Trans-Pacific ‘going crazy’ as demand defies pandemic pessimists

China-U.S. West Coast container rates continue their astonishing climb. Not because of too little vessel supply, but because of too much import demand. U.S. import demand that is not surging despite of coronavirus, but because of it.
“The trans-Pacific eastbound market is going crazy,” exclaimed Nerijus Poskus, vice president and global head of ocean freight at digital freight forwarder Flexport. Current dynamics are unprecedented, he said in an interview with FreightWaves on Wednesday.
“All of us thought that because of the pandemic, consumption would go down,” he said. Instead, it has gone up — at least temporarily.

Import demand: upside surprise

“Our clients are selling more. They’re selling more online. And that’s why they’re shipping more into the U.S. Of the top 100 clients of Flexport, 80% of them are growing year-on-year and assumedly they’re gaining market share,” reported Poskus.
“People are still buying. Even unemployed people. They’re getting government support so they still have money. They’re no longer spending on restaurants, haircuts, gas and commuting. But they have the cash so they’re just buying more things. And they’re buying more things online.
“There are also many people leaving the cities, myself included. So, for example, I had to buy a lawnmower and all of the kinds of things for the home that I didn’t need in the city. I believe there are many people like me.”

Shippers are importing more bikes, camping equipment, household items and exercise machines to the U.S. than before, he noted.
As far as furniture, he said, “Old-school furniture companies that aren’t selling online aren’t doing well. Those that are more innovative and selling online are doing better. Shops like IKEA are selling out.”
More personal protective equipment (PPE) is also coming in. “We are seeing a second wave of PPE,” confirmed Poskus. “I would say anywhere between 5-10% [of volume] is PPE. Not just masks. All kinds of protective equipment.”
Asked why shippers are favoring voyages from Asia to the West Coast versus the East Coast, he replied: “Transit time and e-commerce. It’s so much faster. Even if the final destination is on the East Coast, if you’re running out of inventory, you will ship it into Los Angeles, transload it onto a 53-footer, and arrange for trucking.”

Ocean carriers not supressing capacity

In the second quarter, carriers “blanked” (canceled) a large number of Asia-West Coast sailings to support rates. That strategy, which raised talk of price gouging, has been reversed.
“Most void sailings have now been reinstated,” said Alphaliner in its weekly report. In addition, carriers have launched five new regular services, adding 35,000 twenty-foot equivalent units (TEUs) in weekly capacity. On top of that, carriers have deployed multiple “extra loaders” — additional one-off sailings.
Copenhagen-based Sea-Intelligence estimates that carriers have increased their Asia-West Coast third-quarter capacity by 13.1% year-on-year, marking “the strongest capacity growth in a decade.”
“Spot freight rates … have surged to their highest level ever despite the restoration of blank sailings and even the introduction of new capacity,” said Alphaliner.

Breaking rate records

The Shanghai Containerized Freight Index (SCFI) rate for China-U.S. West Coast was at $3,144 per forty-foot equivalent unit (FEU) last week and $3,167 per FEU the week before, the only two weeks it has ever topped $3,000.

The Freightos Baltic Daily Index also estimates freight rates.
On the China-West Coast route (SONAR: FBXD.CNAW), rates were up 137% from March 1 to $3,071 per FEU on Tuesday.
On the much longer China-East Coast route (SONAR: FBXD.CNAE), rates were up 36% to $3,466 per FEU.
Rates will likely go even higher, predicted Poskus. “By mid-Aug. 15, we may start seeing rates into Los Angeles at $3,400-plus and to the East Coast at over $4,000, which is basically the all-time record,” he said.

Shipper complications mount

As demand outpaces trans-Pacific capacity, supply-chain complications are multiplying.
“There are equipment shortages across the Asia-Pacific,” explained the Flexport vice president. “I actually don’t think this is a short-term challenge. I think it’s going to last for at least a couple of months.
“You have a lot more exports out of China and these empty containers aren’t coming back quickly enough. So, on top of very high prices, we have equipment challenges.
“Reliability is also lower,” he continued, referring to “rolling,” in which carriers delay cargo until a future sailing. “For Flexport, our cargo rolls used to be in the very low single digits. Now they’re significantly higher.”
The reliability shortfall is pushing even more shippers toward higher-cost premium services, which can offer faster transit times, guaranteed no-rolls and guaranteed equipment.
When the coronavirus first struck, premium ocean stole market share from airfreight because passenger-flight cancellations removed belly capacity and caused airfreight rates to spike.
“Now, premium ocean products are growing even more,” explained Poskus. “It’s not just market share from airfreight. Premium is also getting market share from regular ocean customers who are struggling to get equipment or space.”

How long will rate spike last?

One theory is that today’s import strength partially results from cargo being brought forward from the future, meaning volumes will sink in the fourth quarter.
According to the National Retail Federation, “August is expected to be the busiest month of the July-October ‘peak season’ when retailers rush to bring in merchandise for the winter holidays.” FreightWaves Maritime Expert Henry Byers also believes “peak season may very well have come early this year.”
Another theory is that virus fears are bringing shipments forward. Importers want to get products into warehouses and distribution centers before states lock down again in the fall.
Alphaliner opined that the current spike is about moving “as much product as possible before a potential second COVID-19 wave.”
Yet another theory is that the government handouts fueling consumer spending will end. The coronavirus-induced consumer recession wasn’t averted. It was just delayed.
“I don’t think this is sustainable,” concluded Poskus. “I personally think that after Golden Week in China [Oct. 1-7], things will slow down. You might see a small spike right after Golden Week. Then, from about mid-October through December, I expect a slowdown. I think the fourth quarter is going to be different.
“Does it mean that [trans-Pacific eastbound] prices will fall back down to $1,400 [per FEU]? I don’t think so,” said Poskus. “But I do believe the change from a bull market to a bear market in freight is coming.” Click for more FreightWaves/American Shipper articles by Greg Miller