Freight Forward - No Return to Logistics Normalcy in Sight

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week and 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.

“There’s no return to normalcy,” said Paul Bingham, director of transportation consulting at S&P Global Market Intelligence. There have been “structural shifts” in the US economy that won’t snap back to pre-pandemic conditions, he said.

Those shifts include a significant increase in inventory carrying costs which rose 29.5% in 2021 to $501.3 billion and are headed higher as interest rates rise.

“Strategic partnerships are really critical,” said Jennifer Kobus, vice president of transportation and logistics for retailer Ulta Beauty. “They helped us make it through the pandemic. We're looking to improve [costs] in the second half as the market softens but we’re also looking to be a strong partner.”

According to JOC senior editor, Bill Cassidy , Ulta Beauty revamped its trucking portfolio a few years ago, changing its procurement process. In a major change, “the annual RFP [request for proposal] is kind of dead,” Kobus said. The retailer replaced annual bids with a “continuous bidding process” for its lanes and business, she said. Kobus believes more shippers will move in that direction and make greater use of short-term mini-bids.

Business logistics costs as a percentage of US gross domestic product (GDP) rose 0.8 percentage points last year to a 10-year high of 8.0% according to CSCMP’s State of the Logistics report. “We’re not going to see a revision down to 7.5%” in 2022, Bingham said. In total, business logistics costs leaped 22.4% to $1.85 trillion last year, according to CSCMP and its partners Kearney and Penske Logistics.

April Zobel, Profit Center Manager at The Andersons Inc. also highlighted the importance of partnerships in JOC’s Top Exporters webcast (Replay on JOC.com ) but also noted that one thing that kept her up at night is “the lack of clear information such as milestone dates, ERDs, cut dates, and sales dates. Information is provided by the carrier but then it’s different from the rail or port and the data is changing daily and/or hourly.” This quickly changing information ultimately impacts the bottom line.

Improvements in the availability of consistent, clear information may eventually be found in the use of container sensors. Maritime analyst Drewry is projecting that containers equipped with tracking hardware will account for 25.0% of the global box fleet by 2026.

“Smart containers have increased in prominence following the onset of the COVID-19 pandemic and resultant supply chain disruption, which has highlighted the need for better cargo visibility to cope with longer and more volatile transit times,” Drewry said in a blog about the forecast. “And the pace of adoption of smart containers is expected to accelerate over the next five years.”

Senior editor, Eric Johnson writes that the rollout of so-called smart containers was accelerated by Hapag-Lloyd's decision in April to equip 100.0% of its dry container fleet with trackable sensors. The container line told JOC.com in May it was doing so to deliver better data to customers and its internal teams, but also to take the lead in being a provider of smart container-enabled solutions.

Drewry anticipates Hapag-Lloyd's move “will force other leading carriers to follow suit.”

Drewry also expects shipping lines will use smart containers to deepen relationships with shippers as a way to negate the benefits of third-party visibility platforms.

“[Carriers] face increasing competition from alternative tracking solutions, such as removable devices or predictive analytical tools,” the consultancy said.

As noted in JOC’s Top 100 Exporters webcast, relationships will indeed be important as shippers maneuver the not-so-normal supply chain networks this year and beyond. During JOC’s Top Importers webcast (replay available on JOC.com ), Dan Gardner, President, and Co-founder of Trade Facilitators told the audience that he expects demand for ocean freight space to be strong this year from a demand rate base. But he expects Trans-Pacific shipping rates to go down “substantially” early next year.

Also, during the webcast, Steve Hughes, President, and CEO of HCS International noted that it's important for all shippers, no matter the size, to understand where they sit in the pecking order in terms of ocean freight volumes. Citing JOC statistics, Hughes said that there are about 100,000 importers but of that total, 5,000 bring in 1,000 containers or more each year.

For smaller shippers, Hughes recommends shipper associations because shippers can benefit in terms of contracted pricing based on higher, grouped volumes.

While demand is expected to continue to be strong this year, ocean freight spot rates are declining. Senior editor, Greg Knowler writes that ocean carriers holding lucrative long-term rate agreements with their customers could soon be under pressure as spot market prices fall below contracted levels on the trans-Pacific and the rate differential narrows dramatically on the Asia-Europe trade.

Contracted rates for 90 days or more on the trans-Pacific are currently at $7,677 per FEU after rising almost 50.0% since January, with spot rates falling 11.0% so far this year to $7,444/FEU, according to rate benchmarking platform Xeneta. The average contract rate has been below the spot market since June 1.

Asia-North Europe average spot rates have fallen almost 30.0% since January and are now just $450 above the long-term contracted rate of $5,533/TEU; contract rates have risen 12 percent this year.

Hapag-Lloyd spokesperson Tim Seifert said shippers abandoning contracts was "so far" not an issue, with the carrier offering long-term contracts with volume agreements at fixed rates over the contract period, which included shipment and equipment guarantees.

“Our customers usually conclude contracts to have a clear agreement, to secure a certain rate level, to have a better planning ability, and to decouple themselves from the volatility in the spot market,” he said.

Meanwhile, the Port of Charleston will remain open to cargo owners on Sundays through the end of September, a three-month extension port officials believe is one of several key measures to help prevent a major buildup of vessels during the upcoming peak shipping season.

The port believes extending Sunday gate hours, leasing out new chassis to cargo owners, organizing container stacks, and working to ensure a smooth flow of cargo with rail partners CSX Transportation and Norfolk Southern Railway will help it navigate the peak season without major disruptions.

To balance container flows, Norfolk Southern is offering a $75-per-container incentive to ocean carriers that balance the number of containers leaving and returning through the ports of New York and New Jersey, and Virginia, a measure it says will keep railcars flowing smoothly between the ports and inland markets. According to JOC senior editor, Ari Ashe , Norfolk Southern will begin its Port Balance Incentive Program on July 1 and will issue rewards to ocean carriers that reach an 85.0% threshold between boxes leaving and returning to the ports over the next six months, according to an advisory from the railroad.

Switching to air cargo, cargo flown in the below-deck bellies of passenger aircraft has risen to 28.0% of the global total, up from just 4.0% in March 2020 when the COVID-19 pandemic brought international travel to a standstill, according to the International Air Transport Association (IATA).

“With all the uncertainty that these turbulent times and transformational developments bring in their wake, we still expect global passenger travel to return to the 2019 level of activity in 2024 and to expand substantially over the next two decades,” IATA noted in its global outlook presented at the association’s annual general meeting (AGM) in Qatar.

FedEx noted in its recent earnings call with analysts that it expects the Europe to Asia trade lane will recover by the first quarter of 2024 and that airlines’ belly capacity on the trans-Pacific Lane is estimated to recover by the third quarter of 2024. Meanwhile, commercial capacity between Europe and Asia is not expected to recover until the first quarter of 2025.

Until full capacity returns to the market, air cargo rates will remain high. In the 12 months to June 20, average air cargo rates on the Shanghai to North America routes increased 51.0% to $9.65 per kilogram, according to the BAI. Rates from Shanghai to North Europe are up a similar percentage, with the BAI average rate of $6.54/kg representing a 49.0% increase compared with the previous 12-month period.

Speaking of FedEx…besides noting a record fiscal year in terms of revenue last week, it also announced a partnership with FourKites. The two companies will partner on a new platform that will allow FourKites to tap into FedEx’s internal data to help shippers improve their multimodal and multicarrier transportation planning and predictive visibility.

The partnership, which also includes FedEx investing an undisclosed amount into FourKites, gives FourKites exclusive access to hundreds of milestones FedEx collects from its internal network, FourKites CEO Mathew Elenjickal told JOC.com.

“There is a lot of data their network is generating that’s not being exposed publicly,” he said. “FedEx exposes 10 to 15 milestones, but internally, they’re collecting roughly 300 scans [on each shipment].”

FourKites will get access to all those data points to feed into its machine learning model, Elenjickal said. The resulting product, called FourKites X, is a platform aimed at helping shippers in four areas: dynamic planning across modes on a pre-shipment basis, enhanced visibility based on access to more of FedEx’s data, predictive solutions, and what Elenjickal called “end-to-end supply chain optimization.”

For FourKites customers that also use FedEx, FourKites will get detailed access to those customers’ shipment profiles to help them across the four targeted areas. FourKites will also get access to data from FedEx on non-FourKites customers in an anonymized fashion to feed into its models.

And finally, another trucking acquisition. European logistics provider DB Schenker will expand its US footprint by acquiring USA Truck for about $435 million, the latest in a series of recent US trucking acquisitions driven by international interest in the US transportation market.

Danish shipping line Maersk acquired Pilot Freight Services, a US-based global forwarder with trucking assets, in February, and UK-based Pall-Ex Group is seeking US franchisees. The Schenker-USA Truck deal also is reminiscent of Kuehne + Nagel’s 2015 acquisition of US brokerage ReTrans.

The recent spate of acquisitions hasn’t been opportunistic. Companies are paying premiums, not bargain-basement prices, for trucking operations, said Satish Jindel, president of research firm SJ Consulting Group. “That shows confidence in the US trucking market,” despite the risk of an economic recession, he said. Europeans “see a huge market in the US and they find it very sexy.”

They also see customers that do business on both sides of the Atlantic and in other international markets. Increasingly, those shippers are pursuing a more end-to-end transportation distribution model with partners that can offer a broad range of services and scale them.

Schenker is intent on being “among the top land transportation providers in North America and views USA Truck as the ideal platform to build upon,” according to a document filed by USA Truck with the US Securities Exchange Commission.

Economic Outlook

A number of economic reports are expected to be published this week. Highlights to keep an eye on are:

• Monday, June 27 - Advance report on durable goods for May. April durable goods orders increased 0.5%. MarketWatch is forecasting another increase, albeit, a smaller increase of 0.2%.
• Wednesday, June 29 – Third and final revision of Q1 GDP is expected to remain the same as the second revision, a 1.5% decline.
• Thursday, June 30 – Nominal consumer spending for May is expected to decline to 0.4% compared to 0.9% in April.
• Friday, July 1 – PMI for June is expected to be lower than in May. S&P’s May PMI was 52.4 with expectations of 51.2 for June.

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

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