JLL Offers Fresh Perspective on Current State of Global Ocean Cargo Shipping: Part II

The on-going pandemic has created chaos for retailers and manufacturers trying to keep up with supply and demand, maintain analysts with Chicago-based commercial real estate broker JLL.

New research suggests that there’s also a “China Factor” to consider.

Manufacturing activity in China began to decline in Q1 2020 due to the pandemic and there were many cancelled container ship sailings due to the lack of product from closed factories, observes Dr. Kemmsies, CEO of the Kemmsies Consulting Group and Executive Consultant for JLL’s U.S. Ports, Airports & Global Infrastructure Group.

“The lack of Chinese-made inputs, critical to manufacturing operations in the U.S., Japan and Korea, negatively impacted the global supply chain,” he says. “Ocean carriers re-started sailings from China and have scrambled to catch up with Chinese export demand.”

In Q4-2020, Chinese manufacturing capacity reached its highest level in 5 years, however, there remains a backlog of orders. U.S. manufacturing capacity utilization has still not regained its pre-pandemic level due to difficulties attracting workers and ongoing shortages of imported components.

According to Kemmsies, that is why U.S. retailers are struggling to meet demand and rebuild inventories.

“Ocean carriers have started to deploy or re-route more vessels to alternative U.S. ports such as Oakland, Seattle-Tacoma, NY, Savannah and Charleston port gateways,” he says. “SoCal container terminals have responded by opening more truck gates and expanding hours of operation. Ocean carriers have increased shipping rates to ration spare capacity, but this has not deterred importers desperate to meet demand.”

JLL analysts add that some importers are resorting to very expensive air freight. Peloton spent $110 million on air freight to get their Taiwan-sourced product into the U.S. Others have shifted to utilizing East Coast ports to avoid the congested LA/LB ports. SoCal ports of LA/LB were the hardest hit. In 2020, SoCal ports handled 8.8 million TEU’s, 39% of the total reported by 17 of the 21 largest U.S container ports. In Q4 2020, SoCal ports averaged 900,000 TEUs per month, a historical high. And although volumes have declined in 2021 so far, they remain higher than peak levels prior to 2020.

“Therefore, we see more importers utilizing a multi-port strategy to mitigate risk in the future,” says Kemmsies.

Furthermore, transportation trends have worsened container congestion issues at ports. The surge in port volumes in the second half of 2020 are also reflected in railroad volumes. Railcar movements exceeded their 2019 levels and rose to historic highs. Since August 2020, some railroads have imposed surcharges, sometimes as high as 100% of the base rate for the railcar, to ration capacity.

Kemmsies says that did not deter shippers, not even those paying ocean carrier rates that were double their 2019 levels. The heavy use of railcars across the U.S. has limited the supply available in SoCal, which has exacerbated the container terminal bottleneck as approximately 40% of SoCal containers go elsewhere in the U.S. by rail. SoCal is not the only rail-impacted port gateway. Most major port gateways have been experiencing increased delays in rail shipments.

Residential housing market trends indicate sustained strong import volumes. Residential real estate growth is a driver of port volume. Housing construction and/or purchases requires a wide range of construction materials, furnishings, furniture, and appliances – most of which is imported.

New house construction starts have been growing. Multi-family construction spending surpassed its Q1-2019 peak and continues to increase. Existing home sales increased from an annual rate of 5.7 million in 2019 to as high as 6.7 million in the second half of 2020.

New home building and used home sales are expected to increase provided the Fed doesn’t aggressively raise interest rates. Therefore, strong import volume growth at U.S. ports is expected to continue. Since the pandemic began home improvements/additions have also been increasing as households prepare to at least spend a few days per week working and/or potentially studying from home.

These trends also drive containerized import volumes at ports.

Big shifts in trade flows expected for U.S. imported goods. In addition to the bullwhip effect the pandemic has had on global goods, the transportation industry has had to deal with changing world trade flows.

“China has lost 5.4% of U.S. containerized import goods by volume in the last 3 years,” says Kemmsies. “More shifting is expected. Some of this loss was already occurring due to cheaper labor availability in other Asian countries like Vietnam and India. Some of the loss is also due to changes in the U.S. trade policy that started with Trump and will continue with Biden.”

Importers shifting their sourcing to companies located West and/or South of China are more likely to send their goods via the Suez Canal to the U.S. East Coast.
“We have seen this trend in port market share favoring U.S. East Coast ports and expect it to continue slowly over time,” Kemmsies concludes

Part III: How and when will the shipping chaos be resolved?

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