Fight for Trans-Pacific Vessel Space Intensifying

Consumer demand in the US is predicted to drive import growth through the peak shipping season this fall. Photo credit: Shutterstock.com.

"You haven't seen anything yet." That is the warning container lines, forwarders and consultants are giving US retail importers from Asia for the next three months as the eastbound trans-Pacific trade enters the traditional peak shipping season facing an unprecedented shortage of vessel capacity.

After 11 months marked by double-digit year-over-year increases in US imports from Asia<https://www.joc.com/maritime-news/container-lines/record-us-imports-through-may-sound-peak-season-alarm_20210615.html>, and volumes rising 40 percent in the first five months of this year alone, the trans-Pacific shipping network, from Asian-origin ports to US destinations, has been sagging under the pressure. But shipping executives say the worst is yet to come, putting upward pressure on already record spot rates, and intensifying vessel delays and congested marine terminals at major US seaports.

The combination of accelerating import volumes, tight vessel capacity at Asian load ports, congested US ports, and an intermodal rail network stretched almost beyond capacity has driven retailers and other importers to near desperation as they attempt to book vessel space four to six weeks ahead of scheduled departures from Asia. Industry experts say the vessel capacity shortages retailers experienced in the second quarter will likely get worse in the third quarter.

Imports are projected to surge another 14 percent year over year in July, 7.5 percent in August, and tick up 1.7 percent in September against stronger comparisons from the second half of 2020, according to the Global Port Tracker, which is published monthly by the National Retail Federation and Hackett Associates.

Spot rates in the eastbound trans-Pacific have been increasing along with imports, a trend that has been under way since the start of last year's peak season. According to Drewry, the average spot rate from Asia to the US West Coast reached $7,613 per FEU in the last week of June, up 3.1 percent from the previous week and 172.5 percent from the same week in 2020. The Asia-US West Coast spot rate first reached $3,000 per FEU in August 2020 and has climbed steadily since then, more than doubling over the past year. Carriers have successfully implemented general rate increases (GRIs) on a monthly basis over the past year, and more recently, they have been implementing GRIs twice a month<https://www.joc.com/maritime-news/container-lines/trans-pacific-carriers-pushing-rate-increases-more-often_20210614.html>.

But even those record-high spot rates will not guarantee space on vessels leaving Asia. Retailers and non-vessel-operating common carriers (NVOs) must pay premium rates to guarantee that their containers will be loaded onto vessels. Rate sheets that NVOs shared with JOC.com list space guarantees ranging from $1,000 per FEU to as high as $5,000 per FEU on top of the spot rates, which can push the all-inclusive freight rate to the West Coast above $10,000 per FEU.

Consumer demand off the charts

"It's a very scary year, but it's not over. In many ways, it's just beginning," Jon Monroe, who advises NVOs, said in a newsletter to his clients late June. The explosive growth in imports during the second quarter was built on inventory replenishment and e-commerce fulfillment, and did not reflect holiday season imports, which are just now starting to move, he said.

Container volumes in the Asia-North America trade are driven largely by US consumer demand, and consumers are expected to continue spending freely this summer, as well as during the back-to-school and holiday shopping seasons. According to JOC.com parent company IHS Markit, US gross domestic product (GDP) is projected to increase 7.9 percent in the second half of 2021, and to remain strong through 2022. IHS Markit has revised its 2022 projection for GDP growth to 5 percent from 4.8 percent.

"Strong final demand combined with lean inventories, a rising proportion of vaccinated Americans, and the nearly complete recission of domestic pandemic containment measures, all against a backdrop of expansionary monetary and fiscal policy, support our forecast of 6.6 percent GDP growth this year and 5 percent next year," Joel Prakken, chief economist at IHS Markit, said July 6 with the release of the revised GDP projection.

Inventory replenishment will continue to drive some of the import growth, at least for the short term. The retail inventory-to-sales ratio in April was 1.07, down from 1.67 in April 2020, according to the US Census Bureau.

Alan Murphy, CEO of Sea-Intelligence Maritime Analysis, seized upon this economic indicator in the analyst's Sunday Spotlight newsletter, noting how the need for retailers to restock to keep up with sales continues to drive US imports from Asia. "The retail ratio has dropped off a veritable cliff, and is fast approaching a ratio of just one," he said. For reference, in the 28 years before the pandemic, the ratio had never dropped below 1.34, he said.

"None of this appears sustainable, but predicting when we return to 'normal' does not seem possible," Murphy said.

The acceleration of import volumes into North America comes as other east-west trade lanes compete for vessel space and equipment at Asian ports, and this will only exacerbate the space shortages during the August-October peak ocean shipping season.

"It's hard to get on a ship anywhere in the world now" said David Bennett, COO of the NVO Farrow. "There will be a big space shortfall coming for the peak season. There's not a single touchpoint that isn't under enormous stress."

Capacity gone in a blink

Lawrence Burns, a former executive at HMM who is now an industry consultant, said shippers and forwarders can sling mud at the carriers for the capacity shortfall, but the reality is that there is more demand for slots on vessels leaving Asia now than there are vessels to carry the freight. "This is Supply Chain 101," he said.

That means some vendors supplying major retailers simply will not be able to secure enough vessel space to meet the delivery dates to which they have committed, Burns said. "These shippers are already telling retailers, 'I can't meet the original arrival date.' We're at that point now," Burns told JOC.com.

The logistics director for a midsize retailer who asked not to be identified said his staff had forecast a capacity shortfall in the eastbound trans-Pacific for July, August, and September, and that was before the June closure of Yantian International Container Terminals in the Port of Shenzhen, a major gateway for Chinese exports, because of a COVID-19 outbreak.

If these shortages continue through the third quarter, which is likely, "I think retailers will cancel orders in China," the logistics manager said. Even if that involves paying a cancellation fee, some retailers will have no choice. "This will fall back on the Chinese manufacturers," the source said.

Industry analysts predict that the space shortages will not be resolved even as several carriers the past month announced new services, or in some cases deployment of extra-loader vessels, to both the West and East coasts, leading to what Sea-Intelligence called an "unprecedented" injection of capacity into the trade for the peak season.

In the Asia-West Coast trade lane, deployed capacity is projected to increase 24.5 percent from third-quarter 2020, and 32.9 percent from the same three months in 2019, Murphy said. To the East Coast, capacity is projected to increase 25.1 percent from third-quarter 2020 and 33.6 percent from third-quarter 2019.

Some of the additional capacity will be provided by regional carriers in Asia that are new to the trans-Pacific, such as BAL Container Line and China United Shipping. However, major trans-Pacific carrier Maersk will add a weekly service to the West Coast<https://www.joc.com/maritime-news/container-lines/overbooked-asia-us-trade-gets-three-new-services_20210630.html> and one to the East Coast, and Cosco Shipping/OOCL will launch a new East Coast service in August, the carriers announced last week. HMM, which has been running two extra-loader vessels each month in the trans-Pacific, will double that to four per month, "for as long as we see sufficient market demand," an HMM spokesman told JOC.com Tuesday.

Despite the projected increase in capacity, most carriers will only be able to serve their book of steady business, and they are telling importers to seek additional space from NVOs, according to a carrier executive who asked not to be identified.

"I have no room," the executive told JOC.com. "I'm not going to negotiate with you. I have no ability to get you on a ship. Try the little NVOs. Try anybody who can give you an allocation," is the advice he said he is giving shippers who plead for additional space.

Uffe Ostergaard, head of US trades at Hapag-Lloyd, said retailers should look at their import needs for the rest of the year and prioritize which shipments must be delivered in time for the peak season and which can be held until later in the year or even next year. Carriers have tried their best to inject new capacity into the trans-Pacific, but they cannot access much more.

"It's not like we have a whole fleet of ships sitting somewhere that are waiting to be deployed. Everything is working. We don't believe we will be able to get our hands on any additional ships in the second half of 2021," he said during a Hapag-Lloyd webinar.

The hunt for space

As the trade transitions to the peak season, looking for additional space "will be a treasure hunt," so importers should prioritize product categories based upon their profitability so as not to experience stock outages for that merchandise, an industry consultant and former logistics director for a national retailer said.

Some shippers today are focusing almost entirely on securing space, no matter what the cost, said Daniel Grimes, vice president at Janel Group. "We used to see requests for pricing (RFPs), but now we are seeing some shippers sending out requests for bookings (RFBs)," he said.

Grimes also noted the risks inherent in focusing solely on price in today's tight market. "We had a long-time shipper leave us because he was promised lower rates and guaranteed space by another forwarder," he said. "Three weeks later, the client returned to us and said that the other forwarder couldn't keep its promise."

Shippers are also scrambling to circumvent lengthy delays at US ports, especially on the West Coast. NVOs say one option shippers might consider is air freight, if it is feasible.

Whiplash, which operates import distribution warehouses on the West and East coasts and recently rebranded from Port Logistics Group, is seeing an increase in transloading of merchandise into trailers to be shipped to the Midwest via truck, said Scott Weiss, vice president of business development. Generally speaking, the warehouse space necessary to transload - and the equipment to do so - is available and it is less costly than shipping by air, too, Weiss said.

Similarly, with ocean carriers discouraging the inland shipment of intact marine containers, known as inland point intermodal (IPI), because they want to turn the containers quickly at the ports and return them to Asia, some importers are transloading the contents into domestic rail containers and shipping them inland via the domestic network.

Until a couple of weeks ago, the domestic rail network was less stressed than the IPI network at West Coast ports, but Anthony Chavira, chief operating officer at Rail Delivery Services in Southern California, said the delays at the on-dock yards at ports and at the off-dock rail yards have caused a knock-on effect at the domestic rail facilities.

"They're taking crews away from domestic. It's a relatively recent phenomenon," he said.