U.S. Port Delays Force Shippers to Look Up

The recent US West Coast port congestion issues has temporarily reversed the long-term modal shift from air to ocean as shippers seek alternative ways to make sure their goods hit the stores in time for the US holiday season.

World air cargo growth has for a number of years lagged behind container shipping growth due to a combination of factors, including higher demand for commodities that are typically shipped by ocean freight, faster growth at the low-value end of commodities such as T-shirts that reduces air cargo’s overall share and finally the sea conversion of “mature” products. This is evident by lower imports of electrical machinery into the US by air freight between 2005 and 2013, see Figure 1. Air cargo’s 8-year CAGR of -1.4% for the said commodities is the near mirror-opposite of the same items moved by containership.

Figure 1
US Imports of Electrical Machinery (HS Code 85) from World by Air (million tonnes)

Figure 2
US Imports of Electrical Machinery (HS Code 85) from World by Containership (million tonnes)

A study published earlier this year by Seabury, commissioned by the International Air Transport Association (IATA), revealed that the above mentioned factors combined to reduce air cargo volumes by as much as 15 million tonnes since the start of the century, with modal shift accounting for approximately one-third of that sum.

The shift towards the much cheaper ocean freight mode has gathered momentum in recent years as shippers have developed more sophisticated IT systems and leaner inventory strategies. A greater faith in container service reliability is often cited as another contributing factor, but this is possibly overplayed and almost certainly misplaced as the container industry has long struggled to deliver its promises. Drewry’s research shows that barely 60% of containerships arrived at port on the advertised day within a threshold of +/- 24 hours in the third quarter.

The long-term trend from air to ocean transport is not expected to be reversed, but are supply issues in the container sector, including poor reliability, rolled cargo, missed voyages in peak cargo months and port congestion starting to slow the modal shift? More recent numbers show that international air freight growth is starting to keep up with container traffic growth and even overtake it in certain months.

Figure 3
Comparative Freight Traffic Indicator (% change year-on-year)

Some shippers pre-empted the disruption in the container sector by moving cargo earlier and via the longer all-water route to the US East Coast, but as the countdown to “Black Friday” and the start of the holiday season got ever closer, more expedient solutions were required.

Table 1 shows that average transit times from Asia to the US East Coast are 15 days longer than to the West Coast. As well as having to contend with longer lead times Asia-USEC spot freight rates also command a considerable premium that has grown since it looked like the 1 July port labor contract expiration wasn’t going to renewed quickly.

Data from the World Container Index shows that the USEC rate premium over USWC services has expanded from about $1,500 per 40ft container in June to around $2,100 per 40ft by the end of November, see Figure 4.

Table 1
Representative Transpacific Container Service Port-to-Port Transits in Days, November 2014

Figure 4
Recent Developments in Eastbound Transpacific Container Freight Rates

The USWC port slowdown could not have been designed to have caused more disruption or extra cost. Shippers converting to air freight are doing so at a time when air rates are at their seasonal high point of the year.  In addition to its Container Freight Rate Insight database on over 600 different port pairs, Drewry also publishes air freight rates covering 48 key trades in its Sea & Air Shipper Insight report which is published monthly. Following four months of stable pricing, East-West air freight rates surged in October on the back of continued strong peak season demand and the conversion from ocean transport. Drewry’s East-West Air Freight Price Index rose by 11.9 percentage points in October to a year-peak of 115.6 points, the second highest level since the data series started in May 2012.

Figure 5
Drewry East-West Air Freight Price Index (May 2012=100)

As well as the East-West index, Drewry groups together pricing on each of the main trades into aggregate indexes, which are calculated as a weighted average of rates on individual routes. These reveal that the Asia to US route was responsible for most of the overall hike in East-West air freight rates with Transpacific Eastbound Air Freight Rate Index up by 17% against September. In contrast, container freight rates on the route were in decline with the Drewry Transpacific Eastbound Freight Rate Index falling by 7% in October.

Table 2
Comparison of Eastbound Transpacific Freight Rates by Transport Mode

Generally, air rates have held up better than ocean rates as Figure 6 demonstrates, and the rise in air freight pricing relative to much weaker container shipping rates is widening the pricing differential between the two modes. Drewry’s East-West Air Freight Price Multiplier gained 3.5 points in October to x16.5, the widest margin since October and November of last year. The multiplier compares Drewry’s two East-West trade indexes for the modes by converting rates into kilograms.

Figure 6
Comparative Freight Rate Indicator (May 2012=100)

Figure 7
Drewry East-West Air Freight Price Multiplier

Drewry expects air freight rates will continue to show a rise for November as the shopping season hits full swing, while tighter capacity will also support stronger pricing on certain trades. The backlog at US west coast ports has the potential to soften the traditional drop in Asia to US rates in December and depending on how long the issue remains unresolved could prop up air rates through until Chinese New Year.

View

Congestion on the US West Coast ports is a costly reminder to shippers of the need for risk planning, particularly in peak seasons. The issue will help to inflate air rates and demand temporarily, but it will not reverse the longer-term trend towards ocean.

---

Source: http://ciw.drewry.co.uk/; Drewry Maritime Research