The battle for Asian containerized exports rages on between West and East Coast ports. The East had been steadily gaining ground, but COVID-19 is changing the balance in favor of the West, at least in the short term.
Taking share from air
The most immediate effect of the coronavirus, reported by FreightWaves in late March, was a shift from air cargo to premium ocean service.
Advantage West Coast ports. Former air-cargo shippers with time pressures don’t take the long route to the East Coast.
Nerijus Poskus, head of ocean at Flexport, presciently predicted the rise of premium services that offer guaranteed loading, faster ocean transits and priority discharge.
Matson (NYSE: MATX) and CMA CGM subsidiary APL offered premium services. Then Matson added extra sailings, and ZIM unveiled a new premium service — 12 days from China to California. The first ZIM ship arrives in Los Angeles on Saturday.
Premium-ocean demand emerged from reduced belly cargo capacity on COVID-halted passenger planes. Poskus predicted that “once people shift from air to premium ocean, it will prove difficult to shift back.” Supply chains will become accustomed to premium ocean.
E-commerce solidifies gains
The second COVID-19 effect was driven by the surge in e-commerce popularity among locked-in consumers.
Paul Bingham, director of transportation consulting at IHS Markit (NYSE: INFO), highlighted e-commerce when speaking to FreightWaves in April. “The brick-and-mortar ‘retail apocalypse’ that was already playing out will accelerate,” he said. “E-commerce is never going back to where it was in January. Its market share gain will be permanent.”
More e-commerce could incentivize shorter delivery times from Asia. Yet again: advantage West Coast.
“The competitiveness of e-commerce and how it has driven shortened lead times has created even more demand for vessel services that offer guaranteed and expedited transit times,” said FreightWaves Maritime Market Expert Henry Byers.
“It’s simply a risk some companies are not willing to mess with anymore,” said Byers of delivery time. “They would rather pay twice the amount for a specific portion of their containers than risk failing to service their customers. It’s still cheaper than air freight.”
ZIM’s new premium service is branded “ZEX,” short for “ZIM E-commerce Xpress.” It was specifically launched “to cater to the increasing needs of e-commerce customers, especially now due to growing e-commerce demand following the COVID-19 crisis.”
Uncertainty over recovery
Demand for containerized cargo has recovered as states have reopened their economies. After the initial shutdown, businesses needed catch-up cargo on an expedited basis.
But the post-lockdown demand bump is not guaranteed to last. Demand may fall again due to rising infections, business failures and unemployment. If shippers are not convinced of demand sustainability, they may avoid putting cargo on the Asia-East Coast route, which can involve five to six weeks at sea.
Lars Jensen, CEO of Copenhagen-based SeaIntelligence Consulting, wrote in an online post that carriers have been “blanking” (canceling) fewer Asia-West Coast sailings than Asia-East Coast sailings. Meanwhile, trans-Atlantic sailings from Europe to the East Coast continue to be heavily blanked.
“If the reinstatement [of services] was a sign of broader improvement [across the U.S.], we should expect the West and East Coasts both to benefit. But that is not the case,” he wrote.
“Either the seeming strength in the West Coast trade is due to overly aggressive capacity removals that have led to a backlog now being cleared. Or the importers are only expecting a brief, temporary pickup and hence want their product shipped to the U.S. as quickly as possible. [If so] they do not want to use the slower East Coast routing. Reality is likely a mix of these two. I would tend to assign a slightly higher weight to the former [theory on too-aggressive capacity removals].”
Secular change
The counterargument is that all of these West Coast advantages are temporary and do not alter the long-term shift that was underway before the coronavirus crisis. Advantage — big advantage — to the East Coast.
This trend has major implications for land transport. The less volume into West Coast ports, the less cargo railed cross-country to Eastern states, and the more trucked westward from Eastern ports . More volume by sea to the East Coast effectively equals higher demand for trucking and less for rail — and vice versa if the pendulum swings to West Coast ports.
Deutsche Bank transportation analyst Amit Mehrotra told FreightWaves, “The West-to-East shift is a secular theme, one that will play out over a long period of time. Cyclical forces at any given time are going to outweigh those secular trends, and in this context, the ports of Los Angeles, Long Beach and Oakland are still incredibly important.
“But the underlying trend is incredibly clear. I agree that there may be a rush to get things over [due to COVID-19] but keep in mind that the 60% of the population lives east of the Mississippi River. At the end of the day, if you come into the West Coast, you’re going to have to rail a lot of it east, where the major demand centers are.
“And with the expansion of the Panama Canal and the port projects on the East Coast, which allow for bigger ships, and with the majority of the population in these states, it disproportionately favors the East Coast ports.”
Different view on e-commerce
“I agree that e-commerce is very important,” continued Mehrotra. “If you ordered toothpaste 10 years ago, you’d be happy if you got it in five or six days. Now you want it the next day. Two years from now, you’ll want it the same day. That can only happen if it’s close to you to begin with.
“You might say if it’s all about speed and it takes longer to bring a ship to the East Coast, then that’s a hole in the whole thesis. But it’s not a hole.
“In the past, you could have one massive distribution center in the center of the country, have cargo come off the container ship on the West Coast, rail it inland to the distribution center, then use trucks to feed from that hub.
“Now what’s happening instead is you need speed in the last mile. So, you need multiple e-commerce fulfillment centers throughout the East,” he explained. “More container traffic will come to the East [due to higher demand for e-commerce] and you don’t need speed on the ocean part, you need speed on the last mile.”
Ocean rate data
Various data sets show how COVID-19 is affecting the West versus East Coast rivalry. One is spot container rates, which are tracked by the Freightos Baltic Daily Index. If rates from Asia to the West Coast are rising at a faster pace than to the East Coast, this implies more demand to the West Coast.
That’s exactly what’s happening — in a big way. As of Friday, the Asia-West Coast rates (SONAR: FBXD.CNAW) were up 91% year-on-year, while Asia-East Coast rates (SONAR: FBXD.CNAE) were up 24%.
Customs filing data
Customs filings are another bellwether of coastal demand. This data is much less clear-cut but also shows the current advantage to the West Coast.
As of June 23, the seven-day trailing average for the number of customs filings was up 5% year-on-year in the Port of Los Angeles (SONAR: ICSTM.USLAX) and 7% in Long Beach (SONAR: ICSTM.USLGB), but down 12% in New York/New Jersey (SONAR: ICSTM.USNYC) and down 1% in Savannah, Georgia (SONAR: ICSTM.USSAV).
Rail volume data
Another perspective on coastal competition involves inland moves of intermodal rail cars on the main lines — for example, comparing loaded 40-foot containers from Los Angeles to Chicago versus New York/New Jersey to Chicago.
Another win for the West Coast, albeit a slim one. The volume from Los Angeles to Chicago (SONAR: ORAIL40L.LAXCHI) as of Sunday was down 22% year-on-year, whereas the volume from Elizabeth, New Jersey, (SONAR: ORAIL40L.EWRCHI) was down 22%.
Blank sailing data
More evidence can be gleaned from carrier scheduling decisions. The more forward capacity blanked, the fewer forward bookings for cargo slots. If carriers were blanking more sailings to the East Coast than West Coast, it would imply more confidence in bookings to the latter.
In general, much less Asia-U.S. capacity is being blanked in the third quarter than the second. According to data from Copenhagen-based eeSea, 4% of third-quarter Asia-East Coast arrivals have been blanked, versus 16.3% in the second quarter.
For Asia-West Coast sailings, 10.6% were blanked in the second quarter and 4% in the third quarter — in the case of the third quarter, a tie between the coasts.
The general takeaway from the various data sets: The coronavirus crisis is indeed having an effect on the U.S. port mix, to the benefit of West Coast terminals. But it’s not a knockout punch. Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON THE TRANS-PACIFIC AND U.S. IMPORT OUTLOOK: For the full interview with Flexport’s Nerijus Poskus on the early days of COVID fallout, see story here. For the interview with Paul Bingham of IHS Markit on longer-term effects, see story here. And for the full interview with Deutsche Bank transportation analyst Amit Mehrotra, see story here.