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East Coast ports faring better in supply chain crisis

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NEW YORK—“We’re at maximum crisis.”

That is a description of the current supply chain situation by expert Peter Tirschwell, who discussed freight and logistics at a Gift & Home Trade Association seminar this afternoon.

Tirschwell, an IHS Markit Maritime & Trade senior content officer and a longtime writer for the Journal of Commerce, said that since June the shipping situation has deteriorated.

Tirschwell said he pointedly asked Maersk and a second major ocean carrier two weeks ago if they saw any easing in the gridlock at major ports in the U.S. and “neither was willing to say there was light at the end of tunnel. It is unclear when things will clear up.”

There are currently a record number of container ships—77—anchored off the coast of Long Beach, Calif., according to Tirschwell. The reason for the backup is that there are too many containers on the marine terminal. Many importers are leaving containers there because the contracts they have with ocean carriers allow them to do so for several days, even weeks, in accordance with contracts that pre-date COVID.

But many are also leaving containers at terminals because they don’t have any warehouse space. The swing in consumer spending to home products has contributed to the much higher volume coming through the ports. According to Tirschwell, volume levels have increased 20 percent from January through September this year compared to volume during the same time period in 2019.

The rapid rise in e-commerce has also contributed to the problem since e-commerce goods move through distribution centers rather than brick-and-mortar stores. “Everyone is building DCs like crazy now,” Tirschwell said. “There is literally no space whatsoever.”

The situation could potentially lead to inflation, which leads to political problems, which is why the White House started to get involved this summer, Tirschwell said.

The White House attempted to encourage ports —and the interconnected logistics chain— to shift rapidly to 24/7 operating environment. “That was more or less a fantasy because the port system has historically not worked” that way, Tirschwell said. Cargo receivers were not ready to receive goods overnight, and terminal operators don’t want to pay high amounts to keep facilities open around the clock. “The whole thing fell fairly flat. It basically didn’t work.”

Some terminals may stay open late, but in terms of a long term solution, it wasn’t successful, he added.

Not all U.S. ports are snarled up. The Port of New York and New Jersey, which is the third largest in the country, is functioning smoothly and has had no more than one or two ships waiting at berth over the past several months because longshoreman labor rules in New York require that crews work around the clock until a vessel is unloaded, according to Tirschwell. The New York port has also invested in faster gate technology.

“New York is performing fairly well. That’s something to keep in mind. LA is a complete mess. Savannah remains a mess. Some ports are doing better, like Charleston. The Pacific Northwest is not doing well.”

After the White House issued a call for round-the-clock work, it announced massive fines on ocean carriers for containers sitting around terminals for more than nine days. Ocean carriers said they are not responsible and will likely pass the costs on to importers wherever possible (fees take effect Nov. 15).

“These are fees that are going to escalate every day,” Tirschwell said. “Within a month, it will be tens of thousands of dollars per fine per container, which ocean carriers are going to turn around and place on importers.”

Some importers have contracts that prohibit certain fees, so some customers will be protected but others will not be, he added. “It’s unclear to the degree that this will be real financial burden” but it reflects the escalation of White House intervention. “They are running up against a very complex system of multiple moving parts.”

From a container pricing standpoint, rates are not as high as they were a few months ago but they remain considerably higher than the industry norm. And that industry norm of roughly $1,500 per container —as well as favorable terms from ocean carriers, like leaving containers on docks for extended periods of time—was due to a previous overcapacity.

There are plenty of containers around; they are just tied up in congestion, Tirschwell said. “I have not seen raw collusion among ocean carriers. It’s more of a story of lack of capacity against an increase in demand.”

Tirschwell predicted that supply chain problems will go deep into 2022, in part because consumer demand for goods remains strong.

The pendulum is swinging toward higher rates and more disruption. “Ocean carriers are very interested in multiyear contracts,” said Tirschwell. “Costs may be higher than in past but carriers are probably going to be more loyal to contract language than they were this year. Carriers will be more willing to be faithful to capacity guarantees in contracts going forward, especially multiyear ones.”

But it will be “a couple of years” before rates go back to pre-COVID terms. “If the logjam breaks in Long Beach or Savannah and containers and vessels start to circulate more normally, that will unleash capacity into the market. When that capacity comes back, it will force rates down.

“Pay attention to the number of ships waiting outside Long Beach. That’s a perfectly good barometer.”

Another thing to pay attention to is longshoremen labor negotiations on the West Coast next year.

“Every time West Coast longshoremen and employers negotiate, there are disruptive activities by the union to get what they want,” said Tirschwell. “This is a union that uses disruption on the docks as a tool for negotiation that has proven successful over the years and has yielded pay [increases] and benefits for themselves,” he said.” Why would 2022 be any different?”

Importers are diverting cargo to the Gulf Coast or East Coast in anticipation of those discussions but Tirschwell questioned that strategy.

“I am skeptical of that narrative because the union is answerable to the administration. [President] Biden is the most pro-labor president in generations; when he started to implement policies to clear delays in LA/LB he mentioned the longshoremen as a party to the solution. I would think the last thing the union would do would be to appear disloyal to the president especially if he is pro-labor. At least there is a possibility that we won’t see disruption.

“On the other hand, labor and [management] are on a collision course over automation. The union has gone from being supportive because it allowed incremental wages and benefits but now are against automation. That is a very toxic, combustible scenario.”



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