Rough Seas in Ocean Freight – and How to Navigate Them

A Conversation with Edward Aldridge, Agility’s Ocean Freight Chief

Ocean Freight

Conversation

Q

Shippers were hoping to see a return to normal in ocean rates, capacity, container availability, and port operations after the December holidays and Chinese New Year. That hasn’t been the case. Why?

A

One reason is that consumer demand remains very high. Products that people want to support life at home during the pandemic – computer monitors, fitness equipment and other goods – are going from order to factory production to export to consumer as fast as possible. There’s nothing going to replenish what’s at the warehouse or in inventory stock. Consumer spending is intense everywhere, but especially so in the United States, where we’re seeing volume throughputs at West Coast ports that are 30% higher than normal for this time of year.

You see the same thing in Europe with restaurants closed, the inability to travel, borders basically shut and other restrictions in place, even within the European Union. People are thinking, what can I order online to get me through this period?

Q

Have things changed improved in recent weeks at all?

A

Yes. Ocean carriers have done a lot of work redeploying their assets — ships and containers. They looked at their schedules, looked at the port rotations, and their costs. They’ve made some adjustments to service, schedules, and port calls. One example is at LA/Long Beach on the U.S. West Coast, where congestion is so heavy that you have ships waiting at anchor for up to 11 days to unload. Some carriers have sent ships to less congested ports on the West Coast or through the Panama Canal to Gulf Coast or East Coast ports.

Unfortunately, those adjustments haven’t added much effective capacity back into the system. Why? There are so many vessels off schedule and out of position as a result of delays at congested ports and, now, with the incident involving the Ever Given in the Suez Canal. When the canal was blocked, hundreds of ships with billions of dollars in cargo were forced to drop anchor and wait for the canal to clear and reopen, or to take the longer, more expensive route around the Cape of Good Hope off South Africa. Carriers have been forced to cancel some sailings to give themselves time to get vessels back into place.

Q

Then there’s the ongoing container imbalance.

A

That’s right. The pandemic left the industry with hundreds of thousands of shipping containers out of position and unavailable to manufacturers shipping from China and other Asian exporting countries. We still have a serious imbalance. The carriers are desperate to speed containers back to Asia from other markets – container velocity is their priority. So they are eliminating “free days” – the grace period that shippers traditionally get to unload containers and return them. Shippers rely on free days, which essentially give them free storage and allow them flexibility when it comes to scheduling trucking and movements to warehouses or distribution centers. Free days in the U.S. can be five to seven days. Now we’re doing “live unloads” to get the container back immediately. You can always pay extra if you don’t have the ability to return the container right away, but the premiums are higher than shippers have ever seen before. In the Middle East, free days historically were up to 30 days. When you take that away from shippers, you get chaos.

 

The other issue is that carriers are so focused on meeting the demand in North America and Europe, and pushing so hard to get containers back to Asia, they have been skipping the secondary port calls on some “pendulum service” routes. That means when a ship from China calls at LA/Long Beach, it’s turning right around and going back to Asia rather than taking cargo to the west coast of Latin America. Or if it’s going to Rotterdam from Asia, it’s steaming right past Middle East ports without stopping.

We have seen a slight easing of the container shortage in China, but it’s still very severe in Southeast Asia – Vietnam and Thailand, for instance.

Q

What about rates? They have been up at $6,000 to $7,000 per container along Trans-Pacific routes.

A

They actually can be that high, depending on the location. We’ve also seen spot rates of $12,000 to $13,000. That has really squeezed shippers of lower value products. The fact is we’re in a situation where there’s more cargo than there are slots on ships.

It’s quite a change for the carriers. Five to seven years ago, carriers had so much capacity and a corresponding shortage of cargo. Effectively, they were subsidizing slots on their vessels and selling space at a loss.

Q

Have shippers adjusted their mindset?

A

Yes, we’ve always had peak seasons — a period of the contract when you knew it would be harder for you to move cargo. It’s usually been during summer and would build up to things like Chinese New Year. Right now we’re in an extended or rolling peak period unlike anything we’ve seen before.

Shippers are really looking at that and saying, well, I don’t like not having fixed terms during the contract duration, but if that’s what I need to do to be able to move my freight through that period, that’s something that I have to consider. So I think what we’ve now witnessed is two things – one, more openness, more willingness to accept a peak charge even though this is not typically a peak period.

Secondly, there is a very interesting development in terms of shippers now looking at a contractual agreement with carriers built around a commitment of volume and a commitment of service by the parties. I think they’re the two things that I’ve seen coming out of this crisis — the peak season surcharge element being part of the contractual agreements with your provider and the second a commitment-based agreement that ties the parties to volumes and service.

 

RFQs are starting to heat up, and it’s a very different marketplace. Our approach with shippers is to provide flexibility, solutions, alternatives, to question the norm, to ask whether they are sure about that free-day requirement they have because that’s going to cost them money. Are they sure about that port of discharge? Can we use an alternative port? We want to really question things.

The second thing is having a real eye on the slots. We are looking at every vessel allocation, every slot we operate. Every slot from every carrier from every origin has a value, it’s a slot on the ship that’s valuable. So we need to make sure that if we have 400 slots a week on a particular vessel service, I don’t want to use 390. I want to use 420 and squeeze every last ounce out of those slots so that I can make sure I can load the cargo that I commit to with the clients.

Q

How will the global vaccine rollout effect ocean freight?

A

The vaccination rollout will affect containerized shipping and logistics. As more people are vaccinated, more will be able to travel, then will come the return of passenger flights. With that will come the addition of belly cargo capacity back into the air freight market. That will allow shippers to shift some cargo from ocean back to air – high-value goods like consumer electronics that were diverted from air to ocean when air cargo capacity got so tight. That will help take some of the pressure off of ocean rates and capacity.

Q

When do you think we’ll see an easing in ocean rates and capacity?

A

There is no correlation, really, between what you’d expect to pay, and what you will need to pay at the moment. In the Asia-Europe trade we were starting to see some signals of not a decline — but stabilization — before the Ever Given got stuck in the Suez. That incident was a setback, and it will delay any stablization in rates or easing on capacity.

If I look at Trans-Pacific, the signals are all there that this is likely to continue way into the summer. There’s nothing that is changing on the Trans-Pacific eastbound trade. That’s imports into the U.S. — there’s nothing showing rates weakening at all. Demand is extremely strong. Some carriers, in fact, are removing some services on that rotation that’s on their services because of the port congestion.

Q

Why are they doing that?

A

They know that as they put a vessel into the service – if it’s going to wait and sit on the West Coast for six to eight days or more — that’s going to have a knock-on effect on their rotations and schedule. When you slow down the rotation, when you slow everything down, suddenly your available capacity reduces. The same number of vessels doing the same voyage but slowed down takes away your weekly available capacity. Because of the delays on the West Coast, carriers are not able to rotate vessels back into circulation quickly enough. That’s what’s essentially taking capacity out.

So what’s been taken out of ocean services between Week 14 or Week 17 — for Trans-Pacific, Trans-Atlantic and Asia-Europe, the three main East-West trade lanes — have essentially had a removal, a blanking of 7%-8% of available capacity.

Q

Are there other aggravating factors?

A

Infrastructure. The congestion at LA/Long Beach highlights the fact that port infrastructure has not kept pace with the growth in the size of vessels or with the demand for increased throughput. We have worrisome variances in port terminal productivity as the result of a lack of investment and infrastructure. I’m talking about the physical operation and the productivity of the terminal, the number of slots that the terminal can move off a vessel in a particular timeframe. It varies significantly, and we need more infrastructure investment if we want to see improvement.

There are also issues with intermodal infrastructure, especially trucking. Being a containerized-cargo truck driver is not a career that many young people want to go into nowadays. There is not much money to be made for a young truck driver, for example, so we have driver shortages.

Q

How are you helping shippers with all of this?

A

We lean on our diverse product portfolio. We lean on the fact that we have access to all carriers, all services, all alliances, which allows us then to be able to navigate the disruption. We have a central allocation management group in Shanghai that essentially helps us make sure that where we’re loading, we’re loading up to our allocations.

It’s effectively managing the asset of the slot on the ship. In years gone by, you didn’t need to do that because there were more slots on ships than there was cargo available. We are using the multiple service strings that are available to us. The second thing is making sure that we’re supporting customers who support us. What I mean by that is when we are awarded cargo through an RFQ — say 10 containers per week out of Shanghai — that the volume is moving at 10 to us from Shanghai per week. There have been many, many cases where we see cargo materialize that we weren’t formally awarded. We try to assist, but our priority is the committed volumes. Our focus is on the support the customers who have supported us with firm commitments.

Q

Have conversations with customers changed?

A

Many realize that the ecosystem is pretty fragile. Together, we’re looking for solutions like alternative ports — discharging the cargo in a different location. Historically, that would have been a non-starter. “No, I need it to be discharged in that port.” We’re finding a more flexible approach. ‘Find me a solution, give me an alternative and don’t rule anything out.’ The conversations are about partnering and solution-finding.

Q

Do you expect any permanent changes in ocean freight?

A

There is a recognition that we need to look at things like order visibility, predictive analytics on vessel scheduling, things like that. A more efficient supply chain, essentially. I’m talking from order all the way through to final delivery with a high level of flexibility for it to be efficient. Adding more containers by producing more and getting them in position, that won’t answer for an inefficient supply chain. For many years, there’s been a huge amount of emphasis on the ocean rate — what rate can I get? In the last 12 months, people have shifted their focus away from the lowest rates they can achieve. Now it’s what do I need to do to be more efficient and react to ongoing problems and supply chain challenges? It’s an understanding that, yes, the pandemic has affected the supply chain significantly, but next year it might be something else, a year after something else.