Container shipping is under pressure as hopes of a peak season dwindle

One of the earlier scenarios for the 2023 peak season for container shipping was that importers would get cocky and keep much of their business in the spot market. Shipping companies would severely limit transpacific transport capacity. America’s excess inventory would dissipate the moment holiday imports picked up. Spot rates would rise – just like in the 2020 peak post-COVID lockdown season – and importers without sufficient contract coverage would be hit.

Nobody really talks about it anymore.

The destocking took longer than expected. Pressure on consumer demand is increasing. Transpacific transport capacity has not fallen as much as predicted. Spot rates rose in mid-April but have since fallen and remain extremely weak.

The talk is now more of a moderate at best peak season, roughly in line with pre-COVID-19 levels, with no fireworks.

Spot rates are still extremely weak

The container lines implemented a general rate increase (GRI) in mid-April, which was at least partially successful and eventually freed tariffs from the floor. However, they have reportedly postponed planned GRIs for early May and mid-May and are now reviewing the GRIs for June.

Spot indices show that mid-April gains are partially in place, but interest rates have recently declined slightly. “Rate increases observed in April have started to recede,” Omar Nokta, a shipping analyst at Jefferies, said in a research note on Friday.

The Freightos Baltic Daily Index (FBX) for the China-West Coast route on Thursday stood at $1,497 per 40-foot unit. That’s up 48% from the GRI prior to mid-April, but down 14% from April 25.

The Drewry World Container Index (WCI) valuation for Shanghai-Los Angeles for the week ended Thursday was $1,823 per FEU, up 9% from the week of April 13 but down 2% on the week from April 20th.

The FBX China-East Coast index stood at $2,302 per FEU on Thursday, up 10% from mid-April but down 10% from April 24. The WCI Shanghai-New York rate was $2,825 per FEU, up 11% from the week of April 13 but down 1% from the week of April 20.

As for contract rates, new transpacific annual contracts taking effect this month are pricing significantly lower than contracts signed last year.

Xeneta reported Wednesday that long-term contract rates on the Asia-West Coast route averaged $1,893 per FEU. That’s 70% lower than the company’s estimate of average long-term fares on this route at the end of November, albeit 30% higher than Xeneta’s current average spot fare estimate.

Retailers are making progress on overstock

Shipping lines Maersk and Hapag-Lloyd have both predicted that transpacific volumes will increase in the second half of the year due to the end of destocking, supporting higher rates.

They pointed out that import volumes are below US consumption as inventories are depleted. As inventories are depleted, imports better match consumption and volumes increase. The problem with this thesis is that consumption could fall in the second half of the year from the first, which would erase sequential gains from the return to inventory replenishment.

This theme was the focus of client notes from analysts this week following the earnings reports from mega-retailers Home Depot (NYSE: HD), Target (NYSE: TGT) and Walmart (NYSE: WMT).

Home Depot’s inventories in the first quarter of 2023 were still 60% higher in nominal terms than in the first quarter of 2019 before the COVID-19 crisis. However, Deutsche Bank’s transportation analyst Amit Mehrotra claimed that “the vast majority of this probably reflects inflation.” On the consumption side, he pointed out that Home Depot’s unit demand, adjusted for inflation, is already back to pre-pandemic levels.

Target inventories were down 16% year over year and up 30% compared to the first quarter of 2019, “which means inventory levels are roughly flat compared to 2019 when adjusted for inflation,” Mehrotra said.

Greg Melich, retail analyst at Evercore ISI, noted that Target’s sales growth since the first quarter of 2019 has outpaced inventory growth, “suggesting that Target’s (warehouse) overstocking issues are behind it.”

Walmart President John Furner said on Thursday’s conference call, “The first quarter of last year would have been the peak of inventory levels. We cleared a backlog of around 100,000 containers that were delayed in ports. So as you look into the next quarter or so, it just gets bigger and bigger to cut those costs. As you get into the second half of the year, things tend to normalize.”

Concerns about consumption are growing

According to Mehrotra, “the bottom line is that we expect inventories to be back to normalized levels based on today’s demand.” But the risk is broader demand destruction as consumers pull back. Home Depot’s results clearly showed the decline in demand in what the company focuses on: home improvement.”

Mehrotra also noted that retail sales are still above the pre-pandemic trendline, meaning sales must continue to fall as the business normalizes.

“US retail sales excluding autos and gasoline were trending very steadily prior to the pandemic,” he wrote on Friday. Extrapolating this trend suggests April retail sales excluding auto and gasoline sales were 15% above the historical trendline on a nominal basis and 5% on an inflation-adjusted basis, he explained.

“That means monthly retail sales need to fall 5% to normalize to pre-COVID trends. In other words, the big difference between where we are today and the trend can largely be explained by inflation, with a third due to an increase in spending: 5% due to an increase, 10% due to inflation.”

According to Jon Chappell, transportation analyst at Evercore ISI, “De-stocking over the past year and more has been a massive headwind for freight demand, and the imminent conclusion of this criminal case lends some credibility to the bottom thesis.”

However, he warned that “the demand side and the solutions retailers are seeking to find the right size inventory are also a moving target and – considering the peak season ahead – are likely to be much lower than many were then expected.” Earlier this year.”

“So there is certainly progress on backward-looking inventories, but much uncertainty remains as retailers consider the pace of inventory replenishment in the immediate future,” Chappell said.

When could Christmas goods boost imports?

The trade in Christmas items is another variable in the high season.

Many of the holiday loads were already in the booking pipeline at this point in 2022. They will be shipped later this year, which should theoretically provide some volume support in the second half of the year.

During an October 2022 press conference, Port of Los Angeles general manager Gene Seroka said, “September is traditionally a high-volume month for year-end product. Think of toys and games, clothing, shoes and other products. These Christmas gifts fell sharply compared to (September 2021), mainly because they arrived earlier. Our peak season was June and July as importers would bring these goods forward to know when they could hit the market.”

The early peak season of 2022 was marked by fears of delays in shipments due to port congestion and potential labor unrest at West Coast ports. Airline schedules are not quite back to normal yet, but this year there are no queues in ports. And importers have already shifted their supply chains to East and Gulf Coast ports to avoid the labor risk. So there is no reason to rush into importing Christmas items.

Seroka said during a conference call Thursday that this year’s peak season will come later — and may be shortened.

“My estimate for the peak season, based on orders already placed and discussions with retailers, manufacturers and auto companies, is that we’re likely to see a relatively short peak season between the months of September and October,” Seroka said.

“For people who want to ensure in-store and distribution center (DC) appointments, that can start a little earlier, and it could take a little later into November as people try to get last-minute freight through.”

Alan McCorkle, CEO of Yusen Terminals in Los Angeles, said during the same press conference, “What we’re hearing from our customer base is that … we’re going to see a more traditional peak.” If we arrive later in the summer months and into the fall, we will find that volumes are picking up again to replenish supplies for the holiday season.”

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