Ep. 26 - Logistics rewired: The world's largest ocean container shipping event

Table of Contents

Call Participants.............................................................................................................. 3

Presentation.................................................................................................................... 4

Call Participants

ATTENDEES

Kristen Hallam

Mark Szakonyi

Presentation

Kristen Hallam

One of our key themes for 2024 is logistics rewired. At the world's largest ocean container shipping event, TPM, shippers and their transportation providers will have plenty to talk about: Navigation restrictions on the Panama Canal, rerouting from the Red Sea to avoid attacks from Houthi militants, the persistent issue of overcapacity. How is the shipping industry responding to these shocks? And what impact could we see on trade and the global economy?

I'm Kristen Hallam, Lead Content Strategist for Global Intelligence and Analytics at S&P Global Market Intelligence and your host for this episode of the Economics & Country Risk podcast. Joining me today to discuss these issues is my colleague, Mark Szakonyi, Executive Editor of the Journal of Commerce, part of S&P Global. Mark, thanks for being here.

Mark Szakonyi

Happy to be here.

Kristen Hallam

So Mark, what is the state of container shipping?

Mark Szakonyi

Well, I mean, the good news is that despite all the headlines about the Panama Canal and Red Sea and so on, container trade is moving. There has definitely been adjustment in terms of routing, with the majority of container shipping that used to move through the Suez going around Southern Africa. But ultimately, trade continues. However, this is an industry that has been experiencing frequent shocks over the last couple of years, whether it's the pandemic-driven boom in North American imports or the latest with the Houthi attacks.

There's always disruption, and that throws something in the mix. What's making this year a little bit different is that there's a larger question about demand in terms of how consumers are going to be importing, particularly from Asia. And there's also some labor considerations. So there's a lot at play.

Kristen Hallam

So what makes this down cycle unique, Mark? And what are the implications for the industry and for the larger global economy?

Mark Szakonyi

One of the things that's making this down cycle really unique is we're coming from a huge rise in demand that we saw during COVID. So there's this interesting kind of correction that's happening at the same time as folks move more to services and away from goods. Yet there's this larger question about the resilience of the U.S. consumer.

Now we're still seeing some pretty good optimism in terms of import loadings coming into the U.S. for the next couple of months. It's an interesting dynamic there in the sense that we came from such a high, and now there's this big question of just how resilient is U.S. consumer demand. But the other thing that's interesting is that, usually, the carriers are actually quite well positioned going into a down cycle.

So even though there's a larger issue of overcapacity, they've built up some really nice war chests during the last couple of years because they saw record profits, levels that they hadn't seen since the dawn of containerization. So they've got a little bit of resilience here. At the same time, if you look at the overcapacity picture, it does look serious in the sense of capacity is clearly going to be outpacing demand on a global level.

However, when it comes to the Asia to North America trader, the trans-Pacific, there's restraints on just how much capacity they can deploy there in terms of ship size and also how well the land side can handle the ships and move it inland. So just because there's plenty of capacity, that doesn't mean that it's going to be restrained on the trans-Pac, particularly as we see some nice green shoots in terms of early import volumes for this year.

Kristen Hallam

I will just say on the topic of the U.S. consumer, one of our U.S. economists on this podcast last year said, never bet against the American consumer. So I'll just put that out there for your consideration.

Mark Szakonyi

That's kind of like -- that's like actually my asterisk anytime I cite any consumer confidence index or anything. I'm just like, been wrong too many times.

Kristen Hallam

So what is the outlook for containerized U.S. import and export trade in 2024?

Mark Szakonyi

Well, the export is pretty resilient. It's been falling largely because of some wastepaper and different bans on some of our lower-value exports, but agriculture exports have been hanging in there. The bigger question, of course, is on import demand, whether we're going to see how strong the restocking is out of the post-Chinese New Year.

So during the Chinese New Year, which came earlier this year, Asian factories start slowing down production, and we usually see a rush of orders before that. And then afterward, we start seeing some restocking. And that gives us a sense of not just the health in terms of how well retailers and others are thinking demand is going to be in the second half, but it's also giving us a sense in the spot rate, how demand matches up with capacity, because there's obviously a seasonal fall in rates as demand falls.

But the question then becomes how sharply do the spot rates fall, and that could be a barometer in terms of how capacity and demand are going to be matching up in the next couple of months. And that, as you may know, is one of the old historic dynamics that drives our industry.

Kristen Hallam

Something to keep an eye on, for sure. Mark, what role does labor play in how the industry is preparing for 2024? We have seen some significant union activity, shall we say, in recent years, past year, I guess, in particular. So what are we thinking for labor in 2024?

Mark Szakonyi

The big thing that folks are watching in North America are the ILA negotiations. So that's the International Longshoremen's Association, and they're operating most of the cargo that's coming in from the East and the Gulf Coast. And their contract is up later this year. So there's a lot of questions. Will they get it through because the union has notably threatened to strike if they are not happy with the way things are going and they won't extend that contract to deadline.

That's got a lot of people watching closely, partly because we can't shrug it off, and it has been a little bit more, from the rhetorical side, an escalation than in past cycles. But it's also important to remember that, well, each union is different, and the ILA historically has been so-called less militant than their western counterparts.

And that's important because, as you noted, last year, we saw a disruption as the employers and the longshore labor were negotiating a contract for everything from Seattle down to San Diego. And then actually, later on last year, we also saw the labor unions in Prince Rupert and Vancouver have a strike. So these things are absolutely critical because, I mean, frankly, they hold the gates to most of the way containerized trade comes in and out of the country.

But it's important to note that these are concerns. But ultimately, cargo keeps moving, and we haven't really seen historically signs -- there's been a couple of wildcat strikes, but there hasn't been any major ILA-tied disruption in 20 or 30 years. And then, of course, we're also very closely watching what looks like stalled negotiations at the Port of Montreal.

So all of these things are playing. So as a shipper or as an importer, you're thinking about this and saying, "Okay. Well, I've got what's going on in the Red Sea. I've got what's happening in Panama. And I've also got these factors in the sense of, do I need to hedge in case things start getting dicey on the East and Gulf Coast?"

Kristen Hallam

So last year, it was up and down the West Coast of North America, this year, potentially East Coast of North America.

Mark Szakonyi

And Gulf.

Kristen Hallam

And Gulf, never a dull moment.

Mark Szakonyi

No.

Kristen Hallam

You mentioned the Panama Canal there, and I wanted to ask you about the Suez and the Panama Canal. How are these canal restrictions impacting the industry? And what is the larger lesson for industry on geopolitical risks to container shipping?

Mark Szakonyi

I think at this moment, the majority of traffic has moved around the Red Sea through the southern tip of Africa. In terms of the disruption, yes, we saw a jump in container spot rates. Shipments were clearly delayed. But we're thinking that on the ocean side, the disruption has pretty much kind of peaked. We're starting to see the momentum on the spot rates decelerate. Some of them have even retracted.

And frankly, we talk about that overcapacity. Well, overcapacity is less of an issue when you have this type of disruption. And all of a sudden, you've got plenty of vessels to deploy here. And that's definitely mitigated this because it hasn't been a demand-driven disruption like we saw during the pandemic. That is continuing. I think that the general industry is not seeing any clear indication that this is going to change anytime soon.

Now when it does change and the Red Sea is deemed safe by carriers and our insurers and the like, there's also going to be a disruption there because you're going to have to change networks and the stream of trade. I say all this, though, because it's really going to take us about a couple more weeks before we can confidently say what the secondary impact of this current disruption has been, because that's when we're going to start seeing these ships that were kind of thrown off their networks start coming into European ports and U.S. ports.

Now we're hearing about concerns about equipment dislocations, but there are not a lot that we're actually seeing on the ground. But nonetheless, it's something that we have to watch because it builds this bullwhip in our industry that we saw during the pandemic.

In terms of what we've learned, it's tricky because ultimately, container shipping is at the mercy of the bigger geopolitical clashes or headwinds or whatever is going on. In this case, you'd have to go back decades to see this type of scale of disruption, and that's significant. But it's also significant that this is an industry that can move and adapt.

Yes, shippers and importers are going to see their cargo delayed. Some of them may not -- particularly for European exporters, they may have not gotten their shipments when they needed to pre-CNY and maybe had some delayed shipments. But ultimately, the industry adapts. So I think that has to be kept in mind, even as you see lots of folks talking about geopolitical risk.

I definitely think it's ratcheted up, but this is not a new phenomenon for this industry either. That's just -- that's the way it works. It usually comes at a higher cost and plenty of stress, but things eventually get there.

Kristen Hallam

Yes. We had our Head of Supply Chain Research, Chris Rogers, on the podcast talking about the cost of resilience. You can have it if you're willing to pay for it, yes.

Mark Szakonyi

Exactly. And the Panama Canal is a little bit trickier. We got some good news in the sense that they're not going to be cutting the number of transits. And for the container shipping industry, it's not exposed in the same way as bulk and tanker, largely because those transits are usually prebooked. So they're not waiting to get through the locks, like those kind of horror stories that you see about people paying these mouthwatering fees to get a transit.

The other thing, too, is, yes, they've got to deploy sometimes smaller vessels and they don't get the full utilization because the lower water levels means you can't load the ships fully for some of the larger vessels. But that's a crimp rather than what you're seeing in the Suez, which is a complete shift of the container routing requiring a significant amount of capacity. Analysts are kind of kicking around 6% to 7% currently.

Kristen Hallam

Now how is this impacting sourcing and container flows? It sounds like things are finding a way.

Mark Szakonyi

Things are finding a way. I think you're definitely hearing from the West Coast and other ports saying, "Hey, we're making sure that we've got the railcars in positions. If there is going to be this surge, particularly if inbound volumes post-CNY are a little healthier than we expect, which sometimes happens, for us to be ready for it."

You really need a massive dislocation of equipment and demand to be rising for it to get a position in which, for example, I want to ship out next week, but I can't, I've got to wait 2 weeks. But by that time, I've got even more to ship out, and you get these kind of bottlenecks in the industry.

And then little problems can then easily be enhanced by other disruptions. So there's always that question of like, okay, you have the Panama, the Red Sea. There's one more shoe to drop. Then the equation changes again.

Kristen Hallam

So all of these market dynamics that we've been talking about, how are they playing out at the TPM conference?

Mark Szakonyi

Well, from a top level, you're going to be hearing from analysts, container lines and forwarders saying what they're expecting in the big picture, so your capacity, your demand, both on a global side, but also on a trade line. So trans-Pacific, Asia Europe, transatlantic, these are the big trade lanes in which the industry runs on.

But you're going to hear more also about negotiations in terms of the state of labor talks with the ILA. You're going to hear about sourcing and shifting patterns, particularly as folks look more to the West Coast routing after we've seen that labor contract. We're already hearing a lot more about people wanting to book more cargo back into the West Coast. So that's definitely going to be a part of it.

Notably, technology is a huge part of this industry. While folks may say it's completely antiquated, I would disagree. Yet there are so many different types and flows of data, and there's not a whole lot of synchronization. So there can be disruption, but there's definitely interesting things going on in the back end. So we'll be exploring that with my colleague, Eric Johnson, our Senior Technology Editor.

And really, it's a smorgasbord of everything. So while it's focused on the trans-Pacific, we're going to be looking at U.S., Mexico and some of the rise of near sourcing there and the implications for freight transportation, but also intra-Asia and so on. So it's really become more of a global conference because shippers that ship around the world don't just use one trade lane. They're moving around the world and often kind of end-to-end, which we also bring by providing that inland transport, trucking and rail leg.

Kristen Hallam

And for our listeners, I will drop a link to the TPM registration and agenda in the description of this episode. So feel free to click through and explore. Mark, let's wrap up our discussion. Do you have a top takeaway or takeaways for our listeners today?

Mark Szakonyi

Well, nothing so bold, but I've got a clarification actually, because I was remiss in talking about some of the big themes that we're talking about in the industry and also at TPM is that big polluting elephant in the room, which is the IMO mandates that are pushing requirements on the container shipping industry to make these astronomical investments to not only find ways to ship these gigantic vessels with less carbon, but also doing so as freight volumes total grow and then pushing those and trying to get customers to take those costs on. That is an amazing thing to watch and really a huge challenge for the industry.

And the way we're drilling down on it is, yes, you're going to hear on the kind of high level, obviously, how the industry is moving in terms of like ordering new ships that can run on alternative fuels. But we also have some case studies at the tail end of the event where we're going to be talking to shippers how they actually create a decarbonization strategy and start reducing emissions, whether that's going through alternative fuels, different routings, working with their transportation partners and trying to keep them accountable for their emission footprints. So really interesting tactical stuff that you're going to just keep hearing more and more about every year.

Kristen Hallam

That is really interesting, and sustainability is such a big theme in so many industries. It must be especially challenging for shippers right now, though, if they have to go all the way around Africa burning more fuel, right?

Mark Szakonyi

Definitely, the carriers are taking on higher operating costs, but this is an industry that always tries to pass it on through surcharges and fees. That is part of the conversation that you'll be hearing at TPM is just how much of those extra fees that importers and exporters really want to take on.

Kristen Hallam

All that's left for me to do then is to thank you, Mark, for your time. Appreciate you sharing your insights with us ahead of TPM, and thanks to our listeners for tuning in. As I mentioned, there will be a link in the description of the episode, so click on that if you want to learn more about the conference.