EP26: Logistics rewired − The world's largest ocean container shipping event

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 SP Global Market Intelligence, and your host for this episode of the Economics and Country Risk Podcast. Joining me today to discuss these issues is my colleague Mark Sicconi, Executive Editor of the Journal of Commerce, part of SP Global. Mark, thanks for being here. Happy to be here. So Mark, what is the state of containership?

Well, I mean the good news is that despite all the headlines about the Panama Canal and Red Sea and so on, container trade's moving. There's 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 a 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 Hoothi attacks, there's always disruption and that throws a 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 place. So what makes this down cycle unique, Mark? And what are the implications for the industry and for the larger global economy?

You know, one of the things that's making this down cycle really unique is we're coming from a huge rise in depending on 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. Yeah. There's this larger question about the resilience of the US consumer. Now we're still seeing some pretty good optimism in terms of import loadings coming into the US for the next couple months.

It 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 US consumer demand? But the other thing that's interesting is that usually the carriers are are actually quite well positioned going into a down cycle. So even though there's a larger issue of over capacity, they've built up some really nice war chests.

during the last couple of years because they saw record profits at 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 trade or 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 Pack, particularly as we see some nice screenshoots in terms of early import volumes for this year.

I will just say on the topic of the uh US consumer, one of our US economists on this podcast last year said never bet. So I'll just put that out there for your consideration. That's kind of like that's like actually my asterisk. Anytime I cite any consumer confidence index or anything, I'm just like bent wrong too many times. So what is the outlook for containerized US import? for well you know the export

Pretty resilient. It's been falling largely because of some waste paper and different bands 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 gonna see how strong the restocking is. out of the post Chinese New Year. So during the Chinese New Year, uh 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's 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 months. And that, as you may know, is one of the old historic dynamics that drives our industry. Something to keep an eye on for sure.

Mark, what role does labor play in how the industry is preparing for twenty twenty four? 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 twenty twenty four? The big thing that folks are watching in North America are the ILA negotiations. So that's the uh international longshore associations 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 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 while 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 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 in l last year, we also saw the labor unions in Prince Rupert and Vancouver have a strike.

So th these things are are 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. You know, there's been a couple of wildcat strikes, but there hasn't been any major island tide disruption in twenty or thirty 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, you know, do I need to hedge in case things start getting dicey on the Eastern Gulf Coast?

So last year it was up and down the west coast of North America, this year potentially east coast of North America.

And golf. Never a dull moment. Nope. 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 And what is the larger lesson for industry on geopolitical risks to container shipping? 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 rate.

Shipments were clearly delayed, but we're thinking that on the ocean side, the disruption has pretty much cut peak. We're starting to see the momentum on the spot rates decelerate, some of them even retracted. And and frankly, we talk about that overcapacity. Well, you know, 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.

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 gonna change anytime soon. Now, when it does change and this Red Sea is deemed safe by carriers that are 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 gonna take us about a c couple more weeks before we can confidently say what the secondary impact of this this current disruption has been because that's when we're going to start seeing these ships that were kind of thrown off their network. start coming into European ports and and US ports. Now we're hearing about concerns about equipment dislocations, but they're 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 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. Yes, we had our head of supply chain research Chris Rogers on the podcast talking about the cost of You can have it if you're willing to

Exactly. And the Panama Canal is a little bit trickier. We got some good news in the sense that 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 pre-booked. So they're not waiting to get through the locks like those kind of horror stories that you see about people paying these

mouth watering fees to get a transit. The other thing too is yeah, they've gotta 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 six to seven percent correct currently.

Now, how is this impacting sourcing and container flows? It sounds like things are finding a way. Things are finding a way. I think you're you're definitely hearing from the West Coast and other ports saying, hey, we're making sure that we've got the rail cars in positions. If there is gonna be this surge Particularly if inbound volumes post C and Y 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 to get a position in which from for example, I want to ship out next week, but I can't. I've got to wait two 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 got the Panama, the Red Sea, there's one more shoot a drop, then the equation changes. So all these market dynamics that we've been talking about, how are they playing out at the TPM conference? Well, from a top level, you're going to be hearing from analysts, container lines and forwarders.

saying what they're expecting on in the big picture. So your capacity, your demand, both on a global side, but also on a trade line. So, you know, Trans Pacific, Asia, Europe, Transatlantic, these are the big trade lanes in which the the industry runs on. But you're gonna hear more also about negotiations in terms of the state of labor talks with the ILA.

You're gonna hear about sourcing and shifting patterns, particularly as folks look more to the West Coast routing after we've seen that labor contract. We've 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. You know, notably technology is a is a huge part of this industry. While, you know, 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 you know, really it's just Morgensborg of everything. So while it's focused on the Trans-Pacific, we're gonna be looking at

US 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 you know, shippers that ship around the world don't just use one trade lane. They're moving uh around the world and often kind of end to end, which we also bring by providing that inland transport, trucking, and rail leg. And for our listeners, I will drop a link to the TPM registration.

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?

Well, nothing so bold, but I've got a 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 uh 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 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 gonna 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.

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? 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. 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.