US importers rush to new transport capacity levers

Mark Szakonyi, Executive Editor | Sep 30, 2021 8:52AM EDT

The increased interest in multiyear contracting and a sharp uptick in contract rates agreed to in the last three months may ultimately be the most meaningful change in the industry since the onset of the pandemic. Photo credit:

The familiar levers for logistics managers to manage shipping disruptions, such as alternative port routing and front-loading inventory, provide little relief in this chaotic trans-Pacific trade. Container lines and analysts expect congestion to drag well into 2022, with the likes of Peter Sand, chief shipping analyst at BIMCO, noting on a IHS Markit webinar on Sept. 16 that some in the industry do not expect relief until Chinese New Year 2023, approximately 15 months from now.

That is forcing US importers to take bolder action to guarantee capacity in ways that would have been unimaginable in years past. Containers are moving on breakbulk and even bulk vessels, shippers are embracing transloading — some even into boxcars — and interest in multiyear ocean contracts is skyrocketing.

The ongoing shock to the containerized supply chain — resulting in lost sales and production — is driving the C-suite to pay much closer attention to their logistics teams. It is now increasingly common for CEOs, CFOs, and COOs to join calls with container lines or supply chain briefings, logistics managers tell Logistics teams are even getting praise during earnings calls, such as during industrial manufacturer H.B. Fuller’s third-quarter earnings call on Sept. 23.

Amid supply chain disruption, “we have really an opportunity to differentiate (ourselves from other) companies, and I think our team has done just an outstanding job of managing through this, and I just want to thank them. It’s really their great work,” said Jim Owens, president and CEO of H.B. Fuller. “In terms of buffers and inventories, it’s interesting what’s happening out there.”

The degree to which these new capacity levers are still used when Asia import-driven disruption eases will give a sense of whether the COVID-19 pandemic has permanently changed how shippers manage supply chains. Just as many shippers are reconsidering sourcing, whether it be pulling back exposure to a COVID-19–hobbled Vietnam or purchasing key components closer to home, there is a growing sense that importers must ship differently.

Chartering out of chaos?

The C-suite is driving the chartering of vessels by major US retailers, Joshua Bowen, senior vice president of ocean product North America at CEVA Logistics, said during the Council of Supply Chain Management Professionals’ (CSCMP) EDGE conference on Sept. 13. Costco Wholesale, Home Depot, IKEA, and Walmart have all told investors they are chartering ships, and Dollar Tree said it had contracted a ship for three years.

“There is a large number of companies that have gotten to the point where they say, ‘I want the guarantee, and if I charter a vessel, the only person that can roll me is me,’” said Bowen, referring to how carriers often prioritize higher-paying spot business over contracted business.

The chartered transits are generally longer than those of already unreliable liner services, in part because one-off arrivals tend to have lower priority for berth space at ports such as Los Angeles-Long Beach. That put off one importer, who told they jumped on the chartering bandwagon, but “never again.” That is despite trans-Pacific ocean carrier reliability falling to just 9.9 percent in August, a new low since Sea-Intelligence Maritime Analysis began tracking container ship on-time performance a decade ago.

Whether the containers are moving on a chartered small container vessel or a breakbulk ship, there is often little free berth space when they arrive at major US ports. Once they do berth, unloading operations will also be slower than with a typical ship. At the ports of Long Beach and Los Angeles, longshore workers move 25 to 30 containers per hour. When unloading a breakbulk ship that has been outfitted for cellular transport, it is more like five to six moves per hour.

The rejiggering of the vessel also raises the risks of cargo damage and comes with higher insurance costs. Nonetheless, what began as chartering for automotive components has now spread to broader consumer retail, and executives are stressing their efforts to investors.

“We’re reading about it every day,” Richard Galanti, CFO at Costco, said during a recent call with Wall Street analysts. “Containers, trucks, and drivers are all impacting the timing of deliveries and higher freight costs. Despite all these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and/or mitigate our price increases passed on to the members.”

Galanti said Costco, the 47th-largest US importer last year by volume, according to The Journal of Commerce, has three chartered 800 to 1,000 TEU ships for next year and leased thousands of containers.

Land-side creativity

With intermodal rail systems overwhelmed, the practice of transloading ocean containers into domestic equipment has become critical for many importers to secure land-side transport capacity. Logistics providers are getting creative. Cargomatic, for example, is transloading cargo from 40-foot containers into 60-foot boxcars, giving importers another option as Union Pacific Railroad meters domestic cargo and outbound truckload rates out of Southern California spike. Beyond securing land-side capacity, the boxcars can be railed closer to the cargo’s final destination — sometimes even straight to the distribution center, if it has a rail spur. That is attractive, considering the tightness in last-mile truck capacity.

Transits are much slower than intermodal rail, but “it’s absolutely wonderful when you don’t have any other capacity,” said rail industry veteran Tom Finkbiner, who leads Cargomatic’s boxcar initiative. Because the US Surface Transportation Board regulates boxcar rates, there are no congestion surcharges, unlike in some intermodal lanes, which makes pricing more predictable.

The increased interest in multiyear contracting and a sharp uptick in contract rates agreed to in the last three months may ultimately be the most meaningful change in the industry since the onset of the pandemic. Signaling their optimism in the strength of contracting, CMA CGM and Hapag-Lloyd recently grabbed mainstream news attention by announcing that they have capped spot-rate increases, although they did not mention premiums and surcharges.

Their bullishness on contract rates is well founded. According to rate benchmarking platform Xeneta, it was not until August 2020 that the gain in contracts from Asia to the US West Coast made in the last three months began sharply diverging from total contract levels on the trade. Since then, average contract rates from Asia to the US West Coast have more than doubled to $2,347 per FEU, while contract rates signed in the last three months have more than tripled from $1,296 per FEU to $4,435 per FEU. Spot rates jumped from $2,585 per FEU to $8,256 per FEU during the same period, according to Xeneta.

Ultimately, paying more — and for longer contract periods — is one of the strongest, if not the strongest, levers to gain capacity.

“As we go forward into the new contracting, we’re looking at several things,” John Janson, logistics director of wholesale apparel importer SanMar, said during the CSCMP Edge conference in Atlanta. “One, we are talking to our largest contract carrier about a multiyear agreement. We don’t see things getting better. If we sign up for a two- or three-year agreement, does that buy us capacity in the short term?”

Contact Mark Szakonyi at [email protected] and follow him on Twitter: @MarkSzakonyi.