Hello and welcome to the second installment of “Consolidated Regulatory and Supply Chain News”
As the world continues to turn and change, so does the world of Supply Chain.
This update brought to us on a quarterly basis by RAF Solutions offers members of the EACC high level information on news that could affect the trans-ocean business of import and export to / from the U.S. This will mostly be organized by type of information (i.e. ocean freight, air freight, regulations on either side, etc) but there may be some crossover in sections since one new regulation could impact many areas.
Ocean Freight
Port of Baltimore
Commercial shipping traffic through the Port of Baltimore is expected to return to normal levels next month after the channel fully reopened the week of June10 for the first time since the collapse of the Francis Scott Key Bridge in March. Many shipping companies rerouted their cargo to other ports following the deadly collapse in March. The deadly disaster halted most maritime traffic through Baltimore’s busy port as crews worked around the clock to clear an estimated 50,000 tons of fallen steel and concrete from the Patapsco River. The estimated cost for the entire salvage operation is $160 million, with federal, state and local agencies involved.
The U.S. Coast Guard Captain of the Port has reopened the Fort McHenry Channel to commercial vessel traffic for 24-hour availability. This channel has been fully restored to its original depth and horizontal and a vertical clearance. Deep draft vessels still require a Maryland State Pilot and one escort tug, and the Temporary Alternate Channels remain open and available for use until approximately June 30th, the conclusion of all on water salvage and survey operations relating to the Key Bridge Response.
The safety zone established for all navigable waters of the Chesapeake Bay within a 2,000-yard radius of the Francis Scott Key Bridge remains in effect and is intended to protect personnel, vessels, and the marine environment. Except for vessels transiting in one of the four marked channels, no vessel or person will be permitted to enter the safety zone without first obtaining permission from the Coast Guard.
West Coast Ports
Despite an initial level of confidence at the start of the year, the port saw larger volumes in April and May, before picking up even more in June, July and August. Market-driven increases in volume are likely to be exacerbated by the crisis at the Panama Canal that severely limited volumes in the vital shipping lane. And, with that, comes congestion. Adding to this concern is the “slow and go” pace of the International Longshore and Warehouse Union workforce at West Coast ports. They have slowed ground port productivity to a crawl. As a result, data shows a “significant surge” in the average number of containers waiting outside of port limits.
With U.S. economic growth of more than 3% a year (but slowing), and an unemployment rate hovering under 4%, consumption remains strong. Meaning more ships from Asia through the West Coast ports. Combined with a years-long push-back against automation that could potentially increase throughput from union dockworkers at the ports of Los Angeles and Long Beach, those factors could add up to trouble for the shipping hub.
The port is already experiencing longer-than-usual container dwell times at rail transfer facilities, averaging between five and eight days (and growing) in recent months(the target is usually two to four days). And while the port says it has the infrastructure, labor force, analytics and capabilities to handle additional cargo, it doesn’t arrange offloaded container stacks to account for when trucks will be arriving to pick up their cargo. Meaning, even when they can off-load, the containers are stuck because the new regulations in CA have slowed the process to a crawl.
The current processes mean the terminal doesn’t know when the container’s going to leave. If you don’t know, then you can’t plan; if you can’t plan, you’re stuck digging for the container that a trucker comes to get. As volume ramps up, this creates a line of trucks waiting at the terminal gate.
Drought-related restrictions in the Panama Canal, the duration of the Red Sea crisis, and East and Gulf Coast port labor uncertainty are among the reasons many analysts suspect U.S. West Coast ports should brace for a surge in volume in 2024 — and with it, potential congestion.
As volumes shift, do not be surprised if intermodal volumes moving through truck and rail also surged. However, heightened container traffic could also lead to some congestion, though capacity among trucking companies is plentiful and chassis have been added in anticipation of growth.
Red Sea
Since the vessel attacks along the Red Sea began, ocean shipping rates and transit times have gone up significantly. Several carriers have implemented additional surcharges. Some shippers like Ikea have already reported delays as they face constraints for certain products. Even if the situation in the Red Sea returns to normal, shipping companies may face difficulties for months.
Disruption to Red Sea container shipping is continuing and are rising. Maersk said on Monday, forecasting this will cut the industry’s capacity between Asia and Europe by up to 20% in the second quarter.
Most major shipping companies have diverted vessels around Africa’s Cape of Good Hope since December to avoid attacks by Iran-aligned Houthi militants in the Red Sea, with the longer voyage times pushing freight rates higher.
As a point of reference for those who do not remember, the Suez Canal blockage in 2021 lasted about six days and disrupted schedules of the ports in the Mediterranean and North Sea for months.
Panama Canal
While drought restrictions at the Panama Canal continue, cargo diversions are happening and increasing the chances of delays.
Vessels traveling through the major waterway have been limited. The allotment is down from the pre-drought capacity transits per day. However, there is some promising news the Canal Authorities are releasing more water and have announced a limited increase the allotments.
Shippers’ options have been complicated by the crisis in the Red Sea. Companies looking to import cargo from Asia to the U.S. East Coast may have looked to the Suez Canal as an alternative to the Panama Canal. But now that alternative is risky, too, after attacks on vessels traveling to the shipping channel through the Red Sea led major carriers to reroute ships or halt transit.
“Without access to the canals, customers face 30%-40% longer sailing times and higher costs to trade with Asia,” according to a Jan. 24 report from Moody’s Investors Service.
The Panama Canal Authority (ACP) has announced an increase in booking slots for its Panamax locks starting mid-May, in response to current and predicted water levels in Gatun Lake.
Following a severe drought last year, the Panama Canal Authority has had to limit the waterway’s capacity by reducing both the number of daily ship transits and their maximum draft.
The decision comes amid optimism that rainfall will begin by late April and continue for several months due to the weakening El Nino and the shift to La Nina this summer.
Assuming the forecasts hold, the ACP aims to gradually lift all transit restrictions and fully normalize operations by 2025, allowing 36 daily transits and a maximum draft of 50 feet.
Air Capacity
The horizon is unclear for the air cargo market, even as last year’s rapid decline in volumes leveled out in recent months.
Some anticipate 2024 returning to normal seasonality. It could be an opportunity for everyone to catch their breath after the volatility of the past few years. But just because turbulence may have calmed, it doesn’t mean there aren’t potential risks to watch out for.
The biggest challenge will be capacity and the impact of the e-commerce players. These businesses are marked by their capacity needs and willingness to pay any price to secure space. With e-commerce growth forecasted at 20-30% annually, these companies absorb 30% or more of global capacity
Adding to this concern are ongoing geopolitical risks that make the market less predictable, and therefore more challenging to customers. Trends like growing strike activity and U.S.-Mexico border congestion due to developing nearshoring activity are also on the list of possible market risks to keep an eye on.
While the air cargo market may lay at the mercy of e-commerce demand, geopolitical risks and other uncontrollable factors, shippers can still position themselves for success. Monitor and focus on the status and developments that require a to change the plan along with the plan.
Air Freight
The global air cargo industry is off to a flying (pun intended) start in 2024, with a staggering 18.4% surge in demand reported for January and apparently continuing compared to the same period last year, according to the latest data released by the International Air Transport Association (IATA). The air cargo increases outpaced trade and production growth. Notable highlights include a 1% increase in global cross-border trade in December and a resurgence in manufacturing output.
The report, which highlights the strongest annual growth in cargo tonne-kilometres since the summer of 2021, underscores a remarkable recovery in the air freight sector amidst evolving market dynamics. Much of this is attributed to the continued growth of the e-commerce sector, which continues to outpace trade and production trends since late 2023. However, China is experiencing an economic slowdown. The degree we cannot be certain as the actual impacts are controlled by the government.
Despite these positive indicators, concerns over global exports persist. Inflationary pressures in major world economies show mixed trends. The US and EU witnessing a slight easing to 3.1% while Japan reported 2.1%. Conversely, China recorded its fourth consecutive month of deflation, raising apprehensions about economic deceleration.
Middle Eastern carriers emerged as frontrunners with air freight growth, posting a remarkable 25.9% year-on-year increase, fueled by strong demand in the Middle East–Asia and Middle East–Europe markets.
Latin American and African carriers also reported notable gains, reflecting a broader global resurgence in air cargo demand.
US Trucking
The trucking industry was contracting for much of 2023, with large and small carriers alike leaving the market due to bankruptcy, closure or acquisition. Some experts expect this to continue in 2024.
While recent action from the Federal Reserve appears to have minor impact on inflation, it has not slowed manufacturing employment. However, if interest rates remain high and industrial production cools, that could lead to reduced trucking demand and capacity.
If this occurs, shippers may see spot rates fall until demand exceeds trucking supply. Though if the Federal Reserve reduces rates and manufacturing production remains high, shippers may continue seeing low spot rates with plentiful capacity.
Labor
After contentious contract negotiations between UPS and the International Brotherhood of Teamsters last summer, this year is poised to see more clashes between management and labor in the parcel delivery sector.
FedEx Express and the union representing its pilots are still negotiating for a new contract agreement after members rejected a tentative deal. FedEx Express pilots have asked the National Mediation Board to release them from mediation with the delivery company, a move that could ramp up pressure for a contract deal by opening the door to a possible strike. Mechanics at the FedEx unit are in the midst of an organizing drive to join the Teamsters. The labor union is also continuing its campaign to organize the workers that power Amazon’s massive logistics network, highlighting an unfair labor practice strike by delivery drivers at an Amazon contractor that ratified a union contract in 2023.
While we don’t know what the outcome of these negotiations will be, even the threat of a strike is enough to send shippers looking to alternative carriers. Those who rely on FedEx should review their strategies if the negotiations lead to strikes.
Pandemic Recovery
Are global supply chains finally shaking off the after-effects of the COVID-19 pandemic? Study findings suggest that might indeed be the case.
In February, suppliers around the world were “very close to full utilization,” according to surveys of the production orderbooks of some 27,000 businesses. That’s a sharp departure from the idle and under-utilized factories that were so prevalent over the last several years.
Activity in North America was especially strong in February, for which the index showed “stretched” supplier capacity, as manufacturers boosted inventories in expectation of ramped-up production in the near term. It was the first time since March 2023 that suppliers to North America had been in that situation, with backlogs ticking higher as a consequence. Weaker results were seen in Europe, which continues to suffer from some economic stress, and Asia, held back by sluggish demand in Japan, Vietnam and Taiwan. Nevertheless, the index found Asia saw signs of inventory restocking and economic resilience region wide.
The results of the surveys can, of course, be viewed in a less positive light. The “glass half-empty” perspective worries that suppliers running at full capacity won’t be able to satisfy consumer demand, driving up prices and fueling inflation but it’s too early to tell whether the current trend in production levels and supplier capacity will result in inflationary pressure.
Others might point to the index as evidence that the U.S. economy, at least, is running dangerously hot. But experts say they are not seeing the kind of regular price increases that spur renewed inflation, at least for the near term. For many, they are using a word not heard lately: “optimistic.
Weather Impacts
The odds of a weather-roiling La Niña in the coming months are rising, elevating the risk of an unusually active Atlantic hurricane season.
The chances of La Niña, a cooling of the equatorial Pacific, rose to 82% for August, September and October, the U.S. Climate Prediction Center said. In February, there was a 74% chance.
“The numbers edged upwards, not dramatically, and the timing still seems to be the same as to what we were predicting last month,” said Michelle L’Heureux, a forecaster with the center.
La Niña can lead to droughts in South America and California, and more rain across parts of Indonesia and Australia. Currently a strong El Niño, or warming in the Pacific, is winding down. La Niñas often follow intense El Niños because of a phenomenon known as discharge when heat on the equator migrates toward the poles and cold deep-ocean waters rise to take its place.
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