LA/LGB Outlook Darkens
On Friday, terminal operations were closed for the day and night shift due to the International Longshore and Warehouse Union's concerted action to withhold labor, causing disruptions to the export of agricultural goods. According to independent shipping analyst, John McCown, this sudden shutdown highlights the risks associated with shipping goods to the West Coast, which has seen a declining share of imports for the past 21 months. The trend is due to the inventory "bullwhip effect" and concerns over West Coast labor disruptions caused by an expired contract.
Importers planning the coming peak season's import strategy have been given a clear reminder of the dangers of returning some of their volumes to the West Coast this year. The container shipping industry is building significant new tonnage designed for the East and Gulf Coast ports. Even before Friday's shutdown, growing sentiment suggested that the gains of East and Gulf Coast ports were permanent. This shift away from the West Coast could potentially harm U.S. exporters as ships that carried imports that would have called on West Coast ports now serve Gulf and East Coast ports, jeopardizing agriculture exports. Last month, the National Retail Federation (NRF) led a group of 238 state, local, and federal trade associations in penning a letter to President Joe Biden. In the letter, the group called on the administration to provide support to help the negotiating parties quickly reach a new agreement, a press release explained.
Dunavant Solution: We do not see a strike happening in the short term as there has been no vote to authorize one; however, we are closely monitoring the situation and can help you if you prefer alternate routings.
India Wants Key Supply-Chain Role as Firms Shift from China
India's Finance Minister, Nirmala Sitharaman, has stated that the country aims to attract global supply chains and become an alternative to China through production-linked incentive schemes and expanding the domestic consumer market. India is offering these incentives to 13 manufacturing sectors, including semiconductors, to encourage global value chains to move to India. Sitharaman added that this could lead to the production of large, bulk-manufactured goods that could be sold both domestically and internationally. She also said that expecting everything to come out of China is unrealistic, as supply chain disruptions have encouraged firms to diversify, presenting an opportunity for India.
The Indian government has set an ambitious target of achieving $2tn in annual exports by 2030. The country aims to become a top choice for companies shifting their supply chains away from China. Sitharaman cited the example of mobile-phone manufacturing in India, which in 2014 produced very few devices but has since grown to become one of the world's biggest exporters. Additionally, India has been pursuing bilateral trade deals with several countries, including Australia, the UK, and the UAE, and is pushing ahead with a pact with the EU and Canada. Sitharaman is currently on a week-long trip to the US to attend the World Bank and International Monetary Fund's Spring Meetings.
Dunavant Solution: We have select partners in India to assist with intra-country moves as well as booking ocean freight.
Legislation Aims to Improve Connectivity, Safety
Recently proposed legislation in the U.S. House of Representatives aims to enhance the connectivity and security of the nation's supply chain—the Ocean Shipping Reform Implementation Act, introduced by Reps. Dusty Johnson (R-S.D.) and John Garamendi (D-Calif.) would focus primarily on freight activity along domestic ports to promote the efficient movement of goods and supplies. The bill reinforces provisions approved in the Ocean Shipping Reform Act, enacted into law in 2022, and aims to protect U.S. ports, shippers, and manufacturers from the Chinese Communist Party's influence.
The proposed measure would establish a reporting process for complaints against shipping exchanges, such as the Shanghai Shipping Exchange, ban U.S. port authorities from utilizing the Chinese state-sponsored National Transportation and Logistics Public Information Platform, or LOGINK, and direct the U.S. Department of Transportation to examine the influence of the People's Republic of China on the practices of the Shanghai Shipping Exchange through an independent auditor. The findings would be shared with Congress. Since its introduction, the legislation has garnered endorsements from various stakeholders, including the Agriculture Transportation Coalition, the National Milk Producers Federation, and the U.S. Dairy Export Council, among others.
Container Line’s Revenue Up Despite Drop in Volumes
Container shipping lines are reporting a big step down in the first quarter of 2023 from the fourth quarter of 2022. However, earnings are still above pre-COVID levels, despite the collapse of spot rates in the trans-Pacific eastbound market. Annual contracts signed in 2022 continue to shield carriers from the steep decline in spot rates. Meanwhile, trans-Atlantic westbound market spot rates remain much higher than pre-pandemic levels. As a result, the average revenue per forty-foot equivalent unit (FEU), which drives container shipping net income, remains higher than before 2020. Two of the world's largest container shipping companies, Cosco and OOCL, reported a significant decrease in net income and revenue per FEU in the first quarter of 2023 compared to the same period last year. However, the revenue per FEU is still above the pre-pandemic average in most trade lanes.
Indexes covering spot freight rates and long-term rates show a continued decline in the first quarter of 2023 but at a much slower rate than in the second half of 2022. The XSI Global index, which tracks long-term contract rates, fell just 0.5% in March compared to February. The Drewry World Container Index global composite, which measures average spot rates, was unchanged w/w for the week ending Thursday at $1,710 per FEU. Although these indexes are significantly lower than the all-time high reached in 2022, they are still above the pre-COVID levels, indicating that the container shipping industry is still profitable. The WCI global composite is down 79% y/y and is 84% below the all-time high of $10,277 per FEU reached in September 2022. Yet the index is still 20% above its 2018-2019 average, said Drewry.
Dunavant Solution: We continue to work with our existing and new customers to take advantage of spot market opportunities to provide a favorable alternative to contract pricing.
US Imports for March up 6.9% from pre-COVID
According to recent data from Descartes, US imports increased by 6.9% in March from February but were down 27.5% YoY. The data also showed that despite falling import flows to the US from China, Southern California saw a rebound in imports from other countries in March, with Los Angeles and Long Beach seeing rises of 30% and 25%, respectively. However, the NRF has said that the outlook remains uncertain and depends on resolving labor negotiations at West Coast ports and avoiding self-inflicted supply chain challenges. Meanwhile, the risk to the NRF’s prediction is that bloated inventories could take longer than expected to unwind, with Census Bureau data on February wholesale inventory-to-sales ratios revealing three categories of containerized goods with very large inventory overhangs.
Despite improvements in supply chain conditions, other indicators suggest that the industry has not returned to full normalcy. The GSCPI has reported that supply chain conditions have now normalized, but other indicators, such as the OTI and data on cargo “rolls” suggest that while the situation has improved, it is not yet at pre-COVID levels.
Dunavant Solution: As always Dunavant will stay abreast of the situation and adjust accordingly to ensure our customers are getting the best rates and service possible.