Issue 11: Port Congestion Leads Shippers to Seek Alternate Routes

Welcome back to the Legacy Monthly Shipment, your go-to source for the latest supply chain and logistics news, trends and insights.

We’re now well into Q1, with carrier contract season just around the corner. With this in mind, we turn our attention this month to ocean freight challenges and opportunities. Let’s take a look at the leading stories you should be aware of.

Today’s Shipment:

• The WSC reports a record number of ocean container losses since the end of November.
• Peloton increases transportation investment to meet delivery commitments.
• Continued port congestion has container lines seeking alternate routes.
• Importers brace for rising annual contract rates.
• A word of advice from the Legacy team.

REPORT

Ocean Container Losses Over Past Two Months Far Exceed Annual Average

According to a newly released report from the World Shipping Council (WSC), an alarming 2,675 shipping containers were lost at sea over a two-month period, from Nov. 30, 2020 to Jan. 31, 2021. This data stands in stark contrast to the findings of another WSC study, released in July 2020, which stated that container losses were on a downward trajectory, making up for only .0006% of the roughly 226 million containers shipped each year.

These recent losses — which account for almost double WSC’s annual average — can be attributed to five major incidents, including the ONE Apus incident, which we’ve covered at length in previous issues of the Shipment. All five incidents — the MSC Aries, the Maersk Essen, the ONE Apus, the Ever Liberal and the E.R. Tianping — were the result of rough seas and inclement weather during trans-Pacific voyages. The most recent of these incidents, the MSC Aries, resulted in the loss of 41 empty containers en route from the Port of Long Beach, CA, to Ningbo, China.

As the WSC’s initial report would suggest, container losses of this magnitude are a rarity, however, changes in weather patterns could make them a more frequent occurrence. Industry experts are working diligently to understand the factors at play in each of these scenarios and what precautionary measures can be taken to prevent repeat losses. That said, we all know that Mother Nature can be unpredictable, and that shipping loss is sometimes the cost of doing business; this is especially true for complex supply chains, which are more prone to risk.

The period from 2018 to 2020 — and now, it would appear, stretching on through 2021 — has laid bare many supply chain risks due to geopolitical issues, tariffs, changing consumer patterns and, of course, the COVID-19 pandemic. Given these mounting supply chain pressures, one can’t help but wonder whether captains are more inclined to take on unnecessary risk in order to meet carrier commitments. If this were the case, it could provide some causality for the dramatic increase in incidents.

The Legacy team continues to exhort our clients to consider cargo insurance in order to mitigate loss due to weather or other events. For those interested, we’re ready and able to help you evaluate different providers.

ANNOUNCEMENT

Peloton Announces $100 Million Transportation Investment to Combat Shipping Delays

After doubling its manufacturing capacity in 2020, the time has come for Peloton Interactive to pay the piper in terms of delivery. Following months of shipping delays, co-founder and CEO John Foley has announced that the exercise equipment giant intends to invest over $100 million in transportation and delivery costs in order to meet delivery commitments. Much of that $100 million transportation spend will go toward air shipping as the company expedites orders, as well as increased container rates from Asia to the West Coast.

Peloton’s story provides a representative example of the ongoing challenges shippers face in light of capacity constraints, port congestion and increasing consumer demand. With delays expected to continue well into 2021, shippers find themselves in the unenviable position of having to increase transportation costs in order to meet rising consumer expectations.

In his open letter to customers, Foley also revealed plans to invest in U.S. manufacturing capacity to reduce lead times and transportation costs; this is consistent with the industry-wide reshoring trend, which has taken off significantly in the wake of the COVID-19 pandemic and can trace its roots back to efforts to move manufacturing operations out of China after the previous administration imposed significant tariffs in 2018. Though the initial movement saw shippers moving operations from China to India and Vietnam, ocean freight challenges stemming from the pandemic have brought operations closer to home, leading to reshoring and near-sourcing out of the U.S. and Mexico.

Short-term solutions remain evasive for importers, as alternatives such as air freight, routing via alternate ports or shifting production all come with higher costs and may not be viable options. Bearing that in mind, we advise clients — and readers in general — to do the following:

• Order in advance, either by working with production facilities to move manufacturing dates forward or by utilizing “off-book” inventory.
• Plan and book shipments as early as possible.
• Consider using alternate suppliers and substituting products.
• Overcommunicate to customers and, where possible, offer discounts or rewards for current or future purchases.

In the long-term, we recommend that shippers map their supply chain, evaluate current risks and build in redundancy with primary and secondary manufacturers. When evaluating risks, be sure to consider:

• Supplier quality, location and diversity
• Inventory levels and safety stock
• Financial risk
• Geopolitical climate
• Tariffs
• Transportation risk associated with capacity, cost, delays and loss

Finally, be sure to closely monitor your supply chain, regularly reassess your plan and make strategic adjustments as needed.

NEWS

Shipping Companies Say Enough Is Enough to Congested Southern California Gateways

In last month’s Shipment, we covered A.P. Moller-Maersk’s strategic partnership with the Federal Maritime Commission, the Agriculture Transportation Coalition and the Harbor Trucking Association to combat congestion in the ports of Long Beach and Los Angeles. Though plans remain in the works — and under wraps — for many shippers, the effort comes as too little, too late. According to the Wall Street Journal, the number of vessels waiting to dock in those Southern California ports now exceeds those anchored there during the labor strike of 2014, leading a growing number of container lines to seek alternatives.

As noted in our previous story, Peloton is just one of hundreds of companies — if not more — experiencing significant shipping delays due to the combined factors of port congestion and increased consumer demand.

“Our supply chain has been crazier than crazy,” said Arnold Kamler, CEO of Kent International, a bicycle company with major clients, including Walmart and Target. “Normally, when we schedule pickups, we get about 10% of the shipments delayed or canceled. For the past five months, this number has been 40%.”

In light of this, many carriers have opted to cancel sailings rather than have ships tied up at a single port or have diverted trans-Pacific shipments to other ports, including Oakland and Seattle. Though this approach provided a temporary solution to shipping woes, the influx of shipments in smaller ports has created more widespread congestion along the West Coast.

Unfortunately, there’s no easy fix for this ongoing issue. The number of vessels waiting to berth in Long Beach, Los Angeles and other parts of the West Coast continues to grow, and we believe port congestion will remain a challenge until at least the end of Q2. A stimulus bill could push this timeline out even further, as the influx of money will likely result in more purchasing and greater demand. Based on the current situation, we encourage importers to continue to order and book as early as possible, discuss alternate routes with their representatives (if they haven’t already done so), evaluate alternate suppliers for the short or long term and consider air freight, where it makes sense.

For exporters, equipment continues to post a significant challenge, so it’s important to work with providers and give them a medium-to-long-term view of capacity needs. Exporters would also do well to consider contracting for space at higher rates for longer terms and to work with providers and local importers to turn equipment in market to mitigate carrier container downtime.

BRIEF

Spot Rates Continue to Increase, with Annual Contract Rates Expected to Follow Suit

Despite predictions that container shipping spot rates would peak around Chinese New Year, all evidence seems to point to the contrary. Spot rates remain at all-time highs and are expected to remain strong all the way through the second quarter and, as many importers fear, contract rates are likely to follow suit.

“This is a historically strong seller’s market at the moment. We see that for the first half in total,” said Patrik Berglund, CEO of Xeneta, in the company’s most recent market presentation. “The high spot rates … have historically cascaded down into contract agreements, putting the squeeze on shippers worldwide.”

The data supports Berglund’s statements: The Xeneta Shipping Index (XSI), showed a 5.9% increase from December 2020 to January 2021 — one of the largest-ever month-to-month increases in global XSI history. While this is good news for carriers, who finally have the leverage to increase contract rates, as well as to reduce long-term contract market share in major trades and add more to the spot market, it puts shippers on the defensive. The general consensus amongst industry experts is that shippers would do well to more accurately predict volumes and diversify their ocean freight suppliers.

Historically, sea freight volumes tend to decline in late February through May, as the market slows considerably, and importers begin to plan for the coming season. Under ordinary circumstances, we would expect spot rates to drop substantially, and for contracts signed in May by larger retailers such as Walmart and Target to set the market rate.

These are not ordinary circumstances, though: Many Asian countries have restricted travel during Chinese New Year to mitigate the spread of COVID, and many manufacturers are offering employees incentives to work through the holiday in an effort to reduce order backlogs. Product demand remains high, fueled by consumer purchasing and inventory restocking, and the current market strength points to a strong contract season for carriers.

The level of contract rates for larger importers will become much clearer over the coming four weeks. We advise clients and readers alike to consider a mixed approach of contract rates and spot rates by partnering with a freight forwarder or NVOCC. Shipping all volume through a carrier may get you the best rate in certain instances but doing so limits flexibility to access other market capacity; freight forwarders and NVOCCs offer far more flexibility in terms of capacity and service capabilities.

For small-to-medium-sized shippers, an NVOCC or freight forwarder is nearly always your best bet because they offer a higher level of service, more competitive costs and, of course, much-needed flexibility.

INSIGHT

Ask These 5 Questions Before Selecting a Freight Forwarder

Since the inaugural issue of the Monthly Shipment, we’ve spoken at length about the benefits of partnering with a freight forwarder — in addition to greater flexibility, they can also enable you to focus on your business processes, access advanced technology, connect to a larger supply chain network and more.

If you’re considering working with a freight forwarder, there are a few questions you should ask of your existing provider, first:

• Do they offer real-time visibility into my shipments, 24/7/365?
• Are they a certified logistics and customs professional?
• Can they offer secure competitive pricing and vessel space through a Top 15 global forwarding network?
• Do they mitigate risk and offer flexibility by diversifying their carrier base with an NVOCC?
• Can they create tailored solutions with multi-modal options from origin through door delivery?

If you need help preparing for carrier contract season, please don’t hesitate to reach out — the entire Legacy Supply Chain team is here to support you.

As always, we also recommend that you take a look at our blog or resource center for even more logistics insights.

Happy Chinese New Year, everybody — we’ll see you next month.