Supply chain disruptions may dissipate in early 2023

BETHESDA, Md.—If there has been one overwhelming migraine for the automotive aftermarket since the pandemic started, it has been supply-chain disruptions. But those issues may dissipate early next year, according to those involved in the shipping industry.

"You guys who are dependent on ocean transportation for your supply chains have been through the wringer the last couple of years, there's no question about that," acknowledged Peter Tirschwell, vice president of maritime trade and supply chain for S&P Global Market Intelligence, during an Auto Care Association webinar on ocean shipping challenges on Aug. 24.

"This has been off the charts in terms of disruption over the past two years and this is an experience the likes of which none of you who depend on the system have ever had to deal with. If you've gotten through it and you've survived it, hats off to you."

July 2021 saw unprecedented consumer demand for products that led to unprecedented imports, which overwhelmed U.S. ports.

And this trend continues. Container volume increased 5.3 percent during the first half of 2022, ahead of last year, which was a record year, according to Noel Hacegaba, deputy executive director of administration and operations for the Port of Long Beach in California.

But he said he believes the weight of inflation, changes in discretionary spending and the outlook on the economy are going to take a toll.

"I believe that towards the end of this year we're going to start seeing a softening (of shipping imports), but it will probably be happening during the latter part of the year," he said.

"I think in no way, shape or form are we out of the woods yet and so I would brace yourselves for more hassle at least through the end of the year into early 2023 at the earliest," Tirschwell added.

Before the pandemic, the shipping industry experienced periodic "shocks" that caused temporary disruptions, such as labor strikes, shipping company bankruptcies, economic downturns, etc.

However, during the pandemic and recovery, there has been a series of shocks that happened in rapid succession and the supply chain system did not have the ability to adjust before the next shock hit, Tirschwell explained.

These shocks included increased shipping volume due to the consumer spending shift from services to goods, the shutdown of the Suez Canal in March 2021 and pandemic shutdowns in China.

During the first half of this year there was a huge run in inventory which resulted in inbound shipping containers piling up at ports, but a slowdown in the amount and types of merchandise consumers wanted to buy. This resulted in containerloads of merchandise that weren't needed and so they sat at the ports, Tirschwell said.

"The port data shows many of the major ports had huge increases in the number of loaded import containers sitting on the terminals. And this, of course, is the root cause of why ships back up at the ports," he said.

With more containers sitting on the terminals, it takes more time to load and unload the ships, limiting the number of berths for ships to wait in, creating a domino effect down the supply chain.

The second shock to the system this year has been a deluge of empty containers sitting at the ports. As merchandise is being worked through the system, retailers are returning empty containers, but shipping companies no longer have an incentive to dedicate ships to transport only empty containers back to Asia.

U.S. exports have not grown anywhere near as fast as imports have grown over the past two to three years, Tirschwell said. As a result, a much larger percent of the containers coming in to the ports are going back out empty.

Ocean carriers aren't incentivized to remove the empty containers, so the federal government is trying to pressure and cajole the shippers to take the empty containers and send ships solely for the purpose of taking away empty containers.

"This is going to take some time for this to run its course because the level of inventory build-up that we saw in the first half was unlike anything we've ever seen since 2010, which was when the economy was coming out of the Great Recession when there was a very significant import inventory-driven wave," he said.

In 2021, freight rates, which averaged about $1,500 to China, skyrocketed due to demand. Some rates topped out at $30,000 a container, Tirschwell said. Ocean carriers were incentivized to quickly take back empty containers to Asia for restocking to take advantage of these higher freight rates. Container manufacturers also boosted production to meet demand.

"The world is awash in containers right now," he said, noting the shippers are now slow to remove empty containers and return them to the point of origin in Asia because of the cost of loading empty containers on a ship, which creates delays in their shipping schedules.

"It's possible now that there is light at the end of the tunnel," he said, suggesting this may be the last shock to the system and then things will return to normal.

"As normal flow returns, the system begins to revert to normal. One of the things that means is, from a pricing and freight rate standpoint, that a lot of capacity is coming back into the market."

Why were freight rates so high? He contends that there was so much capacity that was tied up and congested and so many ships that were idled off the coast of the ports, that was capacity that was removed from the system at a time when volumes are still highly elevated. "And they remain highly elevated today," he said.

The expectation that volume and imports (total imports are up 30 percent), as well as consumer spending, will decline haven't happened yet, he said.

"When the volumes are highly elevated, that is still putting a great deal of pressure on a system that really was not able to flex up to handle the increased demand," he said.

While cargo ships are no longer waiting off the coast to unload, loaded containers are now piling up at the inland rail hubs.

"The rail system is completely backed up. And the delays for rail shipment –containers that have been off-loaded off of ships at Long Beach are waiting to go on the rails – those delays are still pretty extreme," Tirschwell said.

On Aug. 24, the number of cargo ships at anchor outside the Port of Long Beach was three, reported Hacegaba. At one point last year there were 109 ships sitting out in the bay waiting to enter the crowded port.

Today. in the absence of warehouse capacity, a lot of loaded containers are still sitting at port terminals longer than usual, some three or four times as long as normal, he said. This situation impedes velocity of unloading and loading and leads to a domino effect across the supply chain.

Last fall the Port of Long Beach repurposed vacant land inside the port to hold up to 1 million containers, extended labor hours, and raised fees for containers that were left at the port. Today, the number of containers sitting at port is down 42 percent since last November, he said.

However, the backlog is now shifted to the rail yards. The average number of days intermodal rail containers sit at the port terminal at L.A./Long Beach increased to an average13.3 days in June but now is beginning to see a reversal trend, he said. Shippers are starting to limit intermodal rail container services, which is expected to provide relief.

Terminals are at 90-plus-percent capacity, Hacegaba said. When there are empty containers stored where they are not normally stored, it creates more work and impedes productivity and velocity—and that's what causes artificial shortages of chassis, trucks and rail capacity.

"All these issues are interconnected because we're all using the same system. We're all using the same equipment. And when we have a problem with one part of the system, there's definitely a domino effect."