Clear Supply Chain Pathway? Don’t Hold Your Breath

Written by David Nahass, Financial Editor
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FINANCIAL EDGE, RAILWAY AGE NOVEMBER 2022 ISSUE: The container ship backlog in Southern California was declared officially “over” by The Wall Street Journal in late October. Its ending was not celebrated as much as its beginnings.

In January 2022, when the container ship backlog reached triple digits, COVID fatigue reigned. People were sick of their Pelotons and their families and ready to redirect months of frustration at anything that moved (or in this case didn’t move #rimshot). The end of parking lot Pacific Ocean was like the demise of the local tire fire; it went quietly, having become such a part of culture that people had mostly forgotten about it.

The WSJ identified three factors contributing to the end of backlog: (1) a substantial increase in inventories because of overordering by merchants; (2) a move to bring container ships to East Coast ports to avoid the West Coast congestion and (3) concerns about an impending longshoreman’s strike (resulting in more ships moving to the east).

The ILWU (22,000) members contract expired in July 2022. The last ILWU strike was in 2012. Stop if you’ve heard this before.

But in the now, that is an important but a subordinate issue. More important is the drop off in the number of boxes that are heading into the U.S. from Asia. Volumes in the West Coast ports were down 18% from a year earlier and are at the lowest point since June 2020. Road freight rates have declined 83% from a year ago.

Intermodal loadings year to date are down 5% vs. 2021 which, although higher than 2020, are still below pre-pandemic levels. While most of the decline occurred in the beginning of the year, recent data suggest an additional pullback from recent parity with 2021. J.B. Hunt reported in its most recent earnings results a weaker than normal peak season. The AAR notes that October, generally, is the highest volume calendar month for intermodal loadings. A two-year decline in loadings at this point in the calendar year does not create optimism. Car orders for intermodal platforms (roughly 4,000 platforms scattered over 2022 and 2023) don’t provide a strong indication of strength or weakness in the market.

Ron Sucik, President of RSE Consulting (and perennial Rail Equipment Finance ( intermodal speaker), is an industry watcher who always has boots on the ground in the intermodal world. Ron gave me the following summary of what has caused the current situation in the market:

When much of the import volume that got stuck off the West Coast ports was finally unloaded, it was too late for the retail season for which it was originally ordered. This now “inventory” product clogged distribution centers and warehouses. Additional imports coming through the ports struggled to be unloaded and sat in containers or may have been loaded onto chassis and sent to points inland.

There was additional panic buying being driven by two primary factors. One was a concern about more COVID shutdowns in China, so when there was an opportunity to place an order and get that order fulfilled, companies often did so just to make sure that they would have inventory later in the year. On top of that, the unloading cycle at the Port of LA has been more than 2x historical averages. There was a desire to ensure that all this together—COVID, chassis and warehouse availability and the pace of unloading—did not prevent a retailer from having products to sell.

From Ron’s point of view, the pattern of congestion started in the West, then moved swiftly inland. Inland congestion prevented the railroads from maximizing train volumes out of the West Coast and perpetuated further port congestion. That cycle —west to east to west again—prevented congestion at distribution centers and warehouses from resolving. It is the core cause for why railroad velocity and train volumes decreased, and for why so many of the available loads were shifted to trucks and away from rail.

David Nahass

Slow velocity ties up chassis for longer periods of time. This makes all freight more expensive. However, the collateral impact of continued congestion negatively pressures rail’s ability to move that newer freight through the system. Ron feels this congestion will impact intermodal loadings until distribution centers and warehouses get some freedom to offload the overabundance of consumer goods they are storing right now.

All told, this potentially clear pathway may easily be disrupted by inflation and persistent high fuel prices that could easily cause a significant decline in consumer spending. A recession just might be the fix to allow the system to right itself.

Feel better? Didn’t think so.