Low Rates, Poor Service To Mark Trans-Pacific Trade Amid Capacity Boom

Retailers and other importers will enjoy low freight rates into 2024 due to “an absolute explosion” of capacity entering the trans-Pacific trade in the coming months, but the price they pay will be a degradation in both service and schedule integrity, according to an industry analyst.

Capacity is scheduled to increase as much as 25% to the US West Coast and 35% to the East Coast in the coming months as carriers take delivery of new vessels for their global fleets, Alan Murphy, CEO and founder of Sea-Intelligence Maritime Analysis, told the Intermodal Association of North America (IANA) Expo 2023 in Long Beach this week.

To prevent freight rates from collapsing, trans-Pacific carriers will reduce effective capacity through a “massive number of blank sailings,” Murphy said. Those canceled sailings, he said, will drag down vessel on-time performance, which is already at a dismal level of about 40% to the West Coast and 39% to the East Coast, according to Sea-Intelligence’s Global Liner Performance report.

“You are going to have low rates, but you will have very low service levels, I believe,” Murphy told the IANA conference.

The spot rate from Asia to the West Coast this week was $1,900 per FEU, down 50% year over year, while the East Coast rate of $2,600 per FEU is down 67%, according to Platts, which like the Journal of Commerce is owned by S&P Global.

Murphy noted that schedule reliability in the trans-Pacific pre-COVID-19 was about 75%; on-time arrivals plunged as low as 10% during the pandemic.

A carrier executive told Expo 2023 that container lines have two options for reducing effective capacity — either terminate weekly service strings, which can be quite disruptive to a trade lane, or blank individual sailings.

“Nobody likes blank sailings, but it’s a more agile way to do it,” said Stuart Sandlin, president/North America for Hapag-Lloyd.

Trans-Pacific schedule integrity is also being challenged by delays at the Panama Canal due to low water depths, noted Peter Levesque, president and CEO of CMA CGM North America.

“The Panama Canal is also a piece of what you have to look at,” Levesque told the conference.

Trans-Pacific carriers see the Suez Canal as an alternative to the Panama Canal, and they are able to respond quickly by adding services to the Asia–US East Coast route via the Suez.

“Ocean networks today are as flexible as ever,” Levesque said. “We are prepared to move quickly, if it is a hurricane or the Panama Canal.”

 Plunging US imports from Asia 

US imports from Asia through the first eight months of 2023 are down 21.1% from the same period last year, according to PIERS, a sister product of the Journal of Commerce within S&P Global. August imports of 1.49 million TEUs were up from 1.45 million TEUs in July, but still down 13.1% year over year.

Trans-Pacific lines are responding to the weak import volumes by blanking 200,433 TEUs of capacity in September and have announced an additional 370,688 TEUs in blanks for October, about 14% of trans-Pacific capacity, according to Sea-Intelligence.

“As we approach October’s Golden Week holidays, container volumes are weakening and load factors are falling despite a higher number of blank sailings,” investment firm Jefferies said in a Sept. 10 report. “The number of actual sailings over the next five weeks, after taking into account the cancellations, is the lowest since February.”

US Imports from Asia are now back to 2019 levels, Murphy said. That would only be a problem if capacity does not increase substantially in the coming months, but it will. Capacity is scheduled to increase 10% in 2023 and another 10% in 2024, he said.

Murphy told IANA he is “very pessimistic” about the near- and  short-term prospects for matching demand with supply in the current environment, adding it will take four to five years to fill the new capacity that is scheduled to come online.

“The oversupply will stick with us,” he said.

By: Bill Mongelluzzo / JOC