February 2, 2021
Ocean Market Outlook for 2021: Not All Smooth Sailing
Ready to Get Started?
Flexport makes shipping your cargo transparent, reliable, and affordable
Since the beginning of the pandemic we have seen a vicious market cycle that has created levels of congestion never seen before. Spot rates have soared, and space has become a premium for those who are importing and exporting goods across the globe. That volatility looks set to continue well into 2021. To delve into predictions for the coming months and ways to offset the challenges, Flexport invited Lars Jensen, CEO of SeaIntelligence Consulting for its latest Logistics Rewired webinar series.
What Is Happening?
The situation in the ocean market is global. In the US and Europe, imports are up and exports are down.
“The pandemic has created a unique situation in the market,” explains Lars Jensen, CEO of SeaIntelligence. “More people are stuck at home buying things, and money has been reallocated away from services to goods.”
As a result, businesses across the board have faced inventory shortages since the pandemic hit, with most unable to keep pace with the increased demand.
Port Congestion Is a Big Factor
Port congestion has also been responsible for major issues and has had a notable impact on the TAWB and FEWB trade lanes. In Los Angeles and Long Beach, for example, one third of ships are stuck waiting to discharge cargo—sometimes for up to 14 days at a time.
Adding to the trouble: The backlog of cargo from the spike in imports during the last half of the past year (up by nearly 50%) sits waiting to be offloaded. The situation is exacerbated by escalating Covid outbreaks, which have caused labor shortages at the ports.
Will Equipment Remain Gold in 2021?
Throughout this crisis, equipment has remained the ultimate stumbling block. Roughly 80% of chassis are being used at any moment and 13% are currently out of service. Until such issues are resolved, equipment will remain gold. Nerijus Poskus, Vice President of Global Ocean at Flexport predicts that it will take 2-4 months to iron out the current issues; the port congestion means equipment is not heading back to Asia on time.
One ray of light in all the chaos is that spot rates appear to have stabilized after their seemingly never-ending escalation during the second half of 2020. Flexport is cautiously optimistic that rates will begin to drop after Chinese New Year, which should offer some relief. Check Freight Market Update to keep up to date with rate changes.
The Chinese New Year Effect
The week of Chinese New Year (CNY) is a public holiday, when factories go offline and voyages come to a halt. But 2020 was one long peak season, driven by intense demand and a shift towards e-commerce. As a result, the usual slow-down in spot rates during CNY, which leads to an increase in blank sailings is expected to be different this year. During 2020, there were 88 blank sailings; this year, only 12 are forecast.
How to Prepare for the Year Ahead
After an extremely volatile 2020, businesses are craving stability and a respite from the chaos. Following are a few things businesses can do to make the market challenges easier.
- Don’t rush contracts. At this point in January 2021, very few large retailers have actually finalized contracts. So, while you shouldn’t delay, there’s no need to panic and rush into securing contracts. As always, the best place to be is in the middle. Wait for larger importers to sign and set their baselines to get the best deal in terms of price. Specific, digital contracts will likely carry more weight in 2021.
- It’s never been as important to try to predict volume. Negotiate weekly space allocations in advance: the wider the range, the higher the price. If you cannot predict well, you’ll pay more or find your cargo delayed. Flexport’s forecasting guide contains tips on how to shape your predictions.
- Plan to move a proportion of goods with premium contracts, which can offer space guarantees, the promise of No-Rolls, prioritized discharge, and chassis availability. This becomes especially important for products that are selling well and in high demand.
What’s different now from a year ago is that the supply chain has become better at dealing with the uncertainty. The worst of the industry disruption may very well start easing within the first half of 2021. For importers and exporters, the challenge remains: how to best optimise supply chains under the current set of circumstances.
Tune in to the full recording of the webinar and its slides to learn more, or read the transcript below.
Anders Schulze: Good morning. Good evening, everyone. Welcome to this logistics webinar around the ocean markets and our predictions for 2021. My name is Anders Schulze. I'm the Global Head of Ocean Freight here at Flexport and I'm super excited to spend the next one hour with all you, we have several thousand people dialing in.
So a lot of opportunity to get feedback from all of you and a lot of opportunity to provide you with the latest and greatest insights right here. In front of you, you have a few different screens. First off in the middle, you see the slide deck. That's basically the content that we'll cover throughout the next hour.
You have an opportunity to enlarge the slide deck by dragging the small arrow in the lower right corner. Or the window you see in the top right corner. Then below the screen, you see a few, one of them being a Q and A button where you can basically submit any questions. We have logistics experts right here that can answer any questions instantly.
And then we also have a Q and A session at the very end of the webinar. You can also find a small bio with each of the speakers that I'll introduce you to in a minute. And then you also have the opportunity to download the slide deck from this presentation. Again, if you have any practical questions around any of these technicalities, please feel free to drop them in the Q and A box, and we're there to assist you. Before we go into the content, read this disclaimer right here.
We all know that the state of the ocean nation is pretty much it. Changing every minute, every hour. So what we're presenting to you today is the current snapshot. So please don't hold us accountable for any outdated information over the coming days or weeks as the situation continues to change. This webinar may also not address all of your tailor-made needs, but again, feel free to ask any questions in the Q and A box or reach out to any of us subsequently. We're happy to engage.
I'm super excited to present you with my co-speakers here today. First off, Lars Jensen. Welcome to you Lars.
Lars Jensen: Thank you very much. I'm excited to be here.
Anders Schulze: Lars is the CEO of Sea Intelligence which is basically his own company that he has been running for the past decade or so.
Before that Lars had 10 years of experience in various companies, such as Maersk. And last has basically been in this ocean game for the past, the more than 20 years. So he knows a lot about ocean freight and basically can answer any questions that you would say, at least there, he likes to try.
And Nerijus Poskus is the second speaker today. Nerijus is VP of Ocean Freight Flexport, and has basically been building the ocean freight here at Flexport from ground up. Welcome to Nerijus. Excited to have you.
Nerijus Poskus: Thanks Anders. Hi everybody.
Anders Schulze: All right. Let's let's dive in. As you can see right here, we have quite the meaty topics to cover today and we'll start out with a quick recap of 2020. We know it was a tough year in many ways. So by all means let's not spend too much time on 2020. And nevertheless let's recap the highlights of 2020 that have also been reflected in the first part of 2021.
And then we'll look into equipment, basically the situation of container boxes. Nerijus famously cited equipment as being sort of the goal of 2020. We'll have a discussion around predictions for 2021.
Will it remain the goal or will we see a change here? And we'll look into Chinese New Year. We all know that Chinese New Year typically tends to slow down things or what will happen this time around. And how do we expect the sort of aftermath of Chinese New Year in 2021?
Then we'll take a look at the contract season. Some of you may be signing up the parts of your shipments on fixed contracts. We'll take a look at the prediction for the contract seasons, and then we'll also come up with recommendations and solutions before we jump into the Q and A.
The Vicious Ocean Market Cycle
So with that, let's take a look at 2020 right here. We have chosen to summarize the 2020 situation, at least the second half of 2020 has the so-called vicious ocean market cycle.
As we see it, if we start in the top right corner here of this spinning wheel, you can see that the supply and demand imbalance has been a thing for pretty much eight straight months. Now, in essence, we have more demand than supply out there, which has not been the case in history where we actually have more supply than demand.
This with labor shortage because of the social distancing rules, because of COVID contractions and whatnot has only exacerbated the problem. This is now turning into port congestion issues. We've never seen one before. In some cases, vessels are waiting 10 to 14 days to offload that cargo. In some ports, we'll have a look at some of the mind blowing situations a little bit later.
Suggested reading: Outbreak of Covid Cases at Ports of Los Angeles and Long Beach Escalates an Already Fraught Situation
All of this is translating into more vessel delays that we've ever seen before in this industry. And in return, this is also prolonging the time for equipment or container boxes to get all the way back to the origin. For example, Asia, where the container equipment is very much needed to load the cargo. So we've seen sort of this spinning wheel, this vicious cycle pretty much going on for the past eight months or so.
US Imports skyrocket while exports are down
We'll look into each of them, each of the compounding effects before we predict what's going to happen this year, going forward. So as mentioned we are seeing more demand than ever before. Outstripping the supply out there, here we've depicted the us container in ports over time for the past almost 10 year period.
US Imports are up 25% YoY in Q4'20
And you can see on the green graph right here, that imports into the U S are all time high, less the case for exports on the red graph that is literally dropping like a rock lately. This is even more clear in this snapshot shown here, where we basically assumed in 2020. You can see that the ratio between import and export is increasing to a level we never seen before. It's more than three to one now.
And so in short, the trade tariffs, trade wars are not really doing the trick. It's actually the other way around imports are skyrocketing. NH ports are dropping like a rock. Lars help us understand what's driving this. Why is this happening?
Lars Jensen: It is exceedingly simple, social distancing, closure of entertainment. The inability to travel means people get stuck at home and they buy stuff. It is as simple as that early on, you could see skyrocketing of especially stuff to equip your home offices that then was expanded to other stuff to improve your home and garden. And what have you, it's as simple as that, people spend less money.
But the money they do spend, they reallocate away from services and onto goods.
Europe tells a slightly different story
Anders Schulze: Interesting. Lars: Is that also the situation into Europe? Right here, we see that the Europe development, in terms of imports and exports, it's somewhat of a different story. A little bit different helps us understand what we're seeing here relative to the U.S. Situation.
Lars Jensen: Exactly. It's a little bit different, but still the same. First of all, the pickup Europe started a couple of months later than what we saw in the U.S. But it was the same phenomenon. Secondly, the U.S. consumer, apparently isn't as gung-ho in terms of sitting at home and buying stuff as the U.S. consumer. So what we're seeing in Europe is by and large the same pattern, but it's slightly delayed and somewhat more subdued compared to what we see in North America.
Anders Schulze: Lars on the other chart, we have data up until December. This stops in November. How would you expect the European import to develop in December and January?
Lars Jensen: It's going up. I mean, we don't have firm data yet, but it appears that the Asia-Europe trade is likely going to be off some 13% in December, which is higher. And I would expect January to grow as well. Then of course, we get to the Chinese New Year impact, but I know we're going to cover that later today.
Anders Schulze: Okay. And Lars does this have something to do with the inventory levels, being low and shippers restocking. How do you see that?
Lars Jensen: That is a compounding effect.
When the pandemic hit, we actually had very low inventories. So when consumers suddenly started buying inventories, we're running short quickly, that boosts demand, obviously, and this gives a different play out compared to the financial crisis a bit over a decade ago, which we started with actually extremely high inventories.
This time around is different. So there is a compounding effect of the inventories on top because they will load to start with.
Anders Schulze: Got it, very clear. And on that note, we would love to understand from all of you attending this webinar, how you see sort of your inventory levels compared to your decided inventory levels.
We have thousands of shippers attending. So quite the sample size to get a good feel for how everyone sees it. Would love it if you wouldn't mind taking the next 30 seconds or so to select one of the four options here. In short, are you inventory levels, right? Where you want them to be less than 50% of the site levels, greater than 50%? Or do you basically have too much inventory at hand?
All right. Let's see the results of the last chance to grow up your arm, your vote. All right. Nerijus, what are we seeing here?
Nerijus Poskus: It's not a surprise, about half of the people answered that they have less than 50% of the desired inventory levels, which explains basically why a lot of things in U.S, and I assume Europe, as well are simply out of stock, right? You can buy things and get them delivered. In many cases this week. In some cases we have to wait four months. So this is actually not surprising. It is a little bit surprising. Then some people actually have more inventory than unexpected about 23% or so.
Anders Schulze: How about, are you Lars? Are you surprised by these results?
Lars Jensen: I'm not, I'm not overly surprised either. And I'm not surprised that you have some here that have greater inventory than necessary. Because part of what of course has happened is when people start to buy online, you might change your preferences, like in terms of what it is you buy.
And that means that some of the inventory that the importers had. Especially prior to the pandemic, might've turned out to be goods that people didn't necessarily want.
Carriers have deployed more than historical capacity
Anders Schulze: Makes sense. Okay. Let's let's pivot to the supply situation. And and, and what that looks like. So earlier in 2020, in the first half of 2020, we saw a lot of news out there about carriers, blanking sailings, basically taking capacity out at record high levels.
What you can see me on the green line is that it has actually reduced significantly and carriers are actually deploying more capacity in terms of ships than ever before. The red line here shows a capacity deployed year over year. And as you could see it sort of the far right. It's literally off the chart.
Carriers are deploying quite a lot of capacity at the moment. At least talk about shifts, help us understand this Lars. If this is happening, why are we still having sort of more demand than supply?
Lars Jensen: Well, again, part of it is there's a physical limit as to how much you can ship, but I think we should break it down into two parts because early on, as we can see, there was a raft of blank sailings.
So capacity was down that was used by the carriers to prevent the market collapse. When there was no demand. When you got into second half blank sailings first went to zero and if you are observant on the graph, you will see there's actually now an increase in blank sailings, which often sounds counterintuitive.
Why would we carry us blank sailings in the midst of a capacity crisis, there are two things to it. First of all, the sailings that are blank right now, operationally, the carriers have no choice. I mean, when you have all the vessels stock waiting outside ports, they cannot make the return journey. So they can't actually start sailing there were supposed to do so operationally. There is no choice. The blank sailings now are not by choice. They are by operational necessity.
Secondly, there's also a bit of a myth that a blank sailing means a reduction in capacity. Whereas we can clearly see here, we have an increase in capacity. It is true that there are individual sailings, which are blanked, but in terms of capacity in the market, they are more than compensated for by extra loaders and the phasing of larger vessels.
Vessel anchorages outside LA is currently 33!
Anders Schulze: Interesting. Let's on that note, zoom in at the port situation, because you mentioned that it's quite tough at the moment with all the congestion. So, let's take a look at the two of the biggest ports out there. The port of Long Beach in Los Angeles and the port of Rotterdam in Europe.
What we see on the left side here is a situation where the port of LA is currently having more than a hundred ships in port. And a third of them are literally waiting outside to be able to birth to then discharge the cargo. On top of that, we're seeing COVID cases. We also are seeing a lot of other challenges. Nerijus, help us understand the current situation here.
Nerijus Poskus: Yeah, this is definitely, it's quite tough out there in the ports. Indeed, as you mentioned, there are, there were a few days ago, 112 ships in the port of Los Angeles and Long Beach waiting, which was another record. And 33 of them were waiting to get, actually there were 112 ports. Ships at the port, including the ones that are waiting and 33 of them were waiting for the birth
Furthermore, for example, you have stormy conditions like last night the seas were really high. The winds were very high and many scheduled movements did not happen as scheduled. So they, the conditions are actually getting worse. So why is this happening? One is volume. Like Lars mentioned at the beginning of the year, there were a lot of blank sailings and the port of Los Angeles imports plunged nearly 19%.
But the second half, they actually Rose nearly 50% year over year. So, and what happened is you basically now have almost, and that was last week, 300,000 TEUs waiting to get offloaded. That's a lot of cargo. Two, now you need staff and also infrastructure right to offload everything. So while let's leave infrastructure aside for a minute, the second one is staff, right?
People in the port have a lot of coronavirus cases. Last week alone, there were about 700 COVID-19 cases amongst I think it's something like 9,000 ILW employees. So that's a very high percentage of COVID cases, right? So a lot of people are out. So they can't serve as the ships fast enough, which led to waiting times increasing up to 10, 14 days.
And in some cases, even more depending on the terminals. So port executives, union leaders, and the elected officials launched a campaign to initiate the dock worker vaccinations, because what they're actually fearing is that the terminals may even be shut down. If the conditions get worse. I don't think we're there yet, but again, if the conditions get worse, that may happen.
Third, what's happening is typically at this time of the year, you would have some or more blank sailings. Of course, January is still a very busy month, but right about February, you have a lot of blank sailings pre-Chinese New Year. So to give some stats last year, we had 88 blank sailings At this time of the year, two years ago, it was something like 65, 67.
Suggested reading: Carriers May Break from Blank Sailings at Chinese New Year, Providing Cues for 2021 Planning
This year. We only have seven in Asia, Europe, and five on the transpacific. And like Lars mentioned, many of them are not by choice. There will be more of them and because of the issues. But anyways, so the volumes are very high and it's not only that they're high that are continuously high and they will continue being high for the weeks to come.
So the port will not have time to clean up the mess post-Chinese New Year, what you're seeing on the right is Rotterdam. There is some congestion but much less. There are a few reasons why one is. The ships that are calling European ports, specifically Asia-Europe much larger, in many cases, 20,000 TEUs or so, and two, the port of Rotterdam is much more automated.
So the staff, like in the U.S., a lot of staff are infected with the coronavirus in European, not necessarily seeing that.
Lars Jensen: Yeah. If I can just add a little comment on that, because all the vessels you are showing there have waiting times. If you sit down and say, what does that actually mean? This is the equivalent of pulling five full transpacific services permanently out of action, as long as you have these waiting times.
So the impact is massive. The second part is on the blank sailings because up until a few days ago, It was very clear that the carriers all had the intention of not blanking anything after Chinese New Year to clean up the mess. Then a couple of days ago, there was the announcement from THE Alliance.
They are now blanking. So either 21 or 23 transpacific services in February, not because they want to. But the picture you have there explains exactly why they have to, in order to get the vessels back on track and regain some sort of operational normality. They have no choice. Now it sounds a lot with 20 odd blank sailings in a normal seasonal context.
This is not out of the ordinary. This is what we usually would expect from an Alliance in Chinese New Year. But the problem was up until a few days ago, the expectation was not really any blank sailings in order to help the bottlenecks.
Anders Schulze: So what you're saying in some, Lars, under normal circumstances, the carriers would idle the ships and basically hold them empty right now that waiting is quite full, but essentially it's having more or less the same impact to the overall supply chain.
Lars Jensen: Yes. Yeah. And under normal circumstances, nobody should be worried about 20 odd blank sailings from an Alliance after Chinese New Year, but this is not normal circumstances.
Port congestion doesn't end after container discharge
Anders Schulze: Got it. On that note. Let's move on from the ports themselves to the logistics after the ships have discharged because we're also seeing Quite the, quite some challenges there in terms of chassis availability. Nerijus what are some of the stats we're looking at here.
Nerijus Poskus: Yeah. So what we're seeing here is that in many, many cases, in many ports in the U.S., terminals I should say, we are actually running out of chassis while this graph shows you that roughly 80% of chassis are being utilized at any moment. We have to remember that about 13% of chassis are out of service at any moment, it could be due to service and other things.
The second thing is there are many owners, right? There is no one owner owning all the chassis similar to the shipping line. They own their containers in most cases. So are they in the right place? Because of many owners, it could be that some of the chassis are available, but they are available at the wrong terminal and at the wrong time, so kind of similar to the containers.
But third is the utilization is again, across the market. So it also covers the whole United States. So it could be that sometimes you have some chassis available in one place, but not available at another one. You also have to remember that many chassis are actually being held for particular vessels or clients while in inventory, general truckers cannot access them.
So for example, premium services, right? There are quite a few new premium services launched in the market in 2020 by Metson, CMA, Zim. All of them actually launched in addition to what they had in the past new services. Now, many of those come with chassis guarantee. Those guarantees actually eliminate some of the chassis from the market, because again, they are guaranteed, so they have to have more of them.
So essentially what we're seeing here is that we are out of chassis and it slows things down.
In Europe, I think it's important and interesting. We are not necessarily seeing the same thing. And the reason is quite simple. Chassis are typically owned by the truckers. And when you book a trip with them, they provide you with a truck and wheels for chassis and in the United States that's not the case, which is why we're seeing this mess.
Anders Schulze: Interesting. Do you think that's going to increase the amount of premium services out there to try and attack this problem?
Nerijus Poskus: Indeed. I think the issues are compounding, right? If you have a lack of containers or lack of chassis, then you should have premium services. It's almost essentially like an auction. If you pay more, you get it.
So everybody who doesn't pay, they don't get it. So, yes, I think as long as the current market conditions continue, the premium demand will increase. Absolutely.
Global schedule reliability has dropped to 50%
Anders Schulze: Okay. Let's move on to overall global schedule reliability. All of the compounding effects we've been sort of covering in this vicious cycle that we've seen mating is boiling down to a record low global schedule reliability which basically is as low as 50% in the month of November.
You see the stats for the prior years and the other graphs, this is only covering support stats. And even so, I mean, 50% global schedule with liability. I mean, how can that be sustainable? I mean, we don't see that in many other industries.
Lars, how do you sort of forecast this global schedule reliability in the coming months and years and what to expect out there?
Lars Jensen: Yeah. First to say the positive thing is this 50% that is a rosy picture for many shippers. The reality they experience is considerably worse because this just measures whether the main vessels arrive on time, whether you then get it delivered on time at final destination. A rule of thumb is that's 10 percentage points below what these graphs indicate.
On top of that. This is, of course, when you measure whether a vessel is on time, it requires the vessel to sail in the first place, which means blank sailings do not even include cargo. That is not being loaded because it's being rolled also compounds to this effect. So the reality on the ground is actually a lot worse than what this graph shows and all of this, again, boils down to this is not by choice of the carriers.
We have already discussed all the operational bottlenecks in the system, including the problems with the ports. And until those get fixed, it's hard to get scheduled reliability back on track. It appears to carry us plans for now in the coming months is to use the post-Chinese new year period to get the vessels back on track and back on schedule.
If that works out. And if, and that's a big, if we get the poor congestion sorted out, we could start to get back up to more normal levels within a few months, but that's the optimistic view.
Anders Schulze: So what's your best guess? A year from now, Lars.
Lars Jensen: Yeah a year from now, we're going to be back to normal operations. Normal operations like you also see in the past few years, we're going to end up again between the 70 and 75%. I do not have any expectation that the industry will suddenly start running at 95%.
This is again the global average, it varies from trade lane to trade lane. But by and large, if you look over the last 10 years, what you have seen is schedule reliability hasn't really improved or degraded.
The main thing that has happened is performance across the carriers have become more uniform. To me that signals, and I know there's a lot of shippers that don't like to hear this, but at the end of the day, it's a trade off between what it costs to run on time, where you need to speed up vessels and what's the willingness to pay. I don't have any expectation that that will necessarily change dramatically going forward.
And again, mind you. This is for global average, you do have trade lanes where the average is consistently much higher. You have trade lanes wise, consistently much lower, but a structural systematic change. I don't see that in the cards.
Will equipment remain gold in 2021?
Anders Schulze: Got it. Okay. Thanks Lars. Let's pivot to the equipment situation. Nerijus, your side of equipment, that's being the goal of 2020. I would love to sort of hear your predictions for 2021. Do you still expect it to be the gold? Are you gonna downgrade it to silver on other metal? What's your prediction here?
Nerijus Poskus: So I do expect this to continue. Question is for how long, right? So it's already 2021 equipment issues are still very big in Asia. Like again, the question is how long this is going to last until 2021.
So let's look at some fundamentals. One, equipment is prioritized for better paying trade lanes or premium products. So expect that to continue as long as equipment globally is tight, and it doesn't mean we have no containers. Containers are simply in the wrong places. So if they are in the wrong places. And if there is more supply at the specific port of loading, than demand then there's no issue.
If it's vice versa all of a sudden there is an issue, carriers have to prioritize. And when they prioritize again, they prioritize different trade lanes, premium products.
What is a different trade lane for those who don't know, let's say transpacific journey on a carrier pays, whatever 50 cents a mile, and then Asia Europe lane pays a dollar a mile as an example the carriers will, of course, if they can prioritize loading to Europe rather than the U.S.
And this is actually what we have seen. European prices were too low in 2020 or Asia-Europe prices were too low and transpacific prices were high. So equipment availability, so to speak was better for the transpacific trade leg. Now it's the opposite. The Asia-Europe prices are high and we're going to get into that discussion. Soon.
Another thing it's important to remember is new containers are actually being delivered all the time. The shipping lines ordered quite a bit of them at the second half of 2020. Now, are they delivered at the right time places yesterday or because it's, the shortage is global, but it doesn't cover the whole world, especially it doesn't cover the outputs.
So if you talk about Wuhu or Guangzhou province or whatever, everywhere outside of the main ports, I think the equipment is even more tight. And again, it varies by carrier. It could be that one carrier has equipment. Another carrier has completely no equipment. So I think that will continue at least in the first half of 2021, the second half I maybe leave it up to Lars. So to me again, we have to just remember it is still tight. Question is how long it's going to stay tight.
And the last thing I actually wanted to say here is we also have to remember that today containers and vessels are moving slower and that is a major issue. It's kind of a blank sailing, right?
Blank sailing reduces capacity from the market. If containers and vessels are moving slower that reduces again, the global availability. And why are they moving slower? We have discussed this already, or the ports are congested. We have labor issues at the ports. There is no chassis. There are not enough vessels.
All of these things are adding up, which is why equipment again, globally is moving slower. So until that is resolved, equipment will remain the gold. Again, the question is for how much my personal guess will be about. The second half of the year conditions should improve. But I would like to hear from Lars on his predictions here.
Lars Jensen: My, my quick answer to that question is no, it will definitely not remain gold. A couple of reasons for this one. First of all for those Who have been in the industry long enough, we saw exactly the same scenario play out in 2010 to the T of what we see now, that was a comeback after the financial crisis, where we also had equipment shortages for exactly the same reasons as we have them now.
At that point in time, that was a massive ordering spree of containers. Obviously you needed to alleviate it. And then we ended up with over capacity on the container side. We're going to see a replay of it. Another way to look at it is in 2020 globally. We're going to move basically the same amount of containers as we did in 2019, we sure did have enough containers in 2019.
Suggested reading: Container Availability Shows Positive Trends, but the Tide Hasn’t Turned Yet
The only reason we didn't have enough in 20 is because everybody insisted on moving it in Q4 instead of Q2. We have not seen, the only other thing that could change the need for equipment is if we suddenly saw a massive rearrangement on TEU miles. If sourcing patterns changed dramatically, but they haven't. It's just the timing of it.
So there's absolutely nothing in the data for 2021, indicating that we would have insufficient equipment. Actually there's a building spree of equipment. If you look at the timing for 2010, it took about three months from when the problem really arose until it was resolved. If we put that in the same context, now that basically means this should be resolved by Chinese New Year.
The wild card this time around is the port congestion, because that ties up a significant part of the ability to reposition the empty containers and bring the flow back into balance that could delay it somewhat. But once this gets alleviated, it's not going to remain gold for very long. I would basically have the view that this is going to be resolved again with a wild card of the poor congestion, much sooner than summer.
Anders Schulze: So it sounds like, I mean, lots of nuances here depend on the given ports. Some feeder ports may be more challenging and all those, but let's say, you know, if I, if I'm a ship or from say Shanghai to LA or Rotterdam when am I sort of in the clear, in terms of getting that equipment that container box. Is it one month from now two, three? What's sort of the best guess out there?
Lars Jensen: No. I mean, if I was a shipper, I will still sit with a let's call it a hope because it's not a main case scenario, but have a hope that this would actually be a situation where I would feel more comfortable with it already in a month. And I would have a reasonable expectation that this will not be a problem in two months.
That doesn't mean you're going to see empty equipment. In abundance everywhere, but it brings you away from the situations where it's blatantly impossible in some places.
Anders Schulze: Got it. Nerijus, would you agree?
Nerijus Poskus: I'm a little bit less optimistic than Lars. I do agree. It's not gonna, it's unlikely to last into the second half of two 21, but I think it will last at least two, three, maybe even four months.
Kind of what Lars already mentioned, because of the congestion, it is getting much worse at the ports, like Los Angeles with 33 vessels waiting and maybe 50 vessels waiting in a few weeks with all these additional loaders also coming to the U.S. So that equipment is not coming back to Asia on time.
So my prediction is it's going to last a few months longer than that.
Lars Jensen: Just to throw in a wild card. And I know we're going to discuss it later today, but just one comment, one thing, I mean, if this drags on for a while, the one thing that's going to save the equipment situation is when we get to the point in 21 where demand growth turns negative again.
Freight rates soar on higher demand and shrinking pool of empty boxes
Anders Schulze: Yep.
Okay. Good insight. On that note, let's turn to the next topic rates.
Of course, I mean, all the compounding effects we've talked about is translating into higher freight rates than we've ever seen before. I mean, this chart speaks for itself. It almost looks like a bitcoin child right here with rates basically exploding in 2020.
What to expect here going forward Lars. We have seen a few adjustments here and there for some lanes. Is this massive wave going to break anytime soon? What do you think?
Lars Jensen: At least my take on the Margaret rhino is it appears that we have reached a plateau. I don't expect the rates to come down sharply within the next few days, but I think we reached a plateau and within a few weeks, on the other side of Chinese New Year, we are going to see some of these rates come down relatively quickly.
That does not mean you're going to see rates collapsed. Absolutely not, but they're going to come down to more. Let's call them normal and reasonable levels.
Anders Schulze: Nerijus, how do you see this?
Nerijus Poskus: The few points. One, is this graph actually doesn't show the premiums that often reached thousands of dollars, two, three, even $4,000 to actually get equipment or get priority to get loaded. So the actual situation is much worse. I do agree with Lars that the prices should come down.
I think they will flatten post-Chinese new year. I don't think they will come back to 2019 levels by any means quickly. They may, but I don't think that's going to happen in the next two, three months, but the trend should be downwards. Just to remember that it's not going to go down from three, four or $5,000 in Los Angeles.
It's actually. Five six, $7,000 and that's going to get down. So at first you won't need to pay the premiums to get equipment, and then the prices will slowly start declining. I also think that this will impact contract negotiations in two 21, simply because of how high the spot prices are. You have to remember the contracted rates are three, five times lower than today's FAK rates.
So that's a big insight. The timing is in carrier saver, right? Negotiating contracts and spot market is so high it is good for them.
And last thing people aren't talking about, but DAT prices, fuel prices to low-sulfur fuel prices are actually going up at this time. Of course, relatively to $9,000 per container.
Shanghai to Rotterdam is nothing, but the carrier costs are silently going up. It's not a lot, but it is going up. So that will impact future pricing slightly.
Lars Jensen: One additional comment. I just want to throw in there. I mean, you were mentioning the contract rates. That's a slightly different game. You haven't seen them explode to the same degree, but they're coming up rapidly over the last few weeks.
But if we look at this slightly more in context for the contract raised, most contract rates took. A nose dive to a different level back in 2016, when the markets crashed and the carriers have essentially tried, but been fairly unable to increase contract rates back up ever since then, it seems highly likely that 2021 is a year where they want to actually succeed in doing that.
If they do bring the contract rates back up to the level that was normal. Pre the market crash in 2016, in very round numbers what you're looking at is 70% increases on your contracts on Transpac 50% increases on Asia-Europe, for example.
Anders Schulze: Interesting. What about the floating market, Lars? It's been close with some degree of volatility. It's been somewhat stable in the past. What's sort of the new average level going forward.
Lars Jensen: For the spot race. If you look over especially 2018, 2019, before we got hit by the pandemic, what you see is a stable, slightly increasing trend. And if you try to examine what was going on back then, this was actually when the carriers began to experiment with blank sailings. This is when the Alliance has found out that they can actually make sure they don't put in too much capacity so they can prevent spot rates from dropping.
One would have an anticipation of that trend they were working with is basically the long-term structural trend. So you can look at where were the spot rates, what were the increases slowly over time?
And basically this is where we are going to hit down towards. For 2021. So we won't at the end of the day, come down to 2019 levels. We kind of want to come down to a higher level that was indicated by the increasing trends we already set back in 2018 and 19.
Carriers are making up for historical losses
Anders Schulze: Interesting. And on that note, actually let's take a look at this chart right here, which is quite interesting. Also sort of showing some of the things Lars is describing right here, where basically carriers have started more alliances and embarked in more consolidation to basically make up for historical losses.
What you see here is a 13 year snapshot of the carrier profitability? With a big fat conclusion that on average, they haven't generated more than 0% return on invested capital. Over the years, that's obviously changing as of lately, with the grade levels jumping. And now the carrier profitability is hovering around that 15%.
Lars, what to expect going forward? Will they get, get, pick it back into negative profits territories will the current profitability level remain? Will it even increase? What do you think?
Lars Jensen: Yeah, the crew and profitability levels, especially, what we would expect for Q4 is going to be almost off the charts.
I mean, if you don't make a fantastic amount of money as a carrier in Q4, you're doing something wrong, but the graph is interesting because if you look at the last large spike you have there, that is precisely the rebound after the financial crisis, where we had the same bottleneck effects as we see now, you can also see how quickly it came down.
What's going to be different this time is after the rebound last time the carriers launched into a year long vicious price war, where they fought over market share and volume, which set the tone for all of those losses. That seemed highly unlikely to happen this time around, you're going to see a spike in profitability, and then you're going to come down, but not to negative territory, to a more sustainable level.
Another thing to keep in mind is from a mathematical perspective is of course true that you can say, well, the carriers have lost money over time so now somebody else has to pay. As a shipper that argument doesn't fly very much. I mean, I might've been a shipper. That's only been in the game for the last couple of years.
Why should I pay for a price war the carriers themselves instituted 10 years ago? So there's going to be quite a bit of tension between the carriers and shippers in the contract negotiations here in 2021, because at the end of the day, all the bottlenecks and all the supply chain propers we have right now, that can be late at the foot of the pandemic.
As far as I see it, all supply chain stakeholders have actually made very sound decisions operationally on how to handle this.
Commercially, of course, it's the carriers choice. What kind of pricing strategy do they want to pursue? They have chosen one where they are looking to maximize their own profitability, which is perfectly fair in any market, but it comes at a price in this case, a price in terms of some freight rates and some tension in the relationship with their customers.
Anders Schulze: Got it. On that note. Talking about freight rates and freight spend we'd love to learn from, from all of you out there. What your 2021 freight budget is relative to your spend last year. So take 30 seconds to select any of the five options here so we can learn how you'll see.
Do you expect your freight to go up 25% or more relative to last year? 25 to 50%, more? 50 or more percent? Same as last year? And then finally, do you expect to spend less than last year? That's going to be quite interesting to see how that poll pans out. Quite the time to make budgets in this volatile market.
But let's see. Interesting. 40% or more expect 25 to 50% more.
Lars, what would you do if you were a shipper? How much more would you budget this year relative to last year? The same, or?
Lars Jensen: I would not ask this question. I would ask the question, what would my freight spend be in Q4 21 versus Q4 20? I would take it quarter by quarter because of the extreme volatility.
But that aside, I would probably also have put this in at least the 25 to 50, if not 50 plus percent or more, because again of the rollercoaster ride we are going to be in for.
Anders Schulze: Got it. Nerijus, how do you see it?
Nerijus Poskus: Yeah, I agree with Lars. And I would also say this is based on budget. So most of the companies in 2020 spent way, way above the budget, they didn't plan to pay 8,000 or $9,000 a container from Shanghai to Rotterdam, but they ended up paying it. So of course they expect to pay more this year.
It doesn't mean they will actually spend more money than they actually spent in 2020, especially if the importers were shipping a lot on the spot market, which was extremely high. So I think it kind of depends. And we're going to discuss this in the next few slides, but no, this doesn't surprise me.
And I think indeed, there's a reason why 90% of participants said they will pay more from one to 50%.
What will happen after Chinese New Year?
Anders Schulze: All right. That takes us into the next topic. What will happen? On Chinese New Year, we all know that Chinese New Year is typically a slow down. And then typically, half of the Chinese New Year things will also slow down to some extent. What's going to happen this time around?
Let's start with you Lars. How do you see this?
Lars Jensen: How I see this panning out is, let me bring in a term here. A water hammer. For those of you who are not familiar with it, bear with me at least just for 30 seconds. Imagine, say a two kilometer long pipeline with lots of water flowing through at high speed. That all works phenomenally well, suddenly at the end of the pipeline, somebody shuts the valve rapidly.
Now you have two kilometers of moving water bearing down on that valve in an instant. If you are unlucky, that means the entire pipeline will now burst open. Everything would be broken. That to some degree is what we are experiencing right now. If your pipe is strong enough, at least you won't break it.
But if you measure the pressure inside just inside that, Val, you see a huge spike initially. Then you turn to negative pressure again, as the water is now recoiling backwards, then it comes again, almost like you would say a wave movement. This is what we're going to be in for in 2021. Right now we were hit by the water hammer with the extreme boom transpacific up 30% year on year in December.
What is likely to happen. And this is where the timing after Chinese New Year is extremely murky. Remember when we talked about earlier today, consumers shifted their spending away from services onto goods. That's not because consumers don't like services, it's because they can't buy them. The moment sufficiently many consumers realize there's light at the end of the tunnel.
They will shift that spending back onto services and it might even be likely that they will say, I'm going to go on an extra large vacation, an extra large party. This does not mean that consumption of goods will stop. It absolutely won't but it will go down at least just to let's call it normal levels.
At the same time, you have two months of floating inventory on the way inbound to all the warehouses, they will come into warehouses at a point in time where demand will drop compared to where we are now.
The importers, they will say fine. Let's just halt the ordering at the manufacturers over in Asia until we get the inventory situation under control. During that period, that will mean that bookings of container freight out of Asia will drop sharply. It will not be a long thing.
It will be a month or two, but it will be that water hammer effect where we get the dip and then we'll come back up to normal. That's why earlier I also said, if we don't get the equipment situation solved in a few months, we're going to be hit by a slight negative spike on the demand growth. And that will help us work through all the kinks.
Anders Schulze: All right everyone prepare for the water hammer on that note.
Would love to hear from all of you out there what you expect. So essentially when do you expect the ocean market to go back to normal? Take again another 30 seconds to pick one of the full options here. Can you expect it to recover in one to three months? Three to six months? More than six months? Or basically never?
Lars Jensen: I could ask, has it ever been normal to start with?
Anders Schulze: All right. Let's see the results. Interesting. Nerijus, surprised?
Nerijus Poskus: No, as I also predict three to six months that things will take three to six months for the things to go back to normal. I think it's closer to three than six, but it will take more than a month in my eyes. So not surprised.
Lars Jensen: Yeah. I'd pick the six months more because I agree in the timeframe that this is when we're going to have the problems resolved, but that doesn't mean we're back to normal, back to my water hammer example. We're going to go through a period where it dips down and then we're going to come back to normal. So I would pick that on the six plus.
Nerijus Poskus: Yeah, good point. Yeah. Actually I think for the shippers, the normal is they can get equipment. They can get on a ship and they pay a fair price, for carriers, normal is full ships. Good point Lars.
What will the 2021 contract season look like?
Anders Schulze: All right. Let's turn the page to the next topic. So for the ones that you are there, who ships any of your goods on fixed contracts? We'll now pivot a little bit to talk about the upcoming contract season in, particularly on the transpacific eastbound trade.
So let's start off with a final poll right here. Just to get a feel for what actually means the most to you in terms of priorities, because at the end of the day, when contracting shipments or shipping in general, it's of course all a matter of making sure that your priorities are taken care of. So we would love to learn from all of you.
What you value the highest in terms of these five priorities. You can only select two out of five. I know that's probably asking for trouble asking me for the impossible, given the importance of all of these five attributes.
And yet, nevertheless, if you have to restrain and just select two which ones are the two highest priorities, when it comes to managing your supply chain in 2021. Reliability, price, visibility, customer service, or transit times? Please select just two.
Nerijus Poskus: And thank you for spending time on this one. I'm actually the culprit of this question. It will help me to give you better recommendations for the contract negotiations based on what people have selected. So I appreciate your time here.
Anders Schulze: Definitely. All right, let's have a look. Interestingly, that's pretty clear reliability and price are up there. Surprised Nerijus based on your experience?
Nerijus Poskus: No, I was actually expecting that the price will be slightly higher than the reliability. So what's the it's, they're very, very close to each other.
So actually I'm not too surprised at these results, but a little bit. I like to see that people value reliability as much as they do this time. Probably it's because the reliability in 2020 was so low, but people are kind of done with it.
Yeah. Lars, how do you see the surprise there?
Lars Jensen: I would have picked a sixth one, but it might actually be included here because for me, there's one thing that should take overarching priority in 21. That's resilience. Again, back to the volatility in the market, but that might be, I mean, that is my guess here, but some of the respondents here might read resilience as part of reliability, because does reliability mean you want it on time or does reliability mean that you are sure I can actually ship those 50 boxes a week when that's what I've been promised.
2021 Contract Recommendations
Anders Schulze: Got it. Yeah. No, that's a good addition. On that note, let's look at some of the recommendations for the upcoming contract season. If we turn to the next one here. So we've outlined some high-level recommendations, of course, the devil's in the detail.
Nerijus, do you want to take us through some of the highlights here?
Nerijus Poskus: Yeah, indeed. And just for the sake of time, I'm going to try to do this quickly. So one, a lot of you have probably heard that some importers already finalized their contracts in 2020. And you were all having this question.
Should I launch my RFP tomorrow? Am I late already? Am I going to be out of space? If I don't negotiate today, you remember very few retailers have actually finalized their contracts. Some of them have already signed. Yes. That is true. Are also paying based on remorse with hearing much more than they paid last year, but it's a very small percentage of the market.
So I'm not saying delay in your contracts. But don't rush and don't panic that you have to sign today. It's an option, but where you want to be is you want to know where the base importers are. In terms of price. Let's just say the price is a hundred for an argument's sake as an index. And the sweet spot is plus minus five, right? In terms of an index.
So if you're paying less, you are the lowest paying guy on the ship. You will get bumped when things get bad. If you're overpaying, you will be upset because you're overpaying and your goods may not be competitive. So don't rush, wait for a little more in the border sign, and that will set the baseline.
Expect to pay more than last year. Of course, especially if you are on the fixed contracts, if you are in the spot market, I would say for the full year, not for the first half, but the full year of two 21 expected pay slightly less on the spot market. And 2020, again, 2020 was quite insane. It's also never been as important as this year to be able to predict the volume.
That you are going to ship the MQC divided by 50 or 52 is just not going to cut it anymore. So when you negotiate contracts, try to include allocation ranges, the min, the max and remember the wider, the range, the higher the price, right? If you cannot predict, well, you will end up paying more or your cargo will not move.
So not every carrier or forwarder is able to give you this type of allocations, but if you don't ask, you don't get so MQC divided by 50 probably is slowly in my opinion is slowly going to die. It will take a bit of time. Expect carriers to demand, subject to contracts more than in the past.
What does it mean is the prices you will be receiving from forwarders or carriers? In many cases they will be subject to PSS. Well peak season charges, subject to GRI, subject to ROI. It depends on the carrier. So make sure you read your terms and conditions and make sure you understand what your contracts are subject to, and if they are subject to make sure you understand, is there a ceiling, is there or not, or is it just subject to mutually agreed?
And I'm not saying which one is better. It kind of depends on every client's uniqueness. It's just, it's important to understand it. Like Lars said, optimize for resilience. Plan to move a portion of your freight and premium contracts, maybe by SKU, if some of your SKU or SKUs, basically the units, right?
Like if some of your products are selling better maybe move them on premium products, maybe even sign a contract using those premium services or premium contracts. To make sure that the products that are currently very hot and selling are moving. On the other hand, we saw that some people have too much inventory of some goods.
So those goods are not as important. Maybe you can sign lower, cheaper contracts. That is maybe subject to roll. So this type of differentiation will slowly penetrate the market. I think it will take time. The last thing I'll say here is. Digital contracts, specific contracts.
Like I mentioned with allocations, what is it subject to what, isn't it subject to simply carry more weight? The handshake agreements are not going to cut it. You see what happened in 2020. Many of you have had handshakes agreements that didn't work. So get things in writing and consider digital contracts as they penetrate the market.
Anders Schulze: Any additions from you here Lars?
Lars Jensen: Yeah. I mean, it is partially contained here. The one thing I would pay attention to are bunker surcharges. As a shipper I would brace myself for sharply increasing bunker surcharges too, in 2021. If the world recovers from the pandemic, that also means the world's energy needs are going to go up rapidly.
It takes a bit of time for especially the oil producers to adjust. So you can not rule out a scenario where crude oil prices increase rapidly at some point in 2021, which will cause bunker fuel charges to increase. And therefore also significant increases in bunker surcharges.
Freight Forwarders gained market share in 2020
Anders Schulze: Makes sense. We are almost at time.
I want to be super respectful of everyone's time out there. We really value the engagement here. We'll take another five minutes for a few more questions and answers. But if you have other commitments please feel free to drop, but the ones interested in staying for another five minutes, we'll go on for a little bit more.
Nerijus in addition to these recommendations we also did quite the interesting analysis recently on some of the trends we're seeing out there. Can you basically share what we're seeing here on this chart?
Nerijus Poskus: Thanks Anders. And again, apologies everybody because I know we're out of time, but I think it's quite insightful.
So many people are feeling importers are feeling antsy. If you work with a carrier you're like, Oh, maybe my cargo didn't get loaded what should I do? Should I include an NVO or freight forwarder or this year or vice versa? So I wanted to share some stats. I ran some stats to show that NVOs or freight forwarders gained significant share in 2020.
It doesn't mean that. Carriers didn't do a good job loading your cargo. It simply means that freight forwarders were able to properly navigate it between the carriers as they were running out of equipment or have blank sailings or whatever else happened this year, the forwarders were able to snag more capacity and they bought most of the premium services.
I shouldn't say most, a lot, a lot of premium services were bought by the freight forwarders. So I think it's just insightful again. Take it with a grain of salt. Again, I'm not saying who did a better job. I think data speaks for itself.
The last thing I'll share here is that in 2020 importers need a lot more exceptions, meaning diversions, transloading because the regular shipping to DC model is not working anymore. With e-commerce you need your goods in every single place. So I assume that also impacted the forwarders share in 2020. So it's more of an insight that I wanted to share with you all before the Q and A.
Anders Schulze: Thanks Nerijus. On that note, let's round off with just a couple of questions from the audience. Again, really, really appreciate everyone's engagement. We have seen tons of great questions. We've tried to answer a lot of them online. But the ones that haven't been answered yet, we'll definitely make sure that we get back to each of you offline.
But let's, let's cover just a couple of questions right here. And one of them being one of you mentioned the extra capacity of new containers coming online soon, but are you seeing any new orders for ships that would raise any over capacity issues two to three years out? Lars?
Lars Jensen: No. That's the simple question.
If you look at the vessels, we are in the beginning part of an upcycle in favor of the carriers. Normally at this point in time, you will see the carriers go hog-wild in ordering new capacity on the vessel side. They are not. Sure we are seeing some ordering of ultra large vessels, but in the larger scheme of things, it amounts to almost nothing.
So right now we are not seeing the carriers ordering large amounts of vessels, which also means that unless something else happens, we are poised for at least a couple of years, if not three of gradually increasing upcycle in the market in favor of the carriers.
Anders Schulze: Got it. Thanks Lars. Let's cover another question here. If the carriers have to blank these sailings for operational reasons in tranpac, due to congestion and LA doesn't that increase the time it'll take to clear out the backlog on the China side of the equation. Lars, do you want to start with this one?
Lars Jensen: Yes, indeed. And that's also why I say part of the wild card here in clearing out the backlog and getting equipment back in place is contingent on how quickly we can resolve this poor congestion backlog? Because that is a critical element. Absolutely. Yes.
Anders Schulze: Nerijus, how do you see this? Agree?
Nerijus Poskus: I agree with Lars. I think yeah, I typically agree with Lars.
Anders Schulze: Let's take the final question before we round off here. Is the port situation today worse than with the long beach labor strike a few years back? Do you want to start?
Suggested reading: L.A. and Long Beach port truckers and warehouse workers begin strike
Lars Jensen: As far as I recall, and this is off the top of my head I have seen some stats in recent weeks that indicate we do have more ships and they do wait for a longer time now than when we had back five, six years ago. So it is worse.
Nerijus Poskus: And it lasted longer I would add. While the conditions back then were bad. They lasted it for a few months. Now this is lasting for months and it's expected to last for probably a few more months.
Lars Jensen: Yeah. And, and you can say what's different from back then. That was fine. It was a problem in the ports, but this time it also extends to the chassis to the trucks, to the rail, to the warehouses it's the entire chain that's impacted this time.
Anders Schulze: Definitely on that note. Just want to make sure we don't finish off with doom and gloom. We did hear a glimpse of light at the end of the tunnel throughout the past hour or so. So and it all remained somewhat optimistic.
Lars, Nerijus thanks so much for your time. Thanks to everyone who dialed in, really appreciate the engagement and all your great questions. We'll make sure we get back to each of you offline with any follow-up answers. Thanks so much. Have a great day.
Nerijus Poskus: Thank you.
Lars Jensen: Thank you.