Seefracht 2022: Trends und Prognosen

Logistics Rewired_ Ocean Market Predictions for 2022

Andrew Schulze: Good morning. Good evening, everyone. Welcome to this Logistics Webinar on the Ocean Market Predictions for 2022. My name is Andrew Schulze, I'm Global Head of Ocean and Trucking here at Flexport. And I'm very very excited to spend the next full hour with all of you.

Before we get into the content and introduce the speakers, a few practical remarks out there on how to navigate the app right here in front of you. In the top right corner, you see a few features, one of them is the Q & A feature, where you're more than welcome to ask any question that's on top of mind. That question will be funneled to any of the Flexport experts available that will answer the question directly to you so it won't go out in the public.

We also have an opportunity for you to download the slide deck right here, if you want to share with any colleagues, friends or families for that matter. And there is also a recording on the presentation which you can also download right after.

And a big fat disclaimer before we go into the content as always, what Bjorn, Lars and myself will talk about today is an ever changing ocean landscape out there. So even after this webinar, what we have conveyed you know, we may have a new disruption out there, we may have a new event. So take whatever content we present today for what it is. We also want to make sure that we lean out predict, but it is pretty hard to predict one in this environment. So take it for what it is. I'm super happy to present the two panels today, Lars and Bjorn. First, a big warm welcome to you Lars from Copenhagen.

Lars Jensen: Thanks a lot, glad to be here.

Andrew Schulze: Lars, is the CEO of Vespucci Maritime and a long term veteran in the shipping and logistics industry. Lars has been advising the one company after the other year in year out, so very excited to pick your brain today Lars. Then we have Bjorn Vang Jensen, joining us from Dubai today. Welcome to you Bjorn.

Bjorn Vang Jensen: Thank you very much. Honestly delighted to be here.

Andrew Schulze: Bjorn used to run the global logistics practice for Electrolux, a massive import globally, a massive importer of goods globally for many many years. And then last year Bjorn joined Sea Intelligence. So again, very excited to pick your brain today Bjorn.

Let's get into it. First off, I think we're all acutely aware that the world of logistics, the world of global supply chains is pretty complex in of itself. So we've chosen to keep the agenda very very simple. And first off, we will dig into the current ocean markets. What are the latest and greatest in terms of facts and stats? What are we seeing out there? Then we'll move into what's ahead, what do we see upcoming on the horizon? And what are some of our predictions?

And then lastly, and most importantly, we'll dig into recommendations. We have two of the most well known experts on stage here Lars and Bjorn, we would love to pick their brain on like recommendations, both tactically and strategically as to how to navigate this year and the years to come in the world of ocean freight.

Ocean Schedule Reliability Hits Record Low at 32%

Let's start with declaring statistics on the on ocean schedule reliability, which has yet again hit record lows at 32%. And the last time Lars, you and I spoke, and we both had some expectation that we would see, you know, the red graphs slightly move up and to the right in a rather low pace, but it's actually only gone worse at least I predicted it to improve towards the 40% level or so. But the reality is global schedule reliability is 32% at the moment. On Asia to West Coast, nine out of 10 vessels are arriving late, only one out of 10 is arriving on time. Bjorn, how do you see this and how does this break down to each of the different trade lanes out there and how do you predict this going forward?

Bjorn Vang Jensen: It's shocking it's almost making a joke of the very phrase line of trade. If you define line a trade as a vessel that arrives and departs a certain point on schedule and arrives more or less unscheduled, it's shocking. And what's really shocking is this 32% curve, just showing virtually nothing but decline for over a year now. It masks an even worse reality when you dive into it on a trade and sub-trade basis.

So the 32% global average, if you narrow that down to the US West Coast, let me just consult my notes, we're at 20%. If you look at the sorry, East Coast is 20%. West Coast is 10%. If you take that to Europe, the congestion is going crazy right now. You've got fairly similar numbers about 20% on Northwest and 18% accuracy on the Mediterranean trade from Asia.

And I see no signs of recovery. Because a lot of this has to do with what we're going to be talking about the gummed up supply chain in the US, that just cascades into the rest of the world, and is now really gathering pace in Europe. So I don't see anything that could in the short term bring these numbers up in any meaningful way.

Lars Jensen: To just put a slightly happy spin on the numbers, the one place in the world where things have stayed fairly normal is Africa, they used to be the bottom of reliability. Now they're more or less at the top of reliability.

Bjorn Vang Jensen: Because a lot of vessels have been pulled out of that trade so they could be deployed on the US West Coast. So there's fewer vessels for the same port. So yeah,

Andrew Schulze: Interesting. Okay, so in short, no sign of improvement in the very near term on this (Inaudible). Let's take a look at the total transit time. Because I think one thing is, you know that the vessel schedule reliability, it's tough to be on time when queues are longer than never seen before, right?

Total Transit Times are 2x Historicals

If we take a look at the total transit time from the very end to end, this is the Flexport ocean time, and is indicated where we basically measure total transit time from the time the cargo was ready at the factory until it has left the destination port. So in other words, the very full end to end transit times.

The TLDR here is that the transit times have more than doubled in some cases, the relative improvement between TransPacific and Asia-Europe is that TransPacific have actually exceeded Asia-Europe in terms of total transit time, despite the fact that the actual routing is shorter.

Now Lars, we are at an interesting point in time, the week before Chinese New Year where a lot of factories will shut down. Do you expect this graph to take a drop because of Chinese New Year or how do you see the coming weeks and months?

Lars Jensen: Not in the short term, not at all. It reflects pretty well the problem is not the vessels, the problem is actually not the ports either. The problem is inland. And in terms of Chinese New Year, in the most happy of circumstances, you would see the normal seasonal slump, which likely you won't, but that will be the happy one. But that would still mean that that will mean exports would stop out of China in the beginning of February. So this would only impact US stats a month, month and a half down the line.

So in all likelihood, this will continue to get worse for a couple of months, then it will begin to taper off. And that is assuming we get no curveballs. And in all likelihood we very much will get more curveballs. Starting with highlights of shutdowns of ports and terminals in China.

Bjorn Vang Jensen: It could get even worse. I mean, let's just understand also in the context of is there any capacity to be added to the market is no. But not only that is congestion in and of itself is reducing available to your capacity in the market by an astonishing number. I think it's 10, 12, some say 14%, which is roughly the equivalent of an entire fleet of CMA CGM or Costco disappearing solely as a consequence of capacity being soaked up by congestion. Those vessels are flying off of Long Beach or everywhere waiting to get in. right?

So totally would last and then add to that and on the West Coast now. Last I saw today in The Wall Street Journal was 1700 dock workers in L.A long beach alone. I have been infected with COVID which again, according to the WSJ is larger than the cumulative number that were infected in 2021. So it's not even just a Chinese infection problem, this is the gift that keeps on giving.

Lars Jensen: Just to broaden it out, I know and I'm guilty of it as well. We often end up talking about Los Angeles Long Beach because it's just so visible. It's almost the canary in the coal mine. But you see, the Port of Rotterdam have something like 15% of their staff out with COVID. So there are multiple gangs of workers that can't be there. And work has been up to 40 to 50% for a while, that was off because of COVID restriction. So this is very much a global phenomenon.

Andrew Schulze: Interesting. So basically, what you're saying is that you don't expect any relief in the next couple of months, and you would expect the additional curveball to hit which in other words means that we should expect these elevated levels for quite some time.

Bjorn Vang Jensen: Definitely yeah. If anything that happy slump that Lars mentions. We all know, those who have been around for a long time, it just means that's going to be followed by an unhappy wave of pent up shipment from China. So no.

Andrew Schulze: Okay. Let's take a look at the next one.

Destination Ports Have Up to Five Weeks Worth of Backlog

Lars, you briefly touched on this, namely, the Port of Los Angeles and Long Beach is indeed the world's most congested port at the moment. We're seeing more than 100 vessels waiting consistently for months now.

The average waiting time per vessel is more than 18 days. So it takes more than 18 days upon arrival to actually be able to offload your cargo. That's doing better relatively in other ports, where we see you know the average waiting line of 12 vessels and four days. But to your point Lars, it is climbing by the day, you know, the ports as well.

If we take a look at the math we've outlined right here on the Port of Los Angeles and Long Beach, this basically translates into five weeks worth of backlog which is all time high. And Bjorn should we expect this backlog to continue. It sounds like it based on what you just mentioned. But any relief, any silver bullets, you can reveal here.

Bjorn Vang Jensen: This is rapidly turning into the Dr. Doom show, right? Because I don't see any relief here either. Because this number, 108 vessels that goes up and down. It's sometimes 97, sometimes it's 123.

It makes a great headlines. But what the real problem is in the port, right? In the interland activities, can you get it out of the port? Can you get down on the chassis in the first place? Can you land it because the ports are gone up with empty boxes now for export? Can you get it out of the gate? Can you get it onto a rail ramp? Can you get it on a truck, then the answer to all of them is, well you can, but it takes an awful lot of time. This number is not going anywhere within that band of 98, nine to 120, 130 anytime soon, and certainly not until we solve the interland problems. And Lars can works poetically about that for a long time.

Lars Jensen: No, what I want to do is add a different element that's usually forgotten when we talk about these. You mentioned it beyond the headline grabbing numbers. If the reality was only, okay, fine vessels are 18 days late, and at least I could plan for that. But that's not the reality. I mean, there is a smaller container carrier headquartered here in Copenhagen that if you look at their latest customer advisory, they were saying, well, the delay of our vessels is somewhere between zero and 28 days. So it was not just that the average number is high, it is phenomenally unpredictable on top of it.

Bjorn Vang Jensen: Yup.

Andrew Schulze: Don't worry, I'll try and cheer up the two gentlemen, as we go through the hour here to get out of the Dr. Doom show. But we would also rather you know, set clear expectations instead of over promising and under delivering. But there are a few glimpses of sunlights later on in the presentation. Let's see what that looks like later.

Landside Bottlenecks Will Continue With Elevated Demand

And zooming in on what's causing a lot of this as Lars and Bjorn alluded to briefly is indeed the landside congestion, right? If you just inject more vessel capacity into the system and landside congestion remains, you're not really helping the situation. In many cases you're doing matters worse, right?

And we see some, you know, eye popping stats right here on the left side in terms of dwell times in the terminal and outside of the terminal because of shortage on truck drivers, chassis, warehousing capacity. And then on the right side, we've done a projection in terms of US truck driver capacity and shortage of the same.

It's a well known fact that we've already seen trucking driver shortage for years now. But looking into the future, it's actually expected to get worse, which is not a great piece of news. Lars, Bjorn, anything that could save the day here, it's a long projection going into 2030. Automatic trucks, is that something that could shave some of the past year or any other silver bullets?

Lars Jensen: No. I think you need to look in another direction. I mean, for automated trucks, that's a pipe dream at least in the short to medium term, that is not really going to happen apart from grabbing a few headlines. But there's another thing afoot here. This truck driver shortage, just to make a ridiculous example, assume as of tomorrow, you're going to pay the truck drivers half a million dollars per year. I guarantee you won't have a truck driver shortage. Part of the resolution in this is everybody has to get used to the fact that the supply chain is going to be more expensive that we've been used to, both on the vessels but also on the landside. And that's what's actually going to solve the truck driver shortage. It's supply and demand.

Bjorn Vang Jensen: There's a human factor as well there, which I think is interesting. I've spent quite a lot of time in my previous job, working very closely with truckers at the personal level, the Indy in the San Pedro Bay Area. And there's something as simple as boredom and lack of job satisfaction that is keeping people from joining, especially the short distance haulage. So the pickup of a chassis with a fully delivering it to a warehouse somewhere in the near area.

Even if they're paid for it, the drivers simply don't, nobody wants a job that requires them to sit for 12 hours in a queue, trying to get into a gate and half the time being turned away because there was something wrong with the booking system or they were meant to go into a different gate or they're interacting with the wrong union guy who hate truckers and vice versa. Nobody wants the job. They'd rather drive Uber or Lyft or drive for the local Walmart, Target, whatever home delivery service. Because it gives them satisfaction, I think it's very important. It is not necessarily just about the money, although I agree with Lars. I'd go drive a truck for half a million dollars a year.

But there's a lot of the lifestyle is going away. There's a younger crowd that we're trying to bring to this function and they don't want to join. Is that going to get fixed? No. Are you going to fix it with automatic truck? No, because they still require you guessed it an in-cab driver, he may have his hands off the wheel, but they still got to be there. This is, I'm not saying it's not going to happen. 2030. So it's about how do we somehow make it fun to be a trucker again, and it is not fun? But never forget the human element here is very powerful.

Andrew Schulze: What would you do Bjorn or Lars if you had a magic hand here and that you could get all parties, you know, on the same page solutioning, authorities, associations, private companies. What would you do if you could dictate whole thing in a positive way?

Bjorn Vang Jensen: You have to find a system that incentivizes every single player to play ball, and they are not. You've got the added complication. Hope not too many of them listening, but some of them probably on and there's no disputing it. I've seen it with my own eyes.

You cannot get away from the fact that there are huge dichotomies and arguments that take place between the various players, the real people hate the trucking people, the truck drivers hate the unions, the union hates the terminal operators, the terminal operators hate everybody. You've got to somehow incentivize everybody. Either through rewards or penalties to work together and create a unified system.

But again, is that going to happen in six months? No, it's not. It can happen, yes, it can theoretically happen. But there's so much pent up and historical animosity between the various cogs in that machine, that it's very very complicated. And we see it now. It's kind of worked for forever. But in a crisis like this, it all those icebergs as I call them, you know, are all of a sudden the laid bare, right, the icebergs that made up with the animosities between the players.

Lars Jensen: Yeah, I will more turn around and say again, then that's also not going to be a silver bullet short term. But the key to this is data and information, you have to have full access to all information across all stakeholders. Move the competition away from who is better at keeping the information hidden, to who is better able to use the data.

Because right now, all anybody can do is to sub-optimize their own position, which looks great on their own KPIs. But it's overall detrimental. In a normal market, that kind of works because you've got buffer capacities throughout the system to pick up all the different spikes you see. But over the last 18 months, there has been precisely zero buffer capacity anywhere. So the normal small snacks become major problems because we can't solve them.

Andrew Schulze: So Lars, what you're saying is, it's almost making it mandatory to share data public leases so everyone can collaborate around.

Lars Jensen: Yeah, exactly. And you have to go down a path where and I know we have this phrasing that data is the new oil. Unfortunately, it seems a lot of people are misinterpreting them. So well, if my data is oil, I'm not going to give it to anybody unless they pay me a fortune. And that's a complete misunderstanding, because then there is no value to anyone. So matter of sharing all that data, the data is the new oil for those who are then very good at using the data. That's what you need to compete on.

Bjorn Vang Jensen: If I can just just add, it's not enough to just look at the players here. There's one player we're missing here, in this right? We're talking about the truck driver, the unions and the terminal operators and the railroads and whatnot. We're all talking about the importers, and their behavior.

I was one of them once, right. I know all the games that importers play. I played more than a few of them myself. And probably many people on this webcast have players, women I have played those games, right?

There's a mentality change and education that needs to take place. And an incentivisation slash penalization process that needs to be implemented there to force importers to play football because otherwise it's all for nothing. We're still sitting on chassis in people's yards being used as warehouses on wheels. Well, then, everything we do on the port side is for nothing.

Lars Jensen: At the end of the day, the ultimate I know that's a wet dream for anybody with a data lake right? But that will be, start this at the point where a purchase order has been placed by the importer. Because once that order has been placed, let say the stuffed kangaroo factory in Alice Springs, then I can already predict what the trucking requirement is going to be in Australia? What's the feeder? What's the deep sea? What's the port's? What's the destination all the way across? And if you can collate that for all the different stakeholders, you can predict bottlenecks, which also means to some degree, you can avert the bottlenecks, but it requires data at that level.

Andrew Schulze: Yeah completely. Completely agree here. Okay, let's, let's move on and take a look at another sort of glaring statistic right here, the number of blank or skipped sailings into the West Coast.

About 32% of Weekly Ocean Capacity is Blanked From Asia to North America West Coast Lately

The irony here is that, there's more demand than supply, we need more supply or more capacity yet we're seeing a record high number of plantings or skip sailings, which is, you know, necessity because of these long queues and all this congestion, it doesn't make sense to just, you know, keep stacking up with the queues here, right.

On the left side, some interesting stats on the Transpacific eastbound volumes as a whole. And we're seeing that at the moment around 52% of volume is going into the West Coast, it actually used to be as high as 60%. So we are seeing an impact where some of the cargo is being diverted to other ports, including East Coast, etc. Because of the West Coast congestion.

Same for Los Angeles. Right now it's around 40% of the Transpacific volume going into the Port of Los Angeles and Long Beach. That number actually used to be higher when it's being taken down because of this congestion that remains higher there on a relative scale.

Bjorn, any additional insights here. It is tough, you know, for importers and shippers to understand like, okay, we're short of capacity. We have more demand than we're able to ship yet we're seeing all these blanking so please help us dump this down and make sure everybody is on the same page and what's going on.

Bjorn Vang Jensen: So it's undoubtedly COVID driven at the origin site. I mean, if there's no dock workers to serve that ship, no gangs for the vessel, then why have a sailing? That potentially no sailing, some of it is diverted to other ports, but it's difficult to see what other ports can really absorb much more volumes. I would tend to think there's more a combination of COVID at origin, a lack of desire to have your vessels join the queue, and potentially some alternative ports, but there hadn't been any alternative ports available. Vancouver used to be the dirty little secret, that magic wand for those who knew about it, Houston, but none of these ports has the capacity to take up the slack from LA Long Beach. That's why we are always talking about LA Long Beach. Yes, Seattle is there, Vancouver is there, Oakland is there, they've had their own problems as well oscillating back and forth between congestion and being clear. You can't predict it. What do you think Lars?

Lars Jensen: Yeah, that's a couple of other elements to keep in mind. You mentioned it yourself earlier Bjorn, that this is less liner shipping and more like traps shipping. Because on one hand, we have this rapid escalation in blank sailings, at the same time we have more capacity deployed than ever before, so you could also draw a map or saying what are all the extra loaders, it would look the same. So is the regularity here that are going out the window?

And if you look at the graph, here, you see Chinese New Year 2019, Chinese New Year 2020, the usual spikes, that's a choice on the carrier because demand drops. But what we're seeing now is not so much a choice from the carrier, it's out of necessity when my ship has been caught in that queue for three weeks, obviously, it didn't make it back to China. So I have no choice but to bank the sailing.

I physically don't have the ship, is a different driving mechanism. What I might be able to do, which some of them do, is, I'll charge our small vessel that a quarter million dollars a day and put that in as an extra load only to see it go into the queue as well. So the normal way of thinking about blank sailings is also becoming almost redundant in the current market environment, we think. At least for the time being need to think of this more as a tram operated entity than a liner operated entity.

Bjorn Vang Jensen: Yeah. It's a good point. You got to bring the vessels back on schedule, if you even have them. So this is what you do. We used to call the missions that we blank the whole sailing instead, right? There's no issue in hand-picked missions are no longer enough.

Andrew Schulze: Yeah, on that note, we tried here to sort of depict how it all hangs together, right? Total demand versus planned sailings or planned capacity. And then the actual capacity after these blank have skipped sailings.

Bottlenecks in The Global Supply Chain Reduce Effective Capacity

The TLDR here again, is that, you know, carriers have indeed injected a lot of new capacity into the market. We see that in the purple line here. I think there's sometimes this false perception that we're not, you know, increasing supply as an industry. That's actually not true.

You see that here in the purple line, it is increasing over time. And same with the actual effective capacity available after these blanked or skipped sailings, it's also increasing relative to a year ago. The brutal fact is, of course, that is still very short of the demand out there. And that's basically the story we've been seeing now for 18 straight months.

Lars, there's a lot of uncertainty in the global markets, EU politics, tensions, inflations heightened in the stock market and what not. Could this change the game? In the near term? On the imbalance we're seeing here? How do you see it?

Lars Jensen: Right now, there are not really any signs that that's about to happen. If you look at the US economy, it's still doing fine. Sure there's inflation coming in. One thing we need to keep in mind here with inflation is being waved around as a flag as if this is enormously bad for the economy. We need to keep in mind that deflation has only been here a few years, inflation was the normal state of affairs. Sure, right now it's slightly higher than what we used to be. A lot of that is not even supply chain driven. That isn't unlikely to get a major change to the demand spree.

On top of that, we see an increasing demand in Europe, because keep in mind this phenomenal boom and demand was up until recently purely a US phenomenon. Now we're beginning to see the European consumers become slightly stronger as well, which is just to add to the pressure for capacity.

Anders Schulze: Yeah. Okay. So no relief.

Lars Jensen: No, and maybe just one more comment on inflation, because again we're back to, if you read the headlines there's been no end to this, oh my god we're hitting into the 1970’s kind of horrible scenario.

If you start to look at the numbers, the more reasonable comparison that has been pulled up, is this actually looks more like what you saw in the post World War 2 boom, or in the boom that came after the Korean War. So after you had a downturn, then fine you have a search and you have a boost to inflation. It looks more like that than it looks like the 1970’s.

Bjorn Vang Jensen: Yeah.

Anders Schulze: Interesting. That's good perspective. Okay, let's take a look at how this translates into rates or prices out there. No surprise, everyone is acutely aware of the inflated rate levels relative to the pre pandemic environment.

Index Rates Have Increased 4X From Mid 2020

When you look at the rate indices in aggregate we're talking about a 4x increase ever since mid 2020, but that's the rate indices, that's not necessarily the effective moving rates taking equipment and loading priority into consideration.

Effective rates Have Increased 5x From Mid 2020

If we take a look at the prices from that perspective, we're rather talking about a 5x increase since in 2020, and that's on the spot market, every time you make a booking and you get capacity for same as a one-off spot shipment so to speak.

If we take a look at the fixed prices, typically signed up on an annual basis on the Transpacific for example, it's looking like the price levels that will come in this contract season for 2022 relative to 2021 will land somewhere around 3x, the fixed prices that were signed in 2021.

Now Bjorn, if you had the opportunity to sign up for some of those fixed prices, is that something you will go, for I mean, there's a lot of uncertainty here and 3x is quite staggering right? How do you see it?

Bjorn Vang Jensen: Depends. It depends on your volume, and it depends on whether that's a static 3x throughout, whatever the duration of that contract is. Because, what we're also seeing is a shift, I mean I've always, in my previous role, we always signed one year contracts and in fact sometimes also a few occasions longer index regulated contracts are some of the first to try and do it.

I would sign up, but I wouldn't sign blank, you know 3x for the next three years, and that's not what I'm hearing is being offered in the market either. Carriers are very keen for sure, on long term contracts and three years seems to be the duration they're all converging on. Whether they diverge again is, are these what we call tiered rates, so okay I'll give you 8000 to the West Coast, in year one 7600 in year two and 5000 in year three, fixed, maybe some floating bonker or are we going to index regulate the whole shebang on a maybe quarterly basis over a three year period.

The latter I would be very comfortable with signing and indeed I would go for it. But you need significant volume to be able to do that. And then the last element of it of course is, what other demands are you facing from the carriers? Because you're seeing, even in exchange for these on the face of it lucrative agreements, you better be a very steady importer with really good control of your data, because we're looking at full debt freight which is something that as we all know that debt freight theoretically exists. I don't know anybody who's ever paid it, unless they've had a massive dispute with a carrier.

I don't, I can't remember the last time I heard of anybody paying debt freight, the MQC's usually just extended. Now, full debt freight, if you don't meet your MQC, seasonality is something carriers still don't seem to understood. So if you promise them 5200 to you, they expect 100 every week no matter what, which of course is not the real world. So the devil is in the details as you sign these, if you sign these long term contracts, very very much in the details. But index regulated, I would go for in the blink of an eye and I know for a fact that for large importers the real rates that are being offered are very significantly lower than these, but you need the volume and the flexibility and the guts to sign up for full debt freight, and it's a hard sell in a lot of companies, but you can get it.

Anders Schulze: That's good insight Bjorn, any additional thoughts from you there Lars?

Lars Jensen: My thought is also down the line and there's an added dimension everybody should keep in mind as well is, even if you are in a position, oh I think 3x for full years is going to be bloody expensive. Well keep in mind, what is the risk you're facing? The risk you're facing is, if markets deteriorate even further we might later in this come back to why they actually might. It's not only going to be a matter of spot rates are going to spike, it's going to be a matter of, for some of the carriers if you don't have these contracts your cargo won't move period.

Bjorn Vang Jensen: Yeah.

Lars Jensen: Which means that the trade off here is, sure I might end up paying more than I would like, but it gives me certainty of space, which is actually not guaranteed in the next couple of months.

Bjorn Vang Jensen: Yeah, agreed.

Anders Schulze: Yeah. Okay so, TLDR here is that the devils in the detail and it's important to study any torment condition when embarking on anything of this nature. Okay, let's take a look at the difference between what we define as standard services relative to premium services.

Lars Jensen: We seem to have lost you Anders. Indeed with it, but you and I are still here Bjorn, so why don't we head off, he was on the premium services.

Premium Services Can Improve Transit Times by ∼20%

Bjorn Vang Jensen: Anders are you with us?

Anders Schulze: Yeah, can you?

Lars Jensen: Okay.

Bjorn Vang Jensen: Okay. Yeah, you blinked out.

Anders Schulze: I caught off. Okay. Can you hear me now?

Lars Jensen: Yeah.

Bjorn Vang Jensen: Yes.

Anders Schulze: Okay, great. Essentially what I was saying is what we're seeing is that the difference between standard and premium services is give or take 20% on the transit time from cargo ready date at origin, until destination port arrival.

And given the fact that premium services come with equipment and loading priority which makes it faster, it also comes at a higher cost. And again, there wasn't the detail by trade, by port combination, but on average you would have to pay between, say three and $5,000 more for premium relative to standard.

But the question we have for the group here, we would love to do a quick poll is to see is, is this worth it based on your experiences, let's say the past 18 months since the pandemic hit, because the premium services have also changed quite a bit relative to pre pandemic. So we'd love to learn from the group how you see this. Let's do a quick poll here.

So the question we have from all of you, and you just select one of the answers with the click at the bottom, and how often have premium services offered desired results in terms of loading priority and transit time and advantages relative to standard services? Every time, most of the time, never or rare, or I've never used premium services. We'd love to learn from the group here, we'll give you 20 seconds or so.

All right, let's see the results here. It seems like most of the time is the most popular at 43% and then there's an even split between never rare or have never used premium services. Let me ask you Lars, is this is a surprise? Would you have expected the stats to come out differently?

Lars Jensen: Ah that is a good question. I'm actually not sure how I would have expected the stats to come out, so I'm very uncharacteristically going to draw a blank on the answer to that one.

Anders Schulze: Bjorn?

Bjorn Vang Jensen: I'll give it, I'll take a stab at it. I am not surprised by the haven't used premium services. In fact, I thought it might be slightly lower given that everybody's out there hunting for any way to move cargo, but I would expect it to be much less. But, what really surprised me is that never or rare, because premium services do tend to come with some level of guarantee, which means the carrier's I'm aware of that offer them go out of their way to deliver that product in terms of loading and equipment, so to see almost 30% claiming that rarely or never have they gotten what they bought or paid for, that is surprising to me, very surprising.

But I think it's also worth noting, a that we don't have a timeframe here. So perhaps we should have said with post pandemic or since the pandemic began, how often have you used them, because premium services did exist before the pandemic, right. And also we must remember that we're asking here about loading priority and transit time. We're not really building in located the cargo, of course it actually delivered on dock and available to clear right, but I'm only really surprised by the bottom number, I would have thought that would be quite a lot lower.

Anders Schulze: Yeah. No, I agree with you there Bjorn, there's definitely some exploration to be had there. Okay, let's move on to the next topic right here.

Despite Efforts, Inventories Remain Depleted Relative to Sales

Okay. Inventory levels relative to sales ratios. If we look at the red line here, it's a fact that inventory levels have improved. But the sad story here is that they still cannot keep up with that with sales. So there is no real improvement on the inventory to sales ratio on the green line as you can see right here. An important call out here is that, this data typically comes with two to three month lag. Lars, how would you see the more recent data for, say, December or January for that matter in the green line,?

Lars Jensen: I wouldn't expect any uptake in the green line. And there's also another element we need to keep in mind here when you look at the inventory levels, because when you look deep down in the methodology, it is quite unclear just how much of the inventory that stuck on the ships of the coast is not included, and they would appear at a sizable part is actually not included here. So the real inventory levels are likely to be somewhat higher than what the red line would seem to suggest.

However, as we talked about before, demand is like or rather consumer spending seems to be holding up quite well. So this is going to continue for quite a while to come. This is really only going to change at a medium perspective into the future, when we get the bottlenecks resolved. When we get the bottleneck resolved, then you're gonna see a massive bullwhip effect, because then all of a sudden all the inventory stock in the ships are gonna pile in, and then we're going to have a different problem. But that's not in the card, say until likely way towards the end of this year at the earliest.

Bjorn Vang Jensen: And on top of that, not only will we see the bullwhip for sure, but we may see a second bullwhip or even larger bullwhip oscillations, simply because a lot of importers that I interact with regularly are saying they're very seriously reviewing their inventory policies. Back to your point about whether premium services are worth it, right? That already in and of itself, the answer to that depends on what's your cargo worth, right? And what is the value of having stuff available to sell. Is that worth 5000k more per container? I would suggest that for a lot of importers, they're rapidly coming to that realization.

For years, inventory has been a four letter word in the C suite right, and we don't like it. The truth is that most companies are operating at a ludicrously low wag to the point where inventory levels are certainly what should be a KPI, but not a bonusable one with the focus the inventories has had.

Now, customers coming around saying we need to double up when space becomes available, we're going to double our inventory policies relative to what they were before, we're not just going to restock to get back to our old policies, we're actually going to double up, because this cannot happen again. There are people whose inventories are depleted, I mean this think of the automotive industry, how does it take to get a new car? In the US now 18 months from the day you ordered until the day you get it right. It's the old GM saying, it takes 1200 parts to build a car, it only takes one part to not build a car. And we're in that territory, not just an automotive, but in a lot of manufacturing operations. So let's not forget manufacturing on top of the retailers, very important and they will create a huge bullwhip addition, when it comes.

Anders Schulze: That's a very good point.

Strong Imports Expected To Sustain

Bjorn Vang Jensen: I agree with Lars. Not until they can and they can't, until we solve the gummed up infrastructure in the port and the interlands.

Anders Schulze: Yeah, that makes a ton of sense. And I think you're in the interest of time. Lars what you mentioned in terms of consumer spending and transactions, if you take that into consideration, the forecast in terms of import lines remains strong based on the transactions and purchase orders and whatnot we're seeing out there. And so that's definitely an important factor to take into consideration.

International Longshore & Warehouse Union Contract Negotiations Will Potentially Impact Us West Coast Port Operations Over the Summer

Let's pivot in the interest of time to another very very important topic. And there is a potential strike coming up over the summer on the West Coast, nobody knows, but there are definitely some learnings in the past. We can leverage and take into consideration when planning and looking into routing alternatives. Lars help us understand the potential situation here and walk us down memory lane on what has happened in the past year.

Lars Jensen: Yeah, you can say basically the contract between the terminals and the Port Workers Union, the ILWU expires by June of this year. And if you look back in the past, there's been two cases where they failed to reach an agreement, one time was in 2002, that led to the complete shutdown of all US West Coast terminals for 10 days. I don't even want to contemplate what that would mean in the current environment.

And then there was also a failure to reach an agreement. So towards the end of 2014 into early 2015, there was not a strike or a shutdown as such, it was more the, let's work slow kind of thing. So in the early parts of 2015 there was a queue of 40 vessels outside Los Angeles Long Beach, which was seen as a disaster at the time. Again, putting things into perspective, now the queue was more than 100 vessels.

Furthermore back then, when we then had an agreement, it took six months for everything to work normally again. So that also puts the current debacle into context. Now, fast forward to this time around, it's very clear that there is zero buffer capacity, you can then you have your graph here, can we divert to Canada or Mexico or the US East Coast as well, that will just move the congestion problems up a notch in those areas, that is not a solution, there is no buffer capacity.

In terms of how this will play out, I'm going to go out on a limb here and make my own forecast of it, I expect that there will actually be an agreement, I do not expect a baseline whether it will be a strike. For a couple of reasons, first of all, there's going to be immense pressure on the Union not to make a horrible situation even worse. Then, I'm not really, and the terminals might be offended, but I don't see the terminals as a player here, at the end of the day it's the carriers that's going to pay the bill.

The carriers have learned over the last 18 months, doesn't matter whether you charge a customer 50 or $100 more, they're paying five, 10 thousand dollars more. So they can certainly live with a deal that becomes a lot more expensive. The key bone of contention here is going to be over automation, which the Union will fight tooth and nail. And what we're likely gonna end up with is a deal where there will be much higher salaries for the port workers, there will be more of an open door towards automation as long as it doesn't cost a single job.

Up until then, which means from now until the end of June, this will be a circus, both parties will make it sound like this is a complete breakdown. This is going to be horrible, it's going to be the end of the world that will all be negotiation, nothing else. But my baseline expectation will be, yes, there will be a deal, and yes, it will be a more expensive deal, and that will be passed on to the shippers.

Bjorn Vang Jensen: I can only agree everything as Lars said, I think politically the the optics of the Union completely paralyzing the US West Coast, now that even the cashier at the local supermarket is knowledgeable about supply chain issues when he explains to you that why something is not in stock. This is not, this is inconceivable to me, the political pressure on them is going to be enormous. But I also agree there will be the usual shell game. You know, guess where the ball is now among these three cups and lots of posturing and stuff for the next three to six months for sure. But there will be a deal, it will cost money.

I'm not so sure that the Union if I had to disagree with anything Lars said, are going to just bend over an automation without some iron-clad guarantees. They did actually bend over on automation, for example of an AP multiterminal, last time only to turn around after they had gotten their salary increases and say, well we didn't really mean that, and that took years to resolve. They're very good at playing that game.

And then, they also know that East Coast Union contract, I forget when that's coming up, but it can't be more than a few years from now or a year before the ILU is up for renegotiation on the East Coast. And those two units have become much more chummy with each other than they used to be, so that will be more fun to watch. But the West Coast I think is, it's a shell game and it will resolve itself without too many issues this time.

Anders Schulze: That's interesting. Nobody knows but very very interesting insight. I'm curious to learn from the audience here. How you all see this if this is something you have you started to think about, so let's do a quick poll.

What mitigation strategies have you implemented to come in front of a potential strike situation if anything? Have you planned for alternative routings? Are you looking into a plan? Or haven't you thought about this whatsoever? I would love to get some insight from the participants here, to see what we can learn. Let's do another 10 seconds, see what the inside is. Alright, let's take a look at the results. Okay, so moving a little bit, but very interesting. Lars, Bjorn is this a surprise?

Lars Jensen: I'm not surprised at all. If anything, I would have thought the last one should have had an even higher percentage, because the sad state of affairs is of course every shipper out there is fighting from day to day. I mean you're standing in the middle of a fire that has very limited bandwidth to think more than a week ahead, given the current progress, that's the real issue.

Bjorn Vang Jensen: Yeah, I find it interesting plan for alternative routings, I'd be interested what those routings are. I mean, the obvious answer is East Coast, right? But there's not going to be a viable alternative, because everybody's going to go that way and the carriers are going to urge their customers to go that route, so that might work for two weeks.

Anders Schulze: Yeah, the challenge is the scale here, right. There are definitely alternate routings, East Coast gulf, Canada and Mexico. But the challenge as we saw earlier in the presentation is that 55% of total Trans Pacific volume goes into the West Coast so take that out.

Lars Jensen: So you're gonna say the real alternative that will be fine, I'm gonna move my goods earlier than I planned for, but then we're back in the discussion we had before that already for that now there's insufficient capacity.

Anders Schulze: Yeah, it's a good collab.

Bjorn Vang Jensen: Yeah. The only real answer here given the lack of alternative routings is more inventory, except you can't do that either because you can't get peace for it, it's really.

Anders Schulze: Yeah.

Bjorn Vang Jensen: I've never seen this before. I don't think anybody has not in our lifetime anyway. Of course, you should have a plan. I think you shouldn't have a plan because it's all hopeless. I'm just saying you should have a very stratified plan if you're playing everything on Vancouver being your knight in shining armor, then you're not casting the net wide enough. You need to look at Mexico, you need to look at detention in transit, you need to maybe look at Panama Manzanillo as staging ports, Caribbean Kingston, places like that, depending on your size, right? Because, but you need to get it as close to the US as possible.

Anders Schulze: Yeah.

Bjorn Vang Jensen: But not necessarily into the US, and you have a fighting chance.

Anders Schulze: Yeah, I mean.

Bjorn Vang Jensen: Watching the things of your toes is air freight, is going really coming into vogue. That's for high value cargo, I'd start planning for that.

Anders Schulze: Yeah, I think what we're saying is that, don't put your eggs in one basket, look at spreading them because it's all about mitigating the risks here. Okay, we have five minutes left, I want to make sure that we cover some critically important parts around the outlook and further recommendations.

Ocean Supply/Demand Balance Will Remain Tight Until Later in 2003

So let's do this one rather quick here. We're seeing the order book in terms of vessel deliveries spiking quite a bit in ‘23 and four, more than the double amount of vessel deliveries are hitting the water. And that is also translating into more vessel space than expected demand in the middle of ‘23 and onwards. Bjorn anything else to add here real quick before we move into recommendations.

Bjorn Vang Jensen: I think people need to be very very careful that they don't cease on this as their magic bullet or whatever that what they wish for, it may or may not happen. I hear way too many people and I know you got stats on and on, there's way too many people saying, ah it'll all end in 2023 because there'll be all these new ships coming up. First of all, that's not true. Some ships are going to be delivered towards the fourth quarter of 2023, perhaps, depending on whether they're delayed clauses in the contract with the yards. For example, if raw material prices as in steel goes through the roof, carriers have been known to delay them, they can also tactically delay them if they see to their advantage.

And I mean, on the Asia, Europe string that operates, normally you need 10 vessels these days, probably more like 12, it's not like somebody all of a sudden gonna say, oh, here is the shipping line, here are 12 vessels for your new Europe string, they're gonna come out in drips throughout ‘23, ‘24 and in some cases ‘25. So this panacea that people think new vessels are going to be, it's not. And there are all kinds of other things they can do. Scrapping, the old Panamax vessels that are going to fall flat on their face over and over, ‘23 are going to be the first ones to be driven up on the beaches, and there are other things like they've actually carries to reduced the years over which they depreciate ships, which give them a way of also taking capacity out. They will not be able to play a zero sum game. But they will certainly be able to ensure that it's not just capacity being pumped into the market, they can take some of it out on the other end as well.

Anders Schulze: Yeah. That makes sense. Thanks for those addition Bjorn, super insightful.

Market Normalization Expected Gradually Towards 2024

Let's take a look at them, the sort of overall highlights in terms of, let's say, a three year forecast. This is sort of the Flexport view, I'm not going to repeat all the bullets that are already listed here, as said, you're more than welcome to download the deck. I'd much rather hear from the two of you, how you see this, do you generally sort of agree with the highlights here? Any tweaks? Let's start with you Lars.

Lars Jensen: I mean, overall to make it very short, in the happy scenario with no additional shocks to the system, we could hope for reversal to normal operations towards the end of 2022, we could hope for a normalization of rates halfway through 2023. By the way, that normalization will be at a level substantially higher than anything in the past, and that will remain there going forward. But the one thing I will also add is, don't plan for the happy scenario, there are two extremely large risks right now.

One is shutdowns in China due to COVID. You could have Shanghai closed the day tomorrow, that's a toss up. So that is very much on the card. The second one would be the high risk of cyber attacks happening on critical infrastructure as a consequence of the Russia, Ukraine. Keep in mind, when mosque was taken down, that was an attack on the Ukraine by Russia, nobody even targeted mosque, they were purely collateral damage.

Back then the market could handle the world's largest carrier being out of action for a week, because there was buffer capacity. Right now there is zero buffer capacity anywhere, bring down a line or bring down one or two major ports. And the mess we have now will look like nothing compared to what could happen. As an individual shipper there's not a lot you can do right now, except ask yourself. Is there any critical data where I am always dependent on looking that data up from one of my suppliers, you might want to make sure you have an offline version available of that as well.

Bjorn Vang Jensen: Right now the cloud is not necessarily your friend, you need a memory stick somewhere with the stuff on there that really needs, that is really critical. And then I would just say in closing from my side, this, when will we return to normal, hey I detest the phrase new normal. But when will we, when people tell me, asked me, when will return to normal? They tend to mean when will we go back to $2,700 to the West Coast and 1900 to Europe? The answer is not probably until I've retired, which hopefully a few years from now I got just don't see it happening. So that mindset needs to die.

Lars Jensen: So, maybe just as a last comment from me also in terms of mindset. The very largest importers, they are supposed to make record profits in 2021, despite the operational problems, despite the high prices. And that also clearly shows us that if you are really hurting and struggling in the current environment, the harsh message here is, you have to look at your business model, how can you make it work under these conditions, rather than hope for the market to come back.

Recommendations

Anders Schulze: That's a really good insight and I like the recommendation to everyone right there in terms of protecting your data, please make sure you have a backup in these uncertain times. So we'll add that to the list here, of already outlined recommendations. Again, feel free to follow up with any follow up questions, we would love to engage more. We try to present a lot today, but as always the devils in the details so please follow up with any additional questions.

I hope you all found the insight valuable. There was quite a bit of doom and gloom but as I said early on, we'd rather set expectations as opposed to disappointing everyone down the line. And there are glimpse of sunlights, there are also opportunities for risk mitigating, so we hope again you found all the insight valuable. Thanks to you Lars, thanks to you Bjorn, very insightful.

Lars Jensen: Thank you.

Bjorn Vang Jensen: Thank you very much.