Elevated Asia import volumes could last beyond October
The surge of US imports from Asia — with volume growing at double the pace from March through August compared with the same five-month period a year ago — could continue into November or possibly early 2021, well beyond when the peak typically subsides, multiple carrier and forwarder sources tell JOC.com.
Containerized US import volumes from Asia rocketed 91 percent between March and August, according to PIERS, a JOC.com sister company within IHS Markit. By comparison, inbound shipments from Asia grew 36 percent in the same period in 2019. Total US imports in the five-month period increased 102 percent, compared with a 47 percent expansion in the March-August period in 2019.
“This, combined with the record-level surge in ecommerce, is definitely contributing to an extension of the traditional peak season,” Ed Aldridge, president of CMA CGM (America), said in a statement to JOC.com
But with economists believing the sharp economic recovery seen in the US during the third quarter is already sputtering, questions are growing about how long the import surge will last.
“The second-quarter real GDP (gross domestic product) drop in most of the world’s economies was one for the records. The third-quarter rebound is likely to be unusually strong. After that, however, IHS Markit expects recoveries in most of the world’s largest economies to falter,” IHS Markit chief economist Nariman Behravesh said in a recent report. US GDP shrank 31.7 percent in the second quarter, and IHS Markit forecasts a 26 percent rebound in the third quarter. “I think [the import surge] could last a couple more months, but the faltering of key US data, such as retail sales and industrial production, suggests that this is a very temporary phenomenon,” Behravesh told JOC.com.
Volumes overwhelm port operations
The operational impact of an import surge that extends beyond the end of the typical peak is likely more relevant than the market impact on rate levels. If the volumes remain robust through November, it will perpetuate congestion and other operational challenges currently experienced at ports such as
Los Angeles and Long Beach, where terminals are operating at or near full capacity, chassis are in short supply, and drayage productivity is declining. It would also extend the duration of broader challenges such as carriers’ difficulties repositioning empty containers back to Asia.
But even a late-year slowdown in volumes will not necessarily translate into lower rates. Carriers are expected to re-run the playbook of 2020 in curtailing capacity through blank sailings, especially if that helps set a higher baseline for annual contracts negotiated in the spring of 2021.
This year, contract rates agreed to in the spring during the depths of the lockdown ended up being much lower than eventual record-setting spot rates, meaning carriers, despite experiencing a surprisingly profitable year, actually saw only limited benefit from the higher rates.
The highly unusual year of 2020, which industry sources anticipate they will be talking about for years, is culminating in an unusually robust peak season combining both holiday season goods as well as restocking
“We anticipate very robust volumes throughout the end of the year with a specific focus on Vietnam and India as their growth outpaces the market,” Aldridge said. “Our value-added solutions, including our SEAPRIORITY and EXX differentiated services, are also in high demand as our customers replenish their inventories and seek creative ways to get their products to market more quickly.”
The operational impact of an extended peak has industry executives concerned that the hole the industry is in — especially in Southern California — could become deeper and take longer to dig out of.
“Because of the decline in driver productivity related to port congestion, we are going to see the shortfall in driver capacity and containers getting picked up all the way through the peak. It is going to be the middle of November before things lighten up,” said an import distribution executive that asked not to be identified.
That said, the lack of forward-looking visibility into cargo volumes has been a central theme in 2020, and some believe that hasn’t changed. Container carriers, for example, say the length of time it took to restore capacity in the trans-Pacific, which led spot rates to spike to record levels in recent weeks, was due in large part to a lack of accurate forecasts from customers.
“When you go from the depths of demand cratering as recently as March, April, and May, when retailers having completely shut down their supply chains, canceling orders and bookings, how do you then forecast that in a matter of two to three months the top will blow off, with more vessel capacity deployed in the trans-Pacific than ever, historic volumes of e-commerce sales, restocking will be jumping, and that will happen in such a short period of time?” Ron Widdows, CEO of Flexi-Van Leasing, told JOC.com. “All this and there is still no ability to forecast what demand will look like beyond October, let alone next year.
“As we have seen in the past, when there is an unnatural event that results in a significant amount of friction in the transport chain … it really is a bit of the ‘pig-in-the-python’ dynamic; it takes some time to digest and fluidity to return,” he added.
Retail inventories needs restocking
Contributing to the duration of the peak season this year is volumes being driven both by holiday shipments as well as restocking, a phenomenon that is inherently temporary. Inventory-to-sales ratios in June, the latest available reading, fell to 1.2 from 1.35 in May, and were down 11 percent from June 2019, according to the US Census Bureau.
During the COVID-19 pandemic, “retail inventory-to-sales ratios have dropped far more than during the financial crisis, and it therefore is highly likely that efforts to rebuild the inventory levels back to ‘normal’ are currently under way,” said Alan Murphy, founder and CEO of Sea-Intelligence Maritime Analysis. “It seems unlikely that retailers can suddenly operate with inventories at 15 to 20 percent less than just a few months ago, when compared to the retail sales. If this is the case, we know inventory changes are strong drivers of container volumes, but we also know that such a driver is not permanent.”
Behravesh said there are three reasons for diminished expectations for growth after the third quarter.
First, he wrote, “catch-up spending and accelerator effects have pushed consumers’ purchases of durable goods well above the pre-pandemic level; we expect this overshoot to unwind. Second, fiscal support of the expansion dwindles by year-end. Third, COVID-19 infection rates remain stubbornly high and are expected to increase this fall as temperatures cool, activity moves indoors, and many schools and colleges attempt to reopen with in-person learning. In response, consumers and businesses will be slow to resume pre-pandemic behavior.”
The extended ocean peak season will trickle down into trucking and last-mile service, where executives expect a longer and larger peak season as imports continue to pour into US ports.
“We’re coming into the peak holiday season in the next 60 days or so and volumes are going to be off the charts,” said Greg Ritter, chief customer officer of XPO Logistics. “This year’s peak is going to be bigger, faster, it’s going to come quicker and stay longer.
“When we look at our retail customers, we see how busy they are today and they’re not at peak,” Ritter said earlier this week at the 2020 Council of Supply Chain Management Professionals (CSCMP) Edge Conference. “As we get into October, are volumes going to increase? Absolutely. We’ve got more product that is going to hit the West Coast ports and other ports.”