year ago, according to PIERS, a JOC.com sister product within S&P Global. Import volumes increased despite the normal softness experienced during the Lunar New Year in February. Interruptions in shipments from Shanghai during the COVID-19 lockdowns that began in March and for the most part ended last week also affected cargo volumes. But the fact that imports from Asia continued to grow indicates consumer demand is still strong, Bennett said. Spot rates have declined Spot rates have softened this spring, although they have not come crashing down, as would happen if the trade were entering a recession.

Alan Murphy, CEO of Sea-Intelligence Maritime Analysis, attributes the decline in West Coast spot rates largely to the softer import volumes following the Lunar New Year. He added a cautionary note, however.

“But it is also clear to see that normal seasonality would imply that rate levels are to begin to increase in the coming weeks, if we are to see normal seasonality,” Murphy said in his most recent Sunday Spotlight newsletter.

Forwarders do not expect spot rates in the eastbound trans-Pacific to drop significantly going forward.
“Spot rates are drifting lower, but not in any panic fashion,” Kurt McElroy, executive vice president of Apex, said. “Carriers are capable of managing capacity against sustained volume softness and expect that we will continue to see elevated rates regardless of current volume uncertainty.”

In past years, during seasonal dips in cargo volumes, carriers managed capacity by canceling voyages, known as blank sailings. This year, however, vessel schedules have been so disrupted by congestion in Asian and US ports that the trans-Pacific has experienced “structural” blank sailings, meaning vessels were not in the Asian load ports when they were supposed to be. Vessel on-time performance from Asia to the US West and East coasts in April was only about 20 percent, according to Sea-Intel.

Caradonna said that due to current scheduled blank sailings, total capacity in the trans-Pacific has been reduced by about 20 percent, with some areas, such as the Pacific Northwest, experiencing a greater number of blank sailings because of congestion problems and delays in Vancouver.

On the other hand, the blanks that are scheduled for the coming weeks will give retailers an opportunity to reduce their inventory carryover, some of which dates back to peak season 2021 when some holiday shipments arrived late because of port congestion, said an industry consultant who was a logistics executive for national retailers. Weekly blanked capacity on the trans-Pacific has been trending in the range of 26 to 46 percent from late April through the first week of June, according to Project44. The freight visibility provider’s forecast says the range of weekly blanked capacity will narrow in the coming eight weeks in a range of 28 to 37 percent.

Also, some retailers shipped 2022 back-to-school and holiday season merchandise early this year to protect against supply chain disruptions they fear could arise when the current contract between waterfront employers and the International Longshore and Warehouse Union expires on July 1.

Finally, the capacity that is removed due to blank sailings by the large alliance carriers will be partially offset by the half-dozen new lines that entered the trans-Pacific last year. A second transportation consultant and former logistics director at national retailers said there are so many forces at work right now that he does not anticipate any significant rate movement up or down until the peak season environment becomes more clearly defined.

“I don’t see any race to the bottom in terms of rates, but the longer this [uncertainty] goes on the worse it gets for the carriers,” he said.
· Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter : @billmongelluzzo. · Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com and follow him on Twitter : @MarkSzakonyi.