Container cargo 2020, where we are, and where we may go.

Recently I was asked to do a talk (webinar of course) on the impact of the state of container shipping and the impacts of the pandemic driven shutdowns, I accepted. In preparing for the presentation, as many do, I put my thoughts on paper. With the webinar behind me I realized, while in no way polished, my notes were complete enough to share in an article. I added some punctuation, did a quick spell check, and let it ride.

My first thought in considering speaking was, I could not talk about where we are at this moment and where we are going, without addressing where we were and how we got there.  

Where We Were

2017 and 2018

Coming off a great 2017 in global container growth (+5.6%), in 2018 Purchasing Managers were optimistic. The Purchasing Managers Index (PMI) not only stayed north of 50 in 2018, it was above 55 most of the time. Container cargo volume showed some growth, and the trucking industry was adding capacity.

If you are not familiar with the PMI, it is a zero to one hundred scale showing what surveyed executive purchasing managers believe is the prevailing direction for purchasing. Sub-fifty indicates contraction with zero being the worst, fifty being neutral with no growth no contraction, and anything above fifty being a growth expected number.

As I mentioned, 2017 was a good year for the shipping industry. All in all, 2018 felt like a really great year and ended with 4% container volume growth.  But in fact 2018 was just an ‘okay’ year at as far as world container growth. It felt busier than it really was due to a volume spike from buying triggered by upcoming US tariffs with China. 

Companies saw the tariffs coming and bought goods ahead of time to avoid tariffs. This rush to buy effectively clawed 2019 purchases and container volume into 2018. I addressed this way back in August 2019 in a LinkedIn Pulse article called ‘My new, new, prediction on when cargo volume will ramp up’.

In the August 2019 article I was adjusting my outlook downward and pushed volume increases out further than I had predicted in a previous April 2019 article on the same subject.  In August I pushed the time of increased volume to early 2020.  Even in my opinion at the time (April 2019), was we were not in as great a shape, I said;

“I don’t believe we are heading back to the famine days of 2009. But ocean container carriers, truckers, and warehousing will see a definite cool down for a while. Rates will flatten or decline, there will be more blank sailings, and warehouse and trucking capacity will increase putting downward pressure on spot rates. In short, it will likely be a long summer for those industries. Barring any catastrophic occurrences and retail inventories getting siphoned down over the next couple of months, if the government can refrain from trying to fix things, transportation should get some relief beginning late summer.” 

Looking at 2019

Downward PMI Trajectory began Feb 2019 to sub 55. From Feb 2019 to today, the PMI never saw 55, or more, again. Moreover, by August 2019 the PMI went below 50 and stayed that way for the remainder of the year. Purchasing managers were no longer eager to buy. They over bought in 2018 artificially inflating the growth numbers and stole some volume from 2019 doing it.  2019 ended with only a 2.3 growth rate. The conclusion is growth was deteriorating months before Covid-19 was introduced globally and it actually started in 2018 we just didn’t notice.

The trucking industry was the canary in the coalmine for 2019.

In 2018 the trucking industry thought their long awaited new normal of more loads than capacity had come. They were right, but only for 2018. From Oct 2018 to June of 2019 tender rejection rates went from a high of 25.6% to under 6%.  2019 was a blood bath for truckers. The indication was the supply chain economy was sick.

Where we are 2020

The first quarter, April in particular, is normally the month activity and the PMI begins to trend back up. If you recall my August 2019 prediction, I was pegging early 2020 as the time when volumes would ramp up. How wrong could I have been? 

Due to Covid-19, April 2020 the Purchasing Managers Index dropped off a cliff to 41, almost as bad as 2009 dark days.

Ocean container volumes are tanking sparking estimates of a 20% port volume drops, rail is down 20%, and truckload capacity has been declining three painful quarters in a row. 

What to look for

Continued Reduced Ocean Capacity

High number of canceled sailings through at least May and June. People wanting their cargo may have to be patient. Ocean carriers are focused on trying to keep vessels full. The current numbers for carriers blanking sailing for May and June are 19% (May) and 18%(June). Add five or six points to that number for the US west coast.

Ocean rate downward pressure?

To date, the ocean rates have remained strong. Initially due to blank sailings starting with the China supply side problem all the way back in Feb. Now that the drop in volume is on the demand side, ocean carriers may feel the pressure to compete and a price war may break out between alliances.  Carrier discipline has been good thus far, it will be tested during coming months. It may turn in to a good time to negotiate rates for larger shippers.

Will the Covid-19 Recession Create the Next Hanjin?

I think alliances and loans will prevent a second Hanjin. But stiff competition between alliances will make it tough for container carriers with high debt and already weak financials to sail smoothly. 

Container Imbalances and Shrinking Space on the Westcoast

Container imbalances have developed and warehouse space in port areas will be in short supply on the west coast. Unwanted import shipments are building up. To complicate the situation ocean carriers will likely has lass sailings but use higher TEU capacity vessels which can add to the bottleneck. Moving the goods to more affordable inland secondary market warehouses now will save cargo owners money and heartburn. The secondary warehouse space will not last forever, and the cargo has to move inland sometime. It will also help reduce the container imbalance by allowing more containers to unload.

What do I expect?

This is the part I love the most. Since the future has not happened yet, it is impossible for me to be wrong yet. No one really knows what to expect. The unknown Covid-19 factors make venturing a guess with numbers attached impossible. The most popular number I see is container volume down by an average of 20% globally, more for US ports, in container traffic through the summer 2020. Estimates for trans-Pacific and Asia-Europe and ocean carriers reducing capacity up to 30% through the second quarter. 

One thing for sure is container volume will be down for 2020, but it may not be down by the Armageddon numbers some are throwing around for the entire year.   

While I agree there is not much that can be done for the short term, there may be some relief the second half 2020.  Although there are a few caveats to taking less of a haircut on volume through 2020. 

  • U.S. China relations can’t be a dumpster fire. Some in the U.S. and other countries are rattling sabers because of Covid-19.  China was in no way transparent, or even truthful, about the Covid-19 virus, yet for me, China met my expectations. They did what you would expect China to do. I am a bit confused some people are acting surprised. China chooses a preferred story line and they stick with it.  No, I do not believe what China did was right in any way, and no, I do not think we should forget about it and pretend it never happened. Although focus on China not being forthcoming regarding Covid-19 would be better dealt with in a heathier economy when more countries are on solid ground.
  • U.S. rethinking reductions in current tariffs still in force and avoid Covid-19 related punitive tariffs to China, may help jump start both the US and China economies. While everyone knows the U.S. has been much too dependent on China as a manufacturing source, attempting to change that immediately will hamper trade and the economic recovery. 
  • While trade diversification is certainly in order, and has been for years, for the short term better to begin filling the pipelines that are well warn. Trying to force expansions of new manufacturing centers and trade pipelines when times are tough, will make the job of recovering more difficult.  Even though countries like Vietnam, Taiwan, and South Korea continue to be in play and are willing, alienating China would leave a gap too large to fill in unsteady times.
  • Global steps to reopen must stick and stick on the first try. If virus outbreaks run amok in the U.S. and other countries after initial re-opening attempts triggering more or expanded shutdowns, it won’t be a pretty situation. Global economy killer comes to mind. Reopening must stick.

Of course trade dollars will shrink dramatically, but cargo volume does not have to drop in parallel to the import/export dollars. 

Yes, there will be less consumption over all as people put off some purchases, although many people will still buy things like clothing and other everyday items. The difference could be the purchase will be made at Walmart instead of Macy’s. While trade values will plummet, a shipping container cannot tell if a polo shirt is $12 dollars or $60 dollars. Both shirts both take up similar amounts of space.     

Possible Outcome

If all the caveats I mentioned come together, and if things go as I expect, by the second half of the year should already be heading for a very normal recession, even if a stiff one. The global economy is projected to contract 2-3% in 2020. Keep in mind, a normal stiff recession is better than the best Covid-19 shutdown. 

While the first half of the year will likely be the 20% or more shrink of container volume many say it will be, I believe given the right environment the second half of the year can start the climb back up the hill in better shape than we think we are in.

It is not impossible. Remember, 2019 was not a flying high year? Also, 2018 was not as wonderful as we recall. Tepid purchasing volume growth already kept container volume from flying high in 2019, thus already closer to the bottom even before Covid – 19.

Moreover, the sudden cargo volume retraction was artificially forced through global shutdowns not natural economy shrink. If the shutdown impacts do not last too much longer, the first increase in volume from where we are now may come in a surprisingly large chunk in the 3rd or 4th quarter.

Counting TEU’s and not trade dollars, 20% year on year drop through the second quarter, yes, sure, maybe even more. But I see the bottom at the beginning of the third quarter and the start of growth due to pent up demand left over from the first half of 2020 and the ‘Covid Months’.

Over all 2020 volume will fall well short of 2019 numbers, the uptick later in 2020 could have us seeing numbers like west coast TEU import numbers in the last quarter 2019 (which was a bad west coast quarter). That would position the industry to pick up on growth and stability in 2021. 

Remember the return to good health I expected in the first quarter of 2020? Now I believe that recovery is coming early in 2022.  I would say the second half of 2021, but lingering signs of citizens not getting out and more people working from home will slow things. Even though working from and staying home is the new ‘must have’, there is little to argue that it will reduce the expenditures related to maintaining company workplaces and getting back and forth to work. Commercial real estate, fuel sales, clothing sales, automobile sales, and commercial building maintenance services, among others, will all shrink dramatically.

The best barometer of how the second and third quarters will look will be found when the ocean carriers release their schedules for July and especially August. If the levels of blank sailing worked into the schedule are reduced to around 10% or less by August, we have the seedling of a recovery on our hands. It will be bumpy with ups and downs, but it will be a start. If cancelations remain near 20%, the elongated ‘V’ recovery I maintain is possible, is not going to happen and it will be a long 2020 with no foreseeable end.