For container lines and ports, what a difference a year makes

A year ago, as ship lines entered 2020, they were laying up vessels and canceling sailings in response to soft volumes, while also facing the looming impact of new emissions standards that mandated use of ultra-low-sulfur fuels or equipping ships with exhaust-cleaning systems. 

Then the pandemic arrived. Volumes in an already tepid market fell off the deep end. Ship lines parked more vessels. Ports cut operations, sent employees home to work, and took other measures to adapt.

“When production [from Asia] slowed and ship lines canceled sailings, we saw double-digit drops in cargo” from the spring a year ago, recalls Beth Rooney, deputy port director for the Port Authority of New York & New Jersey. 

Then just as quickly as volumes disappeared, they returned—with a vengeance. 

“As we ended July in negative numbers, and turned the page to August, we went from a double-digit decline to a double-digit increase,” with strong volumes continuing through November, Rooney noted. That reflected shippers who were responding not only to the pandemic’s initial impact but also to concerns over a second wave. “In anticipation of another shutdown, they are throwing as much cargo into the supply chain as they can, creating a ‘just-in-case’ supply chain,” whereas before, the industry convention was to embrace just-in-time practices, which limited on-hand inventories. “The port as a community has had to adjust very quickly.” 

 “THE WEIRDEST ECONOMY” IN MEMORY

The initial pandemic-driven surge turned out to be the opening act in a historic uptick in ocean cargoes, catapulting 2020 into, in the words of one port official, “the weirdest economy” in memory. What was normally a spring and summer peak season was supercharged by pandemic-related consumer buying of goods of all types, as well as a crush of orders for personal protective equipment and related health-care supplies. Add to that massive inventory rebuilding by supply chain managers who shifted from just-in-time to just-in-case tactics. And then the traditional holiday shipping surge joined the party.

By November and December, demand, particularly in the all-important Asia-Pacific–to–North America trades, was off the charts. Containership lines pivoted and put every vessel they could muster on the water.

The flood of ocean cargo isn’t expected to ease soon. The consensus among industry executives is that the surge in cargo and the dearth of container capacity will continue well into 2021. And as the U.S. copes with a renewed surge in Covid cases, just-in-case supply chain stocking is expected to keep trucks and warehouses full into the spring.

All this has meant historic records—and unprecedented challenges—for many U.S. ports. In October, the Port of Long Beach handled over 806,000 containers, an all-time monthly record, says Mario Cordero, the port’s executive director. “That’s the first time we reached that milestone in our 100-year history,” he notes. “Add to that what L.A. [the Port of Los Angeles] moved and you’re talking about 1.7 million containers” moving through the Greater San Pedro Basin complex. “That’s more containers than most of our major gateways in the U.S. move in a year,” he says. 

And the beat played on. November’s volume of 783,523 TEUs (20-foot equivalent units) at Long Beach was a record for that month. In early December, the San Pedro Bay resembled a giant containership parking lot, with some 20 vessels at anchor waiting for a berth.

While the record volumes certainly presented—and continue to present—challenges, Cordero cites several complete or near-complete infrastructure projects that helped ease the congestion. One was the new $1.5 billion Gerald Desmond Bridge, which opened in the fall of 2020 and has three traffic lanes and an emergency lane in each direction (versus two on the old bridge). Some 65,000 vehicles a day cross the bridge, whose raised height also permits larger ships to enter the port’s back channel.

He also cites Phase 3 of Long Beach’s Middle Harbor redevelopment project. Construction on the port’s new marine terminal is scheduled to finish this March, but two-thirds of the complex is already in operation. When finished, the state-of-the-art terminal will be able to process as many as 3.5 million containers annually. “That terminal alone would be No. 6 in terms of [capacity of] U.S. gateway terminals,” Cordero notes. 

GOING OUT OF THE BOX

Ports also are taking an out-of-the-box approach to some of the challenges. At the Port of New York & New Jersey, terminal operators have coordinated to extend hours of operation and add Saturday service, notes deputy port director Rooney. And its Class 1 rail providers, Norfolk Southern and CSX, “have been tremendous partners,” she says, noting that they’ve added more trains to the system. 

The port also has reached out across the region to help shippers secure more storage capacity. An initial list published in July identified 65 off-port sites with open areas where containers could be parked. Rooney’s staff updated that list in November. “Of the 65 entities that had space [in July], today, there are only three who have space available. That is remarkable,” Rooney notes. And with airline traffic curtailed by the pandemic, the staff has even considered making unused long-term parking space at the Newark (New Jersey) airport available for container storage.

Given the lack of sufficient off-port storage options and warehouses already stuffed to the gills, shippers have been holding containers longer and using them as temporary storage, Rooney reports. “Shippers are parking containers,” she says. “Containers and chassis that are normally on the street for three or four days now are out twice that long. That impacts capacity.”

She is encouraging shippers to be more mindful of the problem—and to be part of the solution. “We understand there is limited warehouse capacity, but keeping those containers on the wheels prevents other containers from moving out of the terminals,” she explains. “If the terminals get backed up to the point where they can’t take any more, then the ships start to line up outside.

“We are imploring shippers that if you have to store your cargo in containers, at least get them off the wheels,” so the chassis can be returned and redeployed, Rooney adds. 

WHAT TRADE WAR?

For ocean carriers and port operators alike, 2020 proved to be a year of reckoning—but not for any of the expected reasons. “No one is talking about fuel or trade wars anymore,” says Jim Newsome, president and CEO of the South Carolina Ports Authority (SCPA), who noted that he was pessimistic going into his fiscal year starting in July. Covid changed all that, he says. “Americans spend a percentage of their income, and when they can’t spend it on movie tickets, ball games, travel, or going out to dinner, they buy other things” like home-improvement items, computers and furniture for home offices, home fitness equipment, and other “around the house” items. “It’s been a defined shift in purchasing of goods related to the home. That has really driven the spike in volumes.”

Bryan Brandes, the Port of Oakland’s maritime director, shares a similar sentiment. “We call it retail therapy,” he says. “With people working from home, there’s been a huge demand for supplies for home-improvement projects.” He notes as well that low interest rates have spurred home buying, adding to the demand for construction materials and manufactured goods for the home, from appliances to furniture to housewares. 

The shift in purchasing practices, particularly as more consumers than ever have flocked to e-commerce, has placed a premium on warehouse space, adds Newsome. In response to the rising demand, the SCPA recently broke ground on a new 3 million-square-foot distribution center for Walmart at a port-owned site in Dorchester County. 

OCEAN CAPACITY: FROM GLUT TO CRUNCH

For containership lines, the bust then boom of 2020 saw the industry navigate new and unfamiliar market conditions as well. Who would have predicted a year ago, that 2020, despite the pandemic, would turn out to be one of the most profitable years in the industry’s history? 

“If you look at January of last year, market conditions were weak,” says Lars Jensen, chief executive of Denmark-based SeaIntelligence Consulting. “Demand growth was at zero percent. Carriers were on their heels,” Jensen says, adding that still today “you have an extremely low order book for new vessels.”

On top of that, a 20-year consolidation push had finally reached its endgame, with carriers embracing capacity discipline and increasingly using canceled sailings to control capacity and maintain rates. 

“Then you have the pandemic. That accelerated blank [canceled] sailings. They [containership operators] were extremely good at doing that. They removed capacity within a week of the market collapsing,” Jensen notes. 

As the rebound gathered pace, carriers, at first hesitant, began releasing more capacity into the market. With surging demand outstripping supply, “by November everything that could sail was sailing,” and with that, “schedule reliability plummeted to lows we’ve never seen before,” he notes. “All the BCOs [beneficial cargo owners] are screaming bloody murder,” says Jensen. He has spoken to numerous large forwarders and BCOs. Their common take on the market situation: “Now it’s a matter of how much of my contract [capacity commitment] I can move and how much more I’ll have to pay to move the rest.” 

“ROLLED” CONTAINERS ROIL SUPPLY CHAINS

One illustration of the service challenges presented by surging ocean cargo volumes has been the increasing number of “rolled” containers, meaning containers that were bumped from the vessel they were originally scheduled to be loaded on. According to an analysis by Ocean Insights, a Germany-based ocean supply chain visibility and market intelligence firm, overall container rollover ratios—which it defines as the percentage of cargo arriving at a port for trans-shipment on a different vessel than planned—rose to 28.5% at leading trans-shipment ports in November, up from 22.2% in October.

“Container lines are trying their best to cope with critical box shortages in Asia, but this is putting more pressure on operations and freight rates,” observes Josh Brazil, Ocean Insights’ chief operating officer. “I think what we are seeing is that the cargo pipeline has maxed out ocean supply chain capacity and this is being reflected in heightened rollover levels, which translates into more disruption for shippers and forwarders.”

Carriers’ efforts to normalize operations have met with mixed success. According to Ocean Insights data, the rollover ratio for Maersk, the world’s largest containership line, increased to 35.1% in October from 32.9% in September. Hapag-Lloyd’s ratio jumped to 37.7% for the same month from 34.2% a month earlier. And shipping line ONE (Ocean Network Express) saw its percentage of rolled containers creep up to 39.3% in October from 38.9% the prior month. Bucking this trend, CMA CGM’s rollover ratio dropped from 40.6% and 45.8%, respectively, in September and August, to 31.4% in October.

LINER PROFITS SURGE

Operating challenges aside, ship owners seem reasonably upbeat about their prospects for the near term. In a November interview with Bloomberg TV, Maersk CEO Søren Skou commented that “global supply chains had quite a lot of bottlenecks and they have driven up prices,” as shippers dealt with a whiplash effect of the steep second-quarter decline in cargo, followed by the sharp rebound. The result, Skou said, has been freight costs remaining unseasonably high, particularly in the trans-Pacific lanes. His comments to Bloomberg came shortly after the Copenhagen, Denmark-based company increased its profit forecast for 2020. “We basically have booked all the orders for the rest of the year [2020], and that’s why we are confident raising our guidance,” he told Bloomberg.

At container line Hapag-Lloyd, volumes at the close of 2020 had mostly recovered from the pandemic-induced slowdowns recorded earlier in the year, noted Uffe Ostergaard, who is the company’s president for the North America region. By the third quarter, “global transport volume was still around 3% below where it had been [in 2019, but] it was still a lot better than we expected it to be earlier [in 2020],” he says.

As cargo volume has accelerated, “we have added all the available capacity, both in terms of ships and containers,” he says. “We are focusing on contractual commitments in addition to optimizing vessel capacity and reducing container turn times wherever possible.” He notes as well that through early December, the company had continued to see “a surge in volume … and we don’t think there will be any significant changes until the Chinese New Year in mid-February.”