2023 Ocean Cargo Roundtable: Are more predictable patterns on the horizon

Looking at the current state of the ocean cargo market in 2023 doesn’t exactly match up with how things were a year ago at this time. For one thing, the rate and contract volatility and unprecedented levels of port congestion that the market was up against last year are not really factors this year.

What’s more, as consumers continue to spend more on services rather than goods, there has been a noticeable drop-off in import levels, even though import levels are slowly gaining traction. This leaves industry observers to maintain that when demand eventually does pick up, we could be in a more normal, pre-pandemic market environment.

Joining us in Logistics Management’s Annual Ocean Cargo Roundtable to assess these continued challenges and take a closer look at the current state of market dynamics are two of the industry’s foremost ocean cargo experts: Sarah Banks, managing director and global freight and logistics lead at Accenture; and Philip Damas, director and head of the supply chain advisors practice at London-based Drewry.

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Logistics Management (LM):How do you view the prospects for a 2023 peak season? Or do you believe we’re now in a period where peak is not the annual occurrence that it used to be?

Philip Damas:The pandemic-related consumer boom and the post-pandemic consumer downturn severely distorted the normal peak-season pattern, and we’re still not back to a “normal year” in international shipping. Many commentators have mentioned the persistently high inventory levels of U.S. retailers, which must be run down before large import programs are resumed, for example.

This year, there will not be a normal peak season, in Drewry’s view. Even some ocean carriers, such as Evergreen, now admit that there will be no peak season in the third quarter. And based on the Drewry Container Forecaster, third-quarter imports from Asia to North America will total only 6.3 million twenty-foot equivalent units [TEUs], down from the same quarter in 2022, and only 7% higher than in the weak second quarter.

We don’t think that this is a permanent new pattern. The mass purchasing of end-of-year and holiday consumer products will continue, and we expect a third-season peak season to come back next year.

LM:While inflation is not at the 40-year highs we saw a year ago at this time, it’s still a factor when it comes to decision-making for consumers. In your opinion, how much has inflation made an impact on consumer demand as well as import levels and freight flows?

Sarah Banks:While inflation definitely influences consumer spending, putting more pressure on when and on what consumers spend, there are other factors that have made an impact on the import and freight flows over the last year.

These factors include the re-stabilization of the supply chain, which has brought more certainty to transportation capacity and on-time arrivals and less concern about inventory on-hand, as well as the mix of consumer spending that has shifted from goods and products to either services or less expensive goods. All of these factors combined influence how consumer spending impacts import and freight flows.

花缎:Those are certainly all ongoing factors. Higher prices and interest rates have squeezed the purchasing power and lowered the confidence of many consumers in the United States and in other countries. These economic concerns have made an impact on import levels of both staple products and discretionary-spend products. However, we are seeing signs of improvements, which will lead to a gradual recovery of imports—with the emphasis on the word gradual.

Drewry does not expect the record Asia-to-North America container import volumes to come back until 2025. For the full-year 2023, we’re forecasting a 4.8% contraction in trans-Pacific imports, as expansion in the second half of the year will not be able to offset losses from the first half of the year.

LM:While inventory levels remain somewhat elevated, there are signs of a destocking. How is the current inventory outlook making an impact on ocean cargo volumes?

花缎:We can expect to see a more robust 6.8% growth for inventories in 2024, when the effects of the hangover from the pandemic dissipate and more normal spending and restocking patterns reassert themselves.

LM:How do you view the current state of ocean contract rates and pricing? Are rates sticking more now?

Banks:许多大型船运公司掌握的标记t conditions—demand down, capacity up. It will be difficult to get freight rates to stick, and many shippers are looking forward to the next tender cycles to lock in rates that reflect the latest market conditions.

That being said, these shippers also have a new appreciation for some of the aspects of a service contract, versus spot rates, especially when it comes to flexibility in booking volumes, access to capacity, and non-rolling/preferred status.

花缎:Sarah is spot-on. I would add that U.S. exporters and importers have secured 55%-plus reductions in contract rates and 80%-plus cuts in spot rates on most routes in recent months.

Spot rates on routes from Asia appear to have reached a bottom for now, but the delivery of a record amount of new ship capacity later this year will put further downward pressure on ocean rates. Exporters and importers should obviously do their utmost to secure the freight cost reductions that are available in the market—and use benchmarking groups to monitor their progress.

“We can expect to see a more robust 6.8% growth for inventories in 2024, when the effects of the hangover from the pandemic dissipate and more normal spending and restocking patterns reassert themselves.” - Philip Damas, Drewry

LM:你认为海洋航空公司能够年代ustain the current rate structure, or do you see things changing in the coming months?

Banks:Pricing is determined by market demand and capacity. We’ve seen demand drop from levels seen during the pandemic, while at the same time global ocean shipping capacity is increasing—not only since last year, but projected into the future. This means that rates will continue to reduce over time and shippers will be looking to secure rates that reflect the condition of this market.

It’s not all doom and gloom for carriers in this situation, as recent discussions with large shippers indicated that if carriers can provide more integrated service offerings from origin to destination, improving the overall cost and service level of the supply chain, carriers will be in a position to generate more revenue.

花缎:Drewry sees three short-term drivers making an impact on this market: the return of over-capacity in container shipping; the weakness of demand, partly exacerbated by the fact that U.S. companies are reducing their inventories; and ocean carriers’ attempts to control capacity, mainly through cancelled sailings.

所有这三个因素导致大量增加tions in ocean rates in the first half of this year. At least one of these adverse factors—overcapacity—is expected to become worse in the second half, hence Drewry’s forecast that contract rates will decline again in the second half, particularly on the trans-Atlantic route.

In other words, ocean carriers will have a tough job controlling surplus capacity and holding ocean rates at current levels. The ocean carrier industry must be wondering whether it will be thanked for helping to reduce U.S. inflation—just as it was blamed recently for contributing to U.S. inflation.

LM:Do you expect shippers to leverage volume for favored status?

花缎:In 2022, volume on its own was not enough to enable shippers to secure good rates. However, ocean carriers are now hungry for business and, yes, leveraging volume is coming back as an effective way to secure better terms.

Banks:I’ll add that favored status is helpful in a capacity-constrained market. With demand down and capacity up, the market definitely favors the shippers. With this environment, it’s difficult to say whether shippers will commit significant volumes if capacity is broadly available. It’s really the peak season cycle that puts stress on the system where certain-favored status would be sought by shippers.

In addition, carriers well understand that volume commitments have lacked teeth in the past, and in today’s downward market, it’s even less meaningful. What carriers and shippers should really evolve to is a model that rewards shippers for forecast accuracy on a shorter cycle, versus a larger, longer-term contract at higher volumes, which typically are a best-guess effort.

This would greatly improve carrier service levels and provide more value to both shippers and carriers, versus a volume commitment alone.

LM:With a tentative new labor deal between the ILWU and PMA now in place, will there be a significant return of cargo that was diverted to East and Gulf Coast ports?

花缎:This is difficult to say. Exporters and importers have become very frustrated by repeat, lengthy, and unpredictable labor disruptions at West Coast ports. And some of the change-of-route decisions led to investments in warehouses near the East or Gulf coasts, which can’t be reversed.

Maybe the labor deal will trigger only a partial return of diverted cargoes to the West Coast routing and stop a further loss of market share of West Coast ports. The industry would like to hear West Coast ports announce a plan to stop their long-standing loss of market share and provide more reliability.

“Both shippers and carriers need to collaborate to create a better experience…It starts with the shippers being more transparent in terms
of what’s happening at origin, so carriers can better plan for expected volumes, and ends with carriers operating to committed schedules
and not deviating due to various factors such as port call omissions.” - Sarah Banks, Accenture

LM:How do you view the current state of service, in terms of carriers being able to deliver on promises?

Banks:There has been a pivot back to more reliability in the level of service within the ocean carriers over the last year. However, there’s still much to be done in terms of delivering high quality and reliable service.

To bridge this gap, both shippers and carriers need to collaborate to create a better experience. It starts with the shippers being more transparent in terms of what’s happening at origin, so carriers can better plan for expected volumes, and ends with carriers operating to committed schedules and not deviating due to various factors such as port call omissions.

花缎:Port congestion has decreased a lot since the crazy days of 2020-2021, but ports can still cause delays to shipping. For example, Drewry Container Capacity Insight vessel tracking in mid-July found that ship waiting times at the port of Vancouver, Canada, rose from 21 hours in week 26 to 111 hours in week 27.

Furthermore, ocean carriers are cancelling many sailings in an attempt to control capacity and stop rates from falling. Drewry identified 19 Asia-to-North America sailings that were due to be cancelled between week 29 and week 33 [see chart]. All three alliances are cancelling sailings, to varying degrees.

We expect that there will be many more cancelled sailings in 2023, as we predicted in an earlier interview with Logistics Management. This means that importers should make backup plans for these disruptions and consider multiple options.

Furthermore, with the World Container Index below $1,500 per 40-foot container, ocean carriers may decide that schedule reliability is not a priority. The lack of reliability and predictability of ocean transport does not make the job of a logistics executive easy.