Freight Forward - Relief in Sight

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week through?JOC.com?articles and additional sources and also what to expect for the week ahead.

Just in case you’re wondering, I’m Cathy Roberson, a supply chain writer, and researcher. For this weekly series, I serve as a research analyst for the Journal of Commerce (JOC), for whom I identify trends, provide thoughts and input into stories and assist with parcel last-mile queries.

“During the pandemic, the capacity and rate pressure started in International and work their way to Domestic logistics. Now we are experiencing some relief in International first and early signs of loosening markets domestically,” Best Buy CEO, Corie Barry, told analysts during the company’s Q2 earning call on Aug 30.

Indeed, while there are signs of improvement, there are still concerns within supply chains. “In Ocean Logistics, we are taking advantage of some rate opportunities, but continue to be mindful of ILWU labor discussions and overall US port congestion as we move into the peak shipping season,” Barry told analysts.

Asian imports landing at ports along the US East and Gulf coasts surged in July. West Coast ports, meanwhile, saw a year-on-year drop in cargoes from Asia, demonstrating why those gateways have experienced far less congestion than last summer.

The shift in import volumes continued a trend that began earlier this year when retailers looked to avoid West Coast ports to mitigate the risk of potential disruption from ongoing longshore labor talks.

Asian imports moving through East Coast ports in July increased 14.3% year over year, while volumes along the Gulf Coast jumped 24.2%, according to data from PIERS, a JOC.com sister product within S&P Global. West Coast ports saw imports from Asia fall 5.2% from July 2021, the data showed.

“We have diversified our port exposure and expect less than 40% of our second-half inventory will go through West Coast ports covered by the ILWU contract,” Columbia Sportswear CEO Tim Boyle said in the company’s Q2 earnings report.

In an interview with JOC’s executive editor, Mark Szakonyi, Gen. Stephen Lyons, the new White House port envoy, acknowledged that US port congestion is easing, but it will be a while before the containerized shipping system becomes reliable again.

“We’re actually seeing indicators of progress but it’s still not the new normal,” Lyons said. “We have good amount of work to do before we get to a highly reliable system.”

But inbound volumes are still overwhelming port capacity and warehouse utilization near some ports is at 98% or higher, keeping container dwells at marine and inland rail terminals elevated, Lyons said. The pressure valve on the shipping system needs to be relieved at inland hubs and then flow toward the ocean, and Union Pacific Railroad and BNSF Railways have aided in that by metering cargo to inland destinations, he said. Class I railroads will have the slowest recovery of all transportation providers, with labor issues biting into their capacity, Lyons said.

US railroads are in the midst of working through an agreement with several unions in hopes of improving labor issues that Lyons discussed.

Three unions, Brotherhood of Railway Carmen, International Association of Machinists and Aerospace Workers, and the Transportation Communications Union were the first of 12 unions to follow the recommendations of the Presidential Emergency Board (PEB) which was formed in July: a 22% wage increase covering 2020 through 2024 and $5,000 in bonus payments.

Right before the Labor Day weekend, The International Brotherhood of Electrical Workers (IBEW) reached a similar tentative agreement. It noted in its press release that the agreement included the biggest wage increases in 47 years.

The American Train Dispatch Association (ATDA) also approved the tentative agreement with the addition of one additional personal day and two major changes in the healthcare plan which added autism coverage and increased the hearing aid benefit limits.

As the railroads work to reach agreements with unions, the trucking market continues to witness a number of acquisitions. One of the latest is RoadOne Intermodal Logistics, which picked up drayage company Wilmac Enterprises. RoadOne has been rolling up international and domestic drayage, dedicated trucking, logistics, and transloading businesses for years. Previously it acquired drayage, truckload, and transload provider R&A Trucking while opening a 340,000-square-foot transload facility in Virginia.

For RoadOne, acquisitions are about connecting services needed by customers, including large, multifaceted importers. Those customers need drayage, warehousing, transloading, and regional truckload services “all tied together,” RoadOne CEO Ken Kellaway said in an interview earlier this year.

But there continues to be struggles within the warehousing market – Shippers that can’t find enough available warehousing space are working to squeeze more space out of facilities they already own or lease.

“Back in June, inventory in our DC [distribution center] network peaked at well over 90% of our capacity,” John Mulligan, chief operating officer at Target, said on Aug. 18. By August, Target had pulled that rate below 80%, he said.

Target tries to keep its distribution network operating at or below 85% of its maximum capacity, as operational difficulties and costs rise significantly once beyond that level, he said.

“We’re projecting our DCs will remain at or below 85% of capacity through the remainder of the year,” said Mulligan. Cutting back on inbound orders helped. “Our fall season inventory is projected to peak at a lower level than in spring, providing another vivid illustration of the unique dynamics we’ve encountered so far this year,” he said. But Target continues to pull imported freight forward.

Indeed, Jason Miller, JOC analyst, and associate professor of logistics, Michigan State University, notes in his JOC analysis that while there is truth to the claim that consumer spending is reverting toward the pre-COVID pattern, the purchase mix remains more import-centric than before COVID.

Miller writes that the Bureau of Economic Analysis (BEA) estimates that July 2022’s real spending on import-centric goods is 30% above 2019 levels and maps closely with the observed increase in the weight of containerized imports from Asia as well as the BEA’s separate estimate that real imports of consumer goods, excluding food and automotive, are up 36% from this time in 2019. “Thus, it seems highly unlikely that containerized imports will quickly revert to 2019 levels. The data currently suggest a return to the pre-COVID spending mix should occur by the summer of 2023,” according to Miller.

This demand also spills over to imports of temperature-controlled goods.?JOC’s associate editor, Teri Errico Griffis looked into refrigerated imports for an upcoming JOC magazine story and provided a brief overview on the topic.

Europe Update

European shippers are delaying or canceling import orders as full warehouses across the continent and deteriorating consumer demand leave cargo owners with a growing number of stores loaded with unwanted inventory.

Markus Panhauser, head of ocean freight in Europe for DHL Global Forwarding, explained that the high stock levels were a result of shippers placing orders earlier than usual over the past year to offset port congestion, shortages in raw materials, and growing bottlenecks in inland logistics.

But when the cargo began to arrive in European ports, it quickly filled all available storage space and coincided with declining consumer demand amid a deepening cost-of-living crisis and runaway inflation.

“These full warehouses have triggered quite significant order shifts on the customer side --orders have been delayed or even canceled, and some customers are even facing cash flow issues due to the high level of stocks,” Panhauser told JOC.com.

Meanwhile, transportation networks in Europe are strained as demand for rail freight is placing the sector under increasing pressure.

Ralf-Charley Schultze, president of the International Union for Road-Rail Combined Transport (UIRR), said in a statement that “much more rail freight will be necessary in 2023 and the following period than during the preceding years.”

He pointed to the war in Ukraine that is exacerbating an increasing truck driver shortage throughout Europe. With truck availability curtailed, conventional and intermodal freight trains will need to transport coal, liquefied natural gas (LNG), and oil products, as well as commodities, components, and finished goods typically carried in trucks.

In addition, intermodal services provider Contargo noted in a recent market update that rail engineering works and track closures in Europe were leading to train cancelations and overbooking.

“As well as the massive problems in the seaports — late arrivals of vessels, restrictions in acceptance of containers, etc. — substantial bottlenecks continue to affect our services in the rail network and inland navigation,” Contargo said.

The European Union has laid out plans to double freight rail’s modal share by 2030 from its current level of about 16% in support of emissions-cutting goals. JOC senior editor, Greg Knowler writes that road is a far less expensive mode of transport, and it has enjoyed a huge market share of European cargo movement for decades. In 2020, road had a 77% share, with 6% of European cargo using inland waterways.

While many eyes are on the US west coast port workers’ contract negotiations, more than 560 dockworkers at the Port of Liverpool plan to strike from Sept. 19 to Oct. 3 over an “inadequate” pay raise offer, the latest wave of labor action to hit UK ports.

Workers at Peel Ports’ Mersey Docks and Harbour Company (MDHC) are protesting the offered 8.3% pay package, which the Unite union said amounts to a pay cut given inflation. They will also strike over what they say is MDHC’s failure to honor last year’s pay agreement, including not undertaking the first promised pay review since 1995 and failing to improve shift rotations.

Economic Outlook

• Wednesday, Sept 7 - International trade balance - The trade deficit for July is expected to narrow by $79.6 billion compared to $70.3 billion in June.

That’s it for this week. Please be sure to hit the subscribe button to receive the latest updates.

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Also, if you're interested in more US inland analysis, be sure to check out JOC's upcoming?Inland Distribution Conference.

What did I miss? Have a question? Let me know in the comments. I’ll be checking back throughout the week to answer questions, address comments and share additional insights.

In the meantime, here’s hoping everyone has a good freight week ahead!

-Cathy