One in every of the sooner scenarios for container shipping’s 2023 peak season went like this: Importers would get cocky and keep much of their business within the spot market. Shipping lines would heavily curtail trans-Pacific transport capability. America’s inventory overhang would evaporate just as holiday imports ramped up. Spot rates would jump — just as they did in 2020’s peak season after COVID lockdowns — and importers without sufficient contract coverage would get caught out.
Nobody’s really talking about that one anymore.
Inventory destocking has gone on longer than expected. Pressures on consumer demand are constructing. Trans-Pacific shipping capability shouldn’t be down as much as predicted. Spot rates bumped up in mid-April but have eased since and remain extremely weak.
The talk now could be more a couple of moderate peak season at best, roughly in keeping with pre-COVID levels, with no fireworks.
Spot rates still extremely weak
Container lines implemented a general rate increase (GRI) in mid-April that was a minimum of partially successful, finally clawing rates off the ground. Nevertheless, they reportedly delayed planned GRIs in early May and mid-May, and at the moment are GRIs in June.
Spot rate indexes show mid-April gains have partially stuck but rates have edged backward more recently. “Rate gains seen in April have been slipping step by step,” said Jefferies shipping analyst Omar Nokta in a research note Friday.
The Freightos Baltic Every day Index (FBX) for the China-West Coast lane was at $1,497 per forty-foot equivalent unit on Thursday. That’s up 48% from before the mid-April GRI but down 14% from April 25.
Drewry’s World Container Index (WCI) assessment for Shanghai-Los Angeles was at $1,823 per FEU for the week ending Thursday, up 9% from the week of April 13 but down 2% from the week of April 20.
The FBX China-East Coast index was at $2,302 per FEU on Thursday, up 10% from mid-April but down 10% from April 24. The WCI Shanghai-Latest York rate was at $2,825 per FEU, up 11% from the week of April 13 but down 1% from the week of April 20.
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On the contract-rate front, pricing of latest trans-Pacific annual agreements coming into force this month is sharply lower than for contracts signed the prior yr.
Xeneta reported Wednesday that long-term contract rates on the Asia-West Coast route averaged $1,893 per FEU. That’s down 70% from the corporate’s assessment of average long-term rates on this route in late November, albeit 30% higher than Xeneta’s current average spot-rate assessment.
Retailer progress on inventory overhang
Ocean carriers Maersk and Hapag-Lloyd have predicted that trans-Pacific volumes will rise within the second half resulting from and end to inventory destocking, supporting higher rates.
They identified that import volumes are below U.S. consumption as inventories are drawn. When inventories wind down, imports will align higher with consumption, increasing volumes. The issue with this thesis is that consumption could go down within the second half versus the primary, offsetting sequential gains from a return to inventory restocking.
This issue was a central focus of analyst client notes this week following quarterly results of mega-retailers Home Depot (NYSE: HD), Goal (NYSE: TGT) and Walmart (NYSE: WMT).
Home Depot’s Q1 2023 inventories were still up 60% in nominal terms versus Q1 2019, pre-COVID. But Deutsche Bank transport analyst Amit Mehrotra maintained that “the overwhelming majority of this likely reflects inflation.” On the consumption side, he identified that Home Depot “unit demand is already back to pre-pandemic levels” when adjusted for inflation.
Goal’s inventories were down 16% yr on yr and up 30% versus Q1 2019, “implying unit inventory is about flat versus 2019 when adjusting for inflation,” said Mehrotra.
Evercore ISI retail analyst Greg Melich noted that Goal’s sales growth since Q1 2019 exceeded its inventory growth, “suggesting that Goal’s [inventory] overbuilding woes are behind them.”
Walmart President John Furner said on Thursday’s conference call: “Q1 last yr would have been the height of inventories. We worked through a backlog of something like 100,000 containers that had been delayed at ports. So, lapping those costs gets larger as you sit up for the following quarter or so. While you get into the back half of the yr, things are likely to normalize.”
Concerns grow on consumption
In keeping with Mehrotra, “The underside line is that based on demand today, we predict inventory levels are back to normalized levels. But the danger is more broad-based demand destruction as consumers pull back. Home Depot’s results clearly showcased demand destruction within the space that the corporate focuses on — home improvement.”
Mehrotra also noted that retail sales are still above where the pre-pandemic trend line would place them, meaning sales have further to fall as they normalize.
“U.S. retail sales ex-auto and gasoline were on a really consistent trend prior to the pandemic,” he wrote Friday. Extrapolating that trend suggests April retail sales excluding automotive and gasoline sales were 15% higher than the historical trend line on a nominal basis and 5% higher on an inflation-adjusted basis, he explained.
“This means that monthly retail sales need to say no by 5% to normalize to the pre-COVID trend. Said one other way, the big spread between where we’re today and the trend is usually explained by inflation, with one-third explained by a pull-forward in spending: 5% is resulting from pull-forward, 10% resulting from inflation.”
In keeping with Jon Chappell, transport analyst at Evercore ISI, “Destocking has been a large headwind to freight demand during the last year-plus and the near completion of this punitive process provides some credibility to the bottoming thesis.”
Nevertheless, he warned that “the demand side and what retailers are solving for when contemplating ‘right-sized’ inventories can be a moving goal, and is probably going much lower — when the upcoming peak season — than many would have expected in the beginning of the yr.”
“So, progress needless to say on the backward-looking inventory front, but still lots of uncertainty left to play out as retailers must consider the pace of restocking within the immediate future,” said Chappell.
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When could Christmas goods buoy imports?
The vacation goods trade is one more peak-season variable.
Most of the holiday cargoes were already within the bookings pipeline presently in 2022. This yr, they’re being shipped later, which should theoretically provide some support to second-half volumes.
During a press conference in October 2022, Port of Los Angeles Executive Director Gene Seroka said: “September is traditionally a high-volume month for end-of-year products. Think toys and games, clothing, footwear and other products. Those holiday gift items dropped precipitously in comparison with [September 2021], mainly because they got here in earlier. Our peak season was in June and July as importers moved up the arrival of those goods to bring some certainty to once they could get to market.”
The early peak season in 2022 was driven by fears of delivery delays resulting from port congestion and potential West Coast port labor unrest. Carrier schedules are usually not fully back to normal yet but there aren’t any port queues this yr. And importers have already switched supply chains to the East and Gulf coast ports to avoid the labor risk. Thus, there’s no must rush holiday-goods imports.
Seroka said during a conference call Thursday that this yr’s peak season will come later — and might be abbreviated.
“My estimation on peak season based on purchase orders which have already gone out and discussions with retailers, manufacturers and automotive firms is that we’ll probably see a comparatively short peak season between the months of September and October,” said Seroka.
“Which will start just a little bit earlier for people who wish to ensure in-store and D.C. [distribution center] dates and it could run just a little bit later into November if folks are attempting to get that last-minute cargo through.”
Alan McCorkle, CEO of the Los Angeles’ Yusen Terminals, said throughout the same press conference: “What we’re hearing from our customer base is that … we’ll see just a little bit more of a standard peak. As we get into later in the summertime months and into the autumn, we’ll begin to see volume pick back as much as resupply for the vacation season.”
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