Freight Forward - Clocks Continue to Tick

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week through JOC.com articles and additional sources and also what to expect for the week ahead.

Just in case you’re wondering, I’m Cathy Roberson, a supply chain writer, and researcher. For this weekly series, I serve as a research analyst for the Journal of Commerce (JOC), for whom I identify trends, provide thoughts and input into stories and assist with parcel last-mile queries.

The clock continues to tick as the supply chain community waits for an agreement to be announced between the ILWU and PMA. However, a growing number of sources close to the ongoing West Coast longshore labor negotiations believe that while several difficult issues remain to be resolved, the likelihood is growing that a deal will be reached in August or September with little disruption occurring on the docks.

Still, according to Peter Tirschwell, although that sentiment was voiced by a number of sources, it is not unanimous, with some not convinced the process will proceed smoothly from here despite intense pressure on both labor and management from the Biden administration to get a deal done without further slowing container flow through West Coast ports. None are willing to entirely rule out the possibility, however slim some believe it to be, that the talks could go off the rails.

And speaking of rails….

President Joe Biden signed an executive order last Friday that prevented a national strike by US railway workers that could have occurred upon the expiration at midnight Sunday of a National Mediation Board–mandated cooling off period.

The executive order includes the creation of a Presidential Emergency Board (PEB), which consists of arbitrators and negotiators familiar with the labor issues being contested. It now has 30 days to issue a nonbinding recommendation to the two sides. Rail carriers and unions then will have 30 days to review the general recommendations and come to a deal or declare an impasse, which would extend the date before which a strike cannot occur to mid-September.

Concerns of potential strikes will typically shift cargo to different modes or different locations.

Ports along the US East and Gulf coasts increased their share of imports from Asia during the first half of 2022 as shippers shifted some cargo away from the West Coast ahead of the July 1 expiration of the longshore labor contract.

West Coast gateways handled 58.7% of total US imports from Asia in the first six months of the year, down from 61.5% in the first half of 2021 according to PIERS, a JOC.com sister product within S&P Global. As a result, the East Coast’s share increased to 34.3% in the first half from 32.8%a year prior, while the Gulf Coast’s share rose to 6.7% from 5.3%.

“This is not coming as a surprise to us,” Bethann Rooney, port director for the Port Authority of New York and New Jersey (PANYNJ), said of the increase in Asian imports flowing through East and Gulf coast ports. “Fear of West Coast labor strikes has led some shippers to relocate and reposition their cargo even more so than they did during the height of the congestion on the West Coast...to the East and Gulf coast ports.”

According to PANYNJ estimates, approximately 6.5% of the port’s imports in the first five months of 2022 were shipments that normally would have been sent to the West Coast. “When you look at the total increase in imports of 11.5%, a good chunk of it is West Coast cargo that has been rerouted,” Rooney said during a July 1 press conference.

As railway workers negotiate a new contract, on-time performance worsens. For the first half of 2022, trains' speeds and overall performance slipped while North American intermodal volumes declined 4.7% to 10.2 million loads.

An apparel and footwear shipper, who did not want to be identified, said its warehouses are full because big-box retailers are not taking the inventory amid slowing sales.

The executive said the current problems are different from a year ago when the issue was a lack of labor to unload containers.

“Labor is not a problem at all anymore. It is truly about space to unload it on the warehouse shelves,” the source said. “The inventory isn’t turning right now. Let’s say we had 100,000 SKUs [stock-keeping units], to pick a random number, coming in the warehouse and going out with a regular flow. Now what’s happening is zero or next to zero SKUs are going out the door, but we still have SKUs coming in this week, SKUs behind that, and more SKUs behind that, and it’s clogging the docks. There’s just physically no more space to put anything.”

Pricing remains high across the supply chain despite the easing of trans-Pacific spot rates. While still roughly three times higher than prior to the COVID-19 pandemic, some shippers are trying to renegotiate their service contracts. Some US importers say they have been successful in signing short-term contracts lasting a month or two at lower rates, but customers seeking to renegotiate pricing for the life of the contract are reportedly meeting with strong pushback from carriers.

The degree to which importers are able to secure lower rates in the coming months hinges on cargo volumes and the strength of the eastbound spot rates in the peak season.

The US producer price indexes (PPI) for trucking slipped a notch in June, with truck transportation pricing overall dropping 0.2% from May, largely due to a 2.4% decrease in long-distance truckload pricing, the first decrease in the PPI since truckload spot rates began to fall this year.

The PPI data underscores a swing by shippers away from the truckload spot market toward contract carriers. “We may be seeing a stabilization of these rates because of the shift from spot to contract,” said Tal Dickstein, a senior economist at S&P Global, the parent company of JOC.com.

What’s not cooling yet is pricing in the LTL and long-distance specialized trucking markets, which include refrigerated, flatbed, dry bulk, liquid tank, and heavy-haul carriers. The LTL PPI index rose 0.9% in June, following a 3.4% increase in May and 1.7% gain in April. LTL carriers report solid demand, although softer than a year ago, and overall tight freight capacity in their networks.

Meanwhile, Stuart Todd writes in The Loadstar that FedEx Express will create 1,000 jobs this year at its main European hub at Charles de Gaulle Airport. This comes as FedEx Express completes its integration of TNT after acquiring it in 2016. The integration saw TNT’s hub at Liège Airport, in Belgium, relegated to secondary or regional status, resulting in heavy job losses. Speaking at the company’s investors’ conference last month, Karen Reddington, president of FedEx Express Europe, noted that the air network integration will bring benefits of between $75m to $100m by the fiscal year 2025.

In an Air Cargo World column I penned earlier this year, FedEx COO (now CEO) Raj Subramaniam told analysts that “By combining the FedEx and TNT air networks, total flights will be reduced to 825. The network’s reach extends to 72 airports — “fewer flights, more airports,”. Subramaniam further said, “The logic behind our acquisition of TNT remains sound, we are closing a portfolio gap because we do not have an intra-European deferred service, and now, we do. We can also now serve Europe in and out on a lower-cost structure with this. And we also launched priority timed options. We have noon and end-of-day service, and it gives us flexibility.”

Economic Outlook

This week, S&P’s flash Global US manufacturing and services PMI for July will go out on Friday, July 22. Expectations from analysts are slight declines as consumers shift spending habits due to rising inflation concerns.

US retail sales grew 0.9% from May to June. However, a good WSJ article reported that monthly retail sales from the US Census are not adjusted for inflation which means higher retail sales figures can reflect higher prices rather than more units sold.

Indeed, the latest US inventory to sales ratio noted higher inventories in May for retailers, wholesalers, and manufacturers.

Speaking of inventories...we may find out later this month when Amazon reports its Q2 earnings if it was successful in reducing its inventory levels. During its Prime Days event last week, it reported that Prime members purchased more than 300 million items worldwide. Some of the best-selling categories in the US. were consumer electronics, household essentials, and home goods.

Combined with other retailers’ sales events including Walmart and Target, Adobe Inc. reported that online spending in the US rose 8.5% to $11.9 billion during Amazon.com Inc.’s two-day Prime Day promotion. 

That’s it for this week. Please be sure to hit the subscribe button to receive the latest updates.

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What did I miss? Have a question? Let me know in the comments. I’ll be checking back throughout the week to answer questions, address comments and share additional insights.

In the meantime, here’s hoping everyone has a good freight week ahead!

-Cathy