Peak season for container shipping typically occurs in the third quarter of each year. This is a time when goods are shipped from manufacturing centers in Asia and elsewhere to Western markets like North America and Europe. Herbert Lee, Shipco’s regional director for Hong Kong & South China, describes what happens when demand for shipping services outpaces supply. “Vessels are fully loaded, ports are congested, transit times are lengthened and there are equipment shortages during this period,” he details.
Peak season should not be confused with general seasonal freight patterns, which can be short term from week-to-week or similar. Scott Kates, Shipco’s national operations manager for LCL Import USA, explains that a key difference is in the time frame. “Peak Season is a more sustained time frame of increased volumes and movement of goods over several months that impact many trade lanes and port pairs instead of only a few select lanes.” Mr. Kates says the increased volumes of goods and shipping constraints brought on by limited capacity leads to higher costs due to space restrictions and delays in the actual movement of the goods.
As the first wave of the pandemic spread across countries in 2020, restrictions and shutdowns imposed by most nations led to a sharp decline in both world industrial production and the goods trade. The slowdown of manufacturing, particularly in China, coupled with a contraction in consumer demand worldwide had ocean carriers blanking sailings and consolidating shipping routes to focus on major ports in the first half of 2020. Consequently, global shipping capacity was reduced by -12.9% y/y reports maritime intelligence company eeSea (see Figure 1).
Following extended lockdowns, spending on durable goods rose sharply. The surge in e-commerce activity and consumer spending sent demand for shipping skyrocketing. Container trade rebounded in the fourth quarter of 2020, logging an 8% growth quarter-over-quarter according to the United Nations Conference on Trade and Development (UNCTAD) (see Figure 2).
Andrew Chien, director-LCL development for Asia-Pacific at Shipco says the pandemic not only disrupted the supply chain but also upended how things work. “Pre-COVID, freight markets used to be very consistent, even though it was not stable. Supply chains were at equilibrium and global movement was predictable. The supply chain disruption brought on by COVID-19 has driven up rates, even though when you take a broader view, the overall demand is not higher than the overall supply. What is happening is that supply does not appear at the right place at the right time.”
Demand from Western consumers in the U.S. and European economies sustained the flow of goods in 2021, says Anders Christensen, director, business development for Europe at Shipco. “Broadly speaking, we had one long peak lasting from December 2020 until China’s Lunar New Year 2022. There was a constant lack of equipment coupled with too much cargo and lengthening transit times with no predictability. Meanwhile, rates kept increasing while service worsened no matter what was paid.” An analysis by Sea-Intelligence using schedule reliability and freight rates data gathered from the World Container Index (WCI) found there was no correlation between freight rates and reliability. Instead, the analysis showed reliability improved with overcapacity as it was easier to stick to vessel schedules.
It can be challenging to distinguish peak conditions under current market conditions. Mr. Kates explains that an overall increase in cargo volumes is the reason why the shift to peak season in 2022 will be less distinctive compared to pre-pandemic years. “While there will be a peak season, the industry is already running at much higher volumes than in the past. This reflects in less dramatic shifts from a slower period to “peak” period in the perception of staff and clients,” he postulates.
In pre-COVID years, ocean carriers would introduce increases as a peak season surcharge. In the past two years, they have simply increased freight rates. Shipco’s regional manager, carrier relations for APAC, Ulrik Holck says, “The new contract season for the Trans-Pacific Eastbound corridor started off with all new long-term contracts including a peak season surcharge from the very beginning,” which is why, to some, there is no obvious peak this year.
“The expectation was that volumes would increase again once Shanghai opened, but the rush has not come. We are seeing space opening up especially to the U.S. West Coast and the rates have fallen considerably,” Mr. Holck says.
Even though peak season is not what it used to be, there continues to be peak season-related activity. There are still factors driving it, from the seasonal nature of business activity and cargo flows, to increased e-commerce activity, among others. This is simply not a peak season in the traditional sense. Jens Pottschul, director, business development for Asia-Pacific at Shipco summarizes, “The shipping cycle of the past two years has not been normal and there are no signs that we will see normality in the mid-term future.”
Shippers looking to get ahead of peak season congestion and avoid a repeat of 2021 are moving volumes earlier than usual.
Sea-Intelligence reports evidence of an early peak season, particularly on the Trans-Pacific trade. Weekly deployed capacity scales up to 646,500 TEU in the week ending June 5 (week 22) and is projected to remain at that level through August 7 (week 31) (see Figure 3). The increase will be led by non-alliance carriers that are forecast to boost capacity by 20% to 35% on Asia-North America West Coast services.
On Asia-Europe trade, Sea-Intelligence says the increase in offered capacity in the week ending June 5 brings offered capacity in line with the peak season in 2021. Another increase in the week ending July 24 (week 29) will bring the weekly offered capacity over the 500,000 TEU mark, higher than in any week in the 2019-2022 period.
Although this year’s high-demand and tight-capacity dynamic creates challenges, the risks can be minimized by forward planning. “The key to tackling peak season is having advanced planning and a strategy to be proactive in areas of higher constraints. This will assist to navigate different routings to maximize flow of the cargo, or at minimum to be in front of potential issues to the best of your ability,” Mr. Kates advises.
“At Shipco, we are actively working on new and different routings to avoid potential chokepoints based on real-time data and real-world issues. An example would be the potential labor issues on West Coast in their labor agreements. We are working to find different routings to the Gulf and Eastern ports to route around the possible delays, if they materialize,” Mr. Kates shares.
Carl Zhao, Shipco’s regional director for North China says accumulated backlog orders are now being fulfilled following Shanghai’s reopening. He expects delays to continue into the summer months as factories resume normal operations. “The 2-month lock down in Shanghai put most productions on halt and transportation in/out of Shanghai was basically stopped. With the reopening of Shanghai, more orders will be back, but it takes time for negotiations and requires even more time for production.” Mr. Lee adds that some carriers are placing extra loaders to mitigate the backlog in North China.
If the stockpile of export cargo being shipped arrives at the same time as peak season orders, it will add even more pressure to ports in Europe and the U.S. where congestion is already widespread. Bottlenecks, delays, equipment shortages, and shutdowns have effectively removed about 10.5% of carrier capacity from the system, Sea-Intelligence reports. The accumulation of delays across services on the Asia to North Europe and U.S. networks are also resulting in “structural blanks” in sailings.
The repercussions are being felt regionally in Asia, says Stig Krogh, COO, Asia-Pacific & ISC at Shipco. “Lately, with COVID-related disruption and port congestions, it has taken much longer for vessels to return to Asia, causing many omitted sailings and severe space and equipment issues. This has been especially challenging for origins in Southeast Asia that rely on feeder services to connect mother vessels to Europe and to the U.S. Carriers have more cargo than they can move at main ports, so these are prioritized over the out ports.”
Currently, 2% of global cargo capacity is stuck in the North Sea, waiting outside the ports of Germany, Belgium and the Netherlands, the Kiel Institute for the World Economy said. Northern Europe’s hub ports are facing critically high yard densities even as Russian embargoed cargo remains parked, taking up valuable on-dock space.
Inland transport bottlenecks are also worsening port congestion problems while the lack of port labor and shortage of truck drivers has led to increased dwell times for import containers. The backups to load and unload cargo vessels are translating into lengthier transit times as Shanghai reopens and peak season approaches.
About 60% of the vessels traveling from Europe to Asia have been delayed reports Alphaliner. Container vessels on the Asia-North Europe loop are arriving on average 20 days late in China for their next round trip, forcing carries to blank some sailings as there is no available vessel (see Figure 4). The time needed to discharge and load at the three biggest European container ports was a total of 36 days between arrival at Rotterdam and departure from Hamburg. Such delays cannot be caught up by sailing back to Asia atfull speed. Describing the magnitude of delays in Europe, Mr. Christensen says, “Carriers are unreliable with delays of 3 to 6 weeks depending on where in Europe you are.”
In the first five months of the year, on-time performance of vessels on the Asia-North Europe trade averaged 18% and average vessel arrival delays is close to 9 days, according to the report by Sea-Intelligence (see Figure 5). To compensate for vessel delays caused by the ongoing congestion, carriers are reducing supply with blank sailings and port omissions.
Shippers looking to bypass initial West Coast congestion and inland capacity constraints, as well as avoid potential disruptions from a West Coast port strike have shifted vessel backlogs to East and Gulf coast ports. Meanwhile, a report by the American Shipper says the recent fall in port queues could represent “the final unwinding of COVID-era congestion as inflation takes hold", or it could simply indicate “the relative calm before the peak-season, post-Shanghai-lockdown storm”.
According to Port of Los Angeles’ executive director, Gene Seroka, the port is gearing up for an earlier-than-normal peak season and expects that a U.S. import boom will persist in the months ahead. Currently, the combined monthly imports of Los Angeles and Long Beach ports in 2022 is higher than 2018-2020 trends and is matching the 2021 performance (see Figure 6).
His outlook is shared by National Retail Foundation vice president for supply chain and customs policy, Jonathan Gold who says, “We’re in for a busy summer at the [U.S.] ports. Back-to-school supplies are already arriving, and holiday merchandise will be right behind them.”. Gold says retailers have an incentive to stock up on merchandise before inflation drives costs higher.
While the U.S. ports are working through bottlenecks and moving record numbers of boxes, the volumes are maxing out other critical parts of the system in overland transport. Rail and truck networks that distribute them across the country are strained with equipment and labor shortages. The terminal congestion index for North America has been gradually increasing since peaking a little over 80% in January 2022 and remains highly elevated, reports Sea-Intelligence. The Intermodal Association of North America (IANA) says total intermodal volumes fell-6.6% y/y in the first quarter of 2022 which it attributes to supply chain issues, particularly on the international side (see Figure 7).
Cindi DeSimone, Shipco’s general manager, USA Intermodal, observes that with carriers struggling to clear backlogs before peak season volumes arrive, service levels will deteriorate. “From an intermodal perspective, customers can expect to see delays to trailer departures, especially for rail movement as the demand for space will increase. Priority on rails during peak season includes large direct importers such as Amazon, Walmart and Home Depot, among others.”
“Additionally, fuel surcharges (FSC) are at an all-time high, with the range being 41% - 52% higher. If FSC stays on this upward trend, peak season charges will be reaching levels double what we’ve seen in the past. Providing stable rates to customers is being more and more difficult with the constant fluctuation of the fuel,” Ms. DeSimone warns.
Multiple metrics are suggesting consumer demand could be deflating. The Organization for Economic Cooperation and Development (OECD) downgraded its global growth estimates from 4.5% to 3% in 2022, while the World Bank cut its 2022 GDP forecast from 4.1% to 2.9%. The International Monetary Fund has lowered its forecast from 6.1% to 3.6% in both 2022 and 2023 (see Figure 8).
According to the IMF report, global economic prospects have worsened significantly in large part because of the war in Ukraine and the sanctions that have followed while inflationary pressures are forcing consumers to cut back on discretionary spending.
Multiple metrics are suggesting consumer demand could be deflating. The Organization for Economic Cooperation and Development (OECD) downgraded its global growth estimates from 4.5% to 3% in 2022, while the World Bank cut its 2022 GDP forecast from 4.1% to 2.9%. The International Monetary Fund has lowered its forecast from 6.1% to 3.6% in both 2022 and 2023 (see Figure 8).
Container shipping could be hit by a sharp reversal, and some have suggested a possible “bullwhip effect” where demand contracts and supply increases. Mr. Pottschul notes there is some evidence of a slowdown saying, “Some clients already are seeing a decline in volumes for the start of the third quarter on some of the East-West trades.” Reports of an inventory overshoot in the West has been accompanied by recent news of Chinese manufacturing orders declining by 20% to 30%. However, even with this decrease in orders, the number of orders is still above pre-pandemic levels.
Macroeconomic factors impact demand says Mr. Pottschul, adding that inflation will reduce the spending power from consumers substantially and there might be a vertical shift as clients buy more lower-priced items. “The rising core inflation will continue to put tremendous pressure on the spending power from consumers as costs are increasing, especially for lower to median income households. Freight rates, however, may very well remain robust over the coming months as infrastructure issues and supply chain bottlenecks keep the pressure up in the market. How ocean carriers respond to the situation will be crucial for the industry, probably for an extended period beyond this peak season."
Mr. Krogh says Shipco’s strong partnership with carriers means the company’s clients have a responsive partner with a network of diverse resources to help solve challenges. “With our consistent year-round volumes and good relations with many carriers, we have the flexibility to quickly adjust to find alternatives for space, rates, and transit times. In addition to LCL and FCL services, we also offer a comprehensive airfreight product as well as Sea-Air solutions which enable us to seamlessly switch between modes of transport based on our client’s needs.”
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