Shippers and forwarders in the Asia-US trade have mixed views about how quickly import volumes will rebound when China lifts COVID-19 factory shutdowns in Shanghai, with some anticipating a strong, sustained spike in imports, and others expecting a gradual — and more manageable — buildup in volumes along normal seasonal trends.
The strength of the recovery will determine if freight rates, which have stagnated, increase sharply as peak season approaches. On the operational side, terminal operators are concerned that if there is a sudden surge in imports, they will face a repeat of last summer when ports were congested and vessels backed up in their harbors. At the moment, that congestion has been mitigated by a recent wave of blank sailings on capacity offered to the US West Coast.
Industry sources say the uncertainties surrounding when China will end the COVID-19 lockdown in Shanghai are making it difficult for shippers and non-vessel-operating common carriers (NVOs) to plan their supply chains for the rest of the year. JOC.com spoke to two shippers, five NVOs, and two industry consultants for this story.
“I’ve never seen so many mixed signals,” said Jon Monroe, who serves as an adviser to NVOs. “How long will it take [for Shanghai to come back]? Maybe four to eight weeks. Possibly 12 weeks.”
A mid-size retailer told JOC.com his shipments by and large have been getting out of Shanghai. “We may be the exception, but we continue to ship out of Shanghai,” he said. While Shanghai — the world’s biggest port — has remained open, the lockdowns in the city and surrounding region have disrupted manufacturing, trucking, and logistics operations for the past two months.
Jack Chang, managing director of the forwarder JUSDA, said manufacturers of higher-value, “just-in-time” products such as electronics are finding a way to ship their products through Shanghai, Ningbo, or ports in South China.
“It’s definitely slowed down, but freight hasn’t stopped,” Chang said. “The right way to look at this is vertically. You have to break it down by [product sector].”
Furniture is one of the product sectors that has slowed down. “In general, we’re seeing some slowing relative to what we’ve seen in the past,” said the transportation manager of a home furnishings retailer. He added, however, “There is no change in behavior on our part. We’re not cutting back on purchase orders or speed to market.”
A transportation industry consultant and former executive at two big-box retailers said he’s heard about a few cancellations of orders due to the COVID lockdowns in Shanghai, but not many, and none affecting essential products. “Orders they need to get out, they get out,” the source said.
Surge or gradual build?
Given the inconsistencies in the market over the past two months, views vary as to what will happen when Shanghai fully reopens. One view is that factories will ramp up steadily over time and the eastbound trans-Pacific trade will fall back into the seasonal ups and downs the trade had been accustomed to before COVID-19.
“Will there be a big surge? There’s no sense of urgency right now,” said Christian Sur, executive vice president of ocean freight and contract logistics at forwarder Unique Logistics International. “There’s still a lot of inventory in the warehouses from the last peak season.”
Chang said that given the inventory overhang that continues to strain the capacity of warehouses and reduce cargo velocity, he does not anticipate a flood of new purchase orders or a frenzy among shippers to bid for space on vessels leaving China.
Still, other stakeholders expect a rapid ramp-up in import volumes when Shanghai’s logistics sector returns to pre-lockdown mode.
“It’s interesting there are so many different perspectives on this,” said Lawrence Burns, president of Lawrence Burns Consulting and a former senior vice president of trade and sales at carrier HMM. “I think there is only one perspective. There’s a tremendous amount of pent-up demand. I see a surge.”
The source at the mid-size retailer called the current situation in the eastbound trans-Pacific “the calm before the storm.”
“It’s clearly fairly calm now, but that will change,” the source said.
An NVO source said he envisions rolling waves of import volumes through the end of the year — a surge when Shanghai reopens, a softening of imports in mid-summer, and the normal peak season increase in imports this fall followed by another softening at the end of the year.
Vessel capacity available
Shippers and NVOs say vessel space is not a problem today, and they expect this will be the case at least through June. In fact, some carriers are approaching customers whose allocations they cut in 2022-23 service contracts and are offering space at current spot prices.
“During the last month or two, carriers have been saying if you want space, we can offer it to you,” said Kurt McElroy, executive vice president of forwarder APEX Maritime. “Nothing is moving at premium.”
Spot rates have drifted lower and in some instances are about the same as the service contract rates that took effect on May 1. “Spot rates are at the (beneficial cargo owner) contract rates,” McElroy said — about $8,500 per FEU to the West Coast and $10,00 to $11,000/FEU to the East Coast.
The rate indexes that are published weekly vary widely depending upon which costs they figure into their particular index. Drewry this week listed the West Coast spot rate at $6,856/FEU and Xeneta posted $9,250/FEU, while Freightos was at $12,217/FEU to the West Coast and $15,982/FEU to the East Coast. The Hong Kong to Los Angeles spot rate published by Drewry has dropped 19 percent since mid-March.
Shippers, NVOs, and industry consultants said carriers are not fretting about the current softness in the market and are in no mood to reopen service contract negotiations. That’s partially because a bump in spot rates could be in the offing once Shanghai’s delayed exports hit the water, and also because some carriers have insulated themselves from a weaker spot market by locking up significant volumes in long-term contracts.
“Carriers are finished contracting. They’re just done,” Burns said. Shippers who think they can reopen their service contracts and negotiate lower rates by offering carriers additional cargo for the peak season will be disappointed, he added.
On the operational side, the severe congestion problems and vessel backlogs that plagued gateways on the US West and East coasts have significantly improved. “It’s been more manageable because of the blank sailings,” McElroy said.
Carriers of late have blanked — canceled — dozens of sailings, either because vessels were so off schedule that they were not in the appropriate port when they were due to be, which is known as a structural blank, or because bookings had softened in a particular trade lane. Blanks have been particularly prevalent on the Asia-West Coast trade.
Between April 4 and May 8, 63 sailings to the US West Coast — representing 25 percent of the initial capacity offered — were blanked, according to Xeneta. Only 10 percent of the initial capacity offered to the East Coast was blanked during that time, Xeneta said.
