What a difference a year makes. At this time in 2022, over 100 container ships were stuck waiting off the ports of Los Angeles and Long Beach, California, with around 150 off all North American ports combined. Now, there are almost no ships waiting in Pacific waters and increasingly few off the East and Gulf coasts.
Ship-position data showed just 30 container vessels off North American ports Friday morning. All remaining queues are down to single digits per port.
The Port of Savannah in Georgia had almost 50 ships waiting in mid-2022; there were still close to 30 in late November. As of Friday morning, there were eight.
In its latest North American port update, published Dec. 27, ocean carrier Hapag-Lloyd reported that Savannah terminal capacity utilization was at 60%.
There were eight ships off the coast of Virginia on Friday, waiting for berths in Baltimore or in Norfolk, Virginia. Hapag-Lloyd said that stack utilization at Norfolk International Terminals was at 56%.
The only other lingering concentration of waiting ships was off Houston. The queue there had been in the mid-20s over the summer. On Friday, there were just six ships.
The Barbours Cut terminal in Houston was at 41% utilization and the rail yard at 29% utilization in the last week of December, said Hapag-Lloyd.
All other ports back to pre-COVID levels
Queues are between zero and two ships at all other North American ports, marking a return to the pre-COVID norm.
The Port of New York/New Jersey is now America’s largest container import gateway, surpassing the Port of Los Angeles. There were only two container vessels waiting off of New York and New Jersey on Friday morning. Hapag-Lloyd put late-December yard utilization at the port’s Maher terminal at 67%, APMT at 45% and GCT Bayonne at 35%. “Waiting times have declined at all terminals [with] import volumes continuing to decline,” said Hapag-Lloyd.
Ship-position data showed one ship waiting off Charleston, South Carolina, and none off Alabama, Louisiana or Florida.
On the West Coast, no ships were waiting for berths at Seattle or Tacoma, Washington. Hapag-Lloyd said Tacoma’s Washington United Terminal was operating at 46% capacity, its Husky Terminal at 30%.
There were two ships anchored in San Francisco Bay, waiting for berths in Oakland, California, and one ship off Los Angeles/Long Beach.
According to Kip Louttit, executive director of the Marine Exchange of Southern California, there has been no backup off Los Angeles/Long Beach since Nov. 22, as any ships that arrive after their scheduled time do so by choice for operational reasons, not due to port constraints. “There is ample labor and there are open berths,” Louttit said Thursday.
Port of Long Beach statistics show the number of loaded import containers waiting at terminals for nine days or more is down 96% from the peak in late 2021. There were a total of 65,000 loaded import containers waiting on Long Beach terminals (regardless of wait time) in late November 2021. There were only 14,921 on Friday.
At the Port of Los Angeles, the number of import containers waiting nine days or more is down 90% from the peak in late October 2021. The number of total loaded containers on the terminals is down 70% over the same period, according to port data.
Container shipping lines reaped massive windfalls during the COVID-era consumer boom. Different ocean carriers pursued different fleet strategies in 2020-22, from aggressively maximizing market exposure on one hand to keeping capacity flat or even reducing it on the other.
The liner bonanza isn’t over yet — high contract rates should keep outsized profits flowing well into this year. But with the historic super-cycle winding down, it’s time to take stock of how fleets evolved over the past three years.
Alphaliner released its overview of 2022 fleet changes on Tuesday. Together with Alphaliner’s historical records, the data shows that the aggregate market share of the top 10 lines has stayed steady through the super-cycle — now at 85% of the global fleet versus 84% in early 2020 — but with big changes among individual players.
There are “major discrepancies between the ‘gainers’ and ‘losers,’” said Alphaliner.
The big gainers
Between Jan. 1, 2020, and Jan. 1, 2023, Alphaliner data shows the top 10 liners increased aggregate capacity by 2.6 million twenty-foot equivalent units or 13%. Five companies drove the gains.
MSC:Switzerland’s Mediterranean Shipping Co (MSC) — the world’s largest carrier since surpassing Maersk last January — has been the biggest gainer in terms of absolute capacity. Its capacity is up 832,324 TEUs or 22% over the three-year period.
According to Alphaliner, MSC increased capacity by 7.5% in 2022, primarily through second-hand acquisitions. It boosted capacity by 10.7% in 2021 through a combination of second-hand acquisitions, charters and newbuild deliveries.
CMA CGM:France’s CMA CGM is now the world’s third-largest liner operator, up from fourth place pre-pandemic.
CMA CGM grew the second fastest in terms of TEUs after MSC. It hiked capacity by 697,327 TEUs or 26% over the past three years. A portion of that growth was fortuitous timing, courtesy of newbuilds delivered in 2020-21 that were ordered before the boom. Capacity rose 7.1% last year.
HMM: The third-largest gainer in 2020-22 was South Korea’s HMM. Even more so than CMA CGM, this was not a result of COVID-era fleet strategy but just good timing.
Capacity has risen 427,839 TEUs since pre-pandemic. However, most of that growth was front-loaded in 2020, as the result of 12 newbuilding deliveries and the return of nine ships that came off charters, Alphaliner reported at the time. HMM’s growth stalled in 2022, with capacity declining 0.4% year on year.
HMM is now the world’s eighth-largest carrier, up from 10th place in January 2020. Over the past three years, it has grown capacity in percentage terms more than any other in the top 10 — 110% — albeit off a comparatively small base.
Evergreen: Taiwan’s Evergreen, the world’s sixth-largest carrier (it was seventh largest in 2020), grew capacity by 30% or 385,297 TEUs during the super-cycle period. Virtually all of that growth came in 2021-22.
“Evergreen last year took no fewer than 20 newbuildings,” wrote Alphaliner. In 2021, Evergreen’s growth was also driven by newbuilds, with 14 new vessels entering service.
Zim: While several lines grew due to newbuilds ordered pre-pandemic, others specifically increased capacity to take advantage of the booming freight market. One was MSC, which grew predominantly by buying second-hand ships. Another was Israel’s Zim (NYSE: ZIM), the 10th-largest carrier, which used a different strategy: chartering tonnage.
According to the Alphaliner data, Zim’s capacity surged by 241,520 TEUs or 83% between Jan. 1, 2020, and Jan. 1, 2023, making it the second-fastest grower in percentage terms after HMM.
It increased capacity by 29% last year, the highest percentage gain of 2022 among the top 10.
According to Alphaliner, Zim was “particularly active in the charter market, since ending its cooperation with the 2M partners [Maersk and MSC] on the Asia-Med and Asia-West Coast North America routes meant [it] needed some extra tonnage to maintain a strong presence in these trades.”
The moderate gainers — and the losers
The other five carriers in the top 10 have either grown moderately during the COVID era or dropped capacity.
Hapag-Lloyd and Yang Ming:Germany’s Hapag-Lloyd, the fifth-largest liner operator, increased capacity by 1.8% last year and by 64,800 TEUs or 4% over the past three years.
At No. 9, Taiwan’s Yang Ming upped capacity by 60,724 TEUs or 9% since pre-pandemic. It was the eighth-largest carrier in early 2020.
Maersk: Denmark’s Maersk, the world’s second-largest carrier, has kept capacity effectively flat over the past three years (up 0.6%). Maersk had long been the largest liner operator in the world until it was usurped by MSC a year ago.
“Our strategy is not to gain market share in ocean [shipping],” former Maersk CEO Soren Skou said on the company’s latest conference call. “We’re not really defining ourselves anymore in terms of ocean volumes. Our strategy is to gain share of our customers’ wallet of logistics spend.”
Maersk’s capacity fell 61,705 TEUs or 1.4% last year.
“The company had to redeliver a significant amount of chartered tonnage,” said Alphaliner. “These ships were either sold second-hand or fixed to rival carriers, which were prepared to pay higher charter rates or accept longer charter periods.”
ONE and Cosco: Japan’s Ocean Network Express (ONE), the world’s seventh-largest carrier — down from sixth pre-pandemic — reduced capacity by 0.8% last year, according to Alphaliner. Since January 2020, ONE’s capacity has fallen by 52,447 TEUs or 3%, the second-largest TEU fall among the top 10.
The carrier with the biggest TEU drop over the past three years was China’s state-owned Cosco, shedding 66,171 TEUs or 2%. It’s now the fourth-largest liner operator, pushed from the third-place slot by CMA CGM in 2021.
“The Cosco Group, including OOCL, is an interesting case since the Chinese carrier’s fleet has shrunk for the second year in a row,” Alphaliner said. “After having reduced capacity by 3.2% in 2021, the Chinese group last year saw another 2.1% decline in operated capacity.”
MSC has by far the largest orderbook, with more than double the capacity under construction of any other carrier group. According to the latest data from Alphaliner, MSC has 1.73 million TEUs on order, equating to 38% of its on-the water fleet.
Cosco has the second-most tonnage on order (884,272 TEUs), followed by CMA CGM (689,257 TEUs).
In terms of the orderbook-to-fleet ratio, Zim leads the pack, with 378,034 TEUs on order, equating to 71% of its on-the-water capacity.
In aggregate, the top 10 liner operators have 5.5 million TEUs on order equating to 25% of their existing operating capacity.
Current cargo demand projections do not support the fleet growth implied by this many orders. Rather, the new deliveries, whether owned or chartered, would to a certain extent replace existing vessels in the fleet. Carriers could sell or scrap currently owned ships and/or let existing charters expire to make room for the more cost-efficient newbuilds.
Zim CFO Xavier Destriau pointed out on his company’s latest conference call that existing charters are “bridging our current operating capacity to the scheduled delivery of chartered newbuild vessels.” He noted that Zim has 62 chartered vessels up for renewal during the period when it will take delivery of 46 chartered newbuilds.
“There are a lot of options for us to entertain as we take delivery of those ships,” Destriau said.
A year ago, fear was a big driver of the supply chain crunch: fear that goods wouldn’t arrive on time, stoked by headlines warning that shipping delays could “cancel Christmas.” It became a vicious cycle. The threat of delays caused importers to max out orders and bring them forward, causing more delays.
Importers ordered too much in late 2021, and to avoid another holiday scramble, they shipped in seasonal goods early in 2022. This front-loading alleviated pressure on the supply chain in the second half of the year.
Container shipping schedules have become more reliable in light of lower volumes, so importers have less to fear from ocean shipping delays. But despite progress, the supply chain is still not back to where it was pre-COVID.
Schedule reliability back to 2020 levels
Sea-Intelligence’s “Global Liner Performance” report tracks reliability across 34 trade lanes covered by over 60 container lines.
Sea-Intelligence found that 56.6% of services arrived on time in November — the highest reliability percentage since August 2020. It’s a big improvement from January, when reliability cratered at just 30.4%. Yet the on-time rate is still just above a coin toss and remains well below the 2018-2019 average of 74%.
The November data revealed a significant disparity in on-time performance among container lines, with MSC scoring best at 63.4% and Yang Ming the worst at 42.5%.
Sea-Intelligence also tracks average delays for late vessel arrivals, which likewise show large improvements in 2022.
Average global delays fell to 5.04 days in November, down 37% from the peak of 7.95 days in January. November marked the lowest average since October 2020. Nevertheless, it was still 24% higher than the 2018-2019 average of 4.05 days.
West Coast delays largely gone, East Coast delays lessen
In the U.S. import market, schedule reliability varies by coast. West Coast port congestion cleared in the first half of this year. East Coast port congestion eased more recently.
Data on FreightWaves SONAR from project44 on the average delays between the port of lading and port of departure highlight the coastal disparity.
Delays between Shanghai and the ports of Los Angeles and Long Beach, California, spiked in the first quarter of 2022. Since August, delays have largely disappeared, at around one day.
In contrast, delays between Shanghai and the ports of Savannah, Georgia, and New York/New Jersey remained persistently elevated through mid-October.
East Coast delays have declined since then but remain much higher than those at West Coast ports. Container services from Shanghai to New York/New Jersey averaged delays of 5.2 days in the third week of December, and services from Shanghai to Savannah averaged 8.7 days, according to project44 data.
Flexport indicator also improving
Other indicators also show a reduction — but not yet a resolution — of supply chain issues.
Flexport launched the Ocean Timeliness Indicator (OTI) in December 2021. The OTI measures the time from the cargo-ready date at the exporters’ gate to the date when products leave the destination port (i.e., the landside transport time from the factory to the port in Asia, plus the Asian port wait, the ocean journey time and the North American port wait).
The OTI for the Far East-U.S. route (covering all three U.S. coasts) peaked at 113 days in January, the same month Sea-Intelligence found liner schedule reliability to be at its worst.
The OTI was down to 69 days in the third week of December, 39% below the all-time high, but still 50% above the 2019 average of 46 days.
According to Flexport, the OTI shows that “while the worst of late-2021 buildup in congestion may be over, levels are still well above pre-pandemic levels.”
It turned out to be the big unwind. As this year comes to a close, the party is pretty much over. Many of the COVID-era market gains are gone. The rest will be in jeopardy in 2023.
Asia-West Coast rates back to normal
The Freightos Baltic Daily Index (FBX) assessed China-West Coast rates at $1,378 per forty-foot equivalent unit on Monday. The index has been relatively unchanged since Nov. 23 and is down 93% from its all-time high in September 2021.
It has now done a full round trip since the beginning of the COVID-induced consumer boom — it’s back where it was at this time of year in 2019.
The weekly Drewry World Container Index (WCI) assessed Shanghai-Los Angeles spot rates at $1,992 per FEU as of Thursday. It has been roughly flat since Dec. 8. It’s down 84% from its peak in November 2021, although still $557 per FEU above where it was in late December 2019.
Container shipping spot rates are also assessed by Platts, a division of S&P Global Commodities. Platts put North Asia-West Coast spot rates at $1,300 per FEU as of Monday, $50 per FEU below its assessment at this time in 2019.
The U.S. West Coast market “may have reached bottom,” said Platts.
Asia-East Coast rates head toward pre-COVID levels
That congestion is finally clearing. There were 10 ships in the queue off Savannah, Georgia, on Monday, down from almost 50 at one point this summer.
FBX put China-East Coast spot rates at $2,905 per FEU on Monday, down 87% from the peak in September 2021, albeit still up $295 per FEU or 11% from pre-COVID levels. Unlike FBX’s West Coast index, which plateaued this month, the FBX East Coast index has slid 16% since Dec. 1.
The Drewry WCI Shanghai-New York index was at $3,889 on Thursday, down 76% from the all-time high in September 2021. According to the WCI, spot rates in this lane are still $1,391 per FEU or 56% above where they were at this time in 2019.
East Coast-West Coast price spread normalizes
During the 2020-22 container shipping boom, Asia-East Coast spot rates reached an unusually high premium versus Asia-West Coast rates. Prior to the pandemic, this premium hovered around $1,400-$1,500 per FEU. During the boom, it shot as high as $6,000 per FEU.
The exceptionally high spread persisted well into 2022 as volumes shifted to the East Coast. As recently as early September, it topped $4,500 per FEU, according to FBX indexes. But by the last week of December, it was down to $1,527 per FEU, near its traditional level.
Platts reported the same normalization pattern in its own indexes. “The spread between East/West Coast import rates is now at $1,525 per FEU, nearing the pre-pandemic average, which was upset in 2022 as many cargo owners adjusted import behavior to favor the East Coast,” it said on Tuesday.
Trans-Atlantic rates still almost triple pre-COVID levels
Other parts of the container shipping market remain far from normal. One is the westbound trans-Atlantic market.
The FBX Europe-East Coast assessment was at $5,693 per FEU as of Monday, 2.9 times its level at this time in 2019. The latest Drewry WCI Rotterdam-New York assessment was $6,989 per FEU, also 2.9 times pre-pandemic levels.
According to Sea-Intelligence, this remaining bright spot for carriers is about to get snuffed out. Sea-Intelligence CEO Alan Murphy said carriers are injecting “serious amounts of capacity on this trade lane.” That capacity infusion should depress spot rates.
Murphy explained, “From mid-December 2022, operated capacity on North Europe-North America East Coast will shift from being roughly at the same level as in 2019 to being 20% higher. And as we get into mid-February 2023, this is poised to jump even further, to 30% [higher]. Capacity from the Mediterranean will grow at an average of 25% over 2019 in January-February 2023.”
Contract rates poised to reset much lower in 2023
Another market that has not reverted to normal — one that is key to ocean carrier profitability — is the annual-contract market. Ocean carriers move the majority of their volumes on contracts, not spot. While falling spot rates eventually bring contract rates down, there is a lag.
Long-term rates are tracked by Xeneta. Its long-term contract index held fairly steady in December after falling sharply in November. Xeneta’s global contract-rate average is still up 70% year on year this month, and its contract-rate assessment for U.S. imports remains 130% higher.
“This is really just the quiet before the storm,” said Xeneta CEO Patrik Berglund on Thursday. “As more and more long-term contracts expire in the new year, expect the [Xeneta’s long-term index] to post far greater month-on-month declines.
“All indicators point toward considerable rate drops from today’s levels, with several of the major Far East trades pointing toward new long-term contracts that are much closer to the currently far lower spot-rate benchmarks.
“We’ve seen a golden age for the carriers since the beginning of the pandemic, but those days are all but gone now,” said Berglund.
The ocean shipping industry is just days away from the debut of the Carbon Intensity Indicator (CII), a new regulation meant to combat global warming. Even as an initial baby step, the CII is not inspiring confidence in the future decarbonization of shipping.
The new regulation seeks to lower carbon emissions by having container ships, tankers, bulkers, car carriers and other vessels operate more efficiently. It is a product of the United Nations’ International Maritime Organization (IMO) that has been in the works for years and debated ad nauseam within shipping circles.
Those outside of shipping who rely on the world’s vessels to transport their goods may scratch their heads when they learn of the strange brew the IMO has concocted. CII’s complexities, unintended consequences and weak enforcement call to mind the phrase “too many cooks in the kitchen.”
And implementation, set to begin Jan. 1, just got even more complicated.
For the CII regulation to work properly, there must be agreement between shipowners and charterers — the companies that lease ships from owners — on how the emissions-curbing responsibility is split. “Cooperation is key,” emphasized shipping insurer Gard.
The terms of that cooperation are laid out in the charter agreement or “charterparty.” A charterparty clause covering CII was finalized by shipping association BIMCO on Nov. 16.
On Tuesday, a group of the world’s largest vessel charterers sent a letter to BIMCO stating that they will refuse to use the clause because “it places the obligation to comply with CII disproportionately on charterers.” The 23 signatories included shipping lines Maersk, MSC, CMA CGM and Hapag-Lloyd; agricultural shipping giants ADM, Bunge and Louis Dreyfus; and top trading houses Trafigura and Vitol, among other big names.
How CII works on paper
The CII will assign each ship a letter rating from “A” (best) to “E” (worst) based on its annual carbon intensity in relation to an IMO-set target that will reduce over time. CII focuses on ship operations, not vessel hardware (which is the focus of a separate new regulation, EEXI).
The first CII rating will be determined in 2024, based on the carbon intensity of ship operations for the annual period starting in January. Thus, shipowner CII strategies will start affecting voyage planning very shortly.
A ship’s carbon intensity is calculated by multiplying its annual fuel consumption by a carbon-emission factor assigned to fuel type used, then dividing that total by the annual distance traveled multiplied by the ship capacity. In other words, an estimate of the carbon emissions divided by ton-miles.
What shipowners theoretically want to avoid is getting an “E” in any one year, or a “D” three years in a row. If that happens, the shipowner must update the vessel’s Ship Energy Efficiency Management Plan (SEEMP) by developing a corrective action plan, then adhere to that corrective plan.
There has been speculation that a lower rating would also make the vessel less attractive to future charterers or buyers, incentivizing owners to lower ship speed starting in 2023 and thereby lower fuel consumption to support ratings.
Numerous shipping interests have pointed to major problems with the way this regulation has been written.
“CII cannot be used to achieve desired decarbonization goals,” dry bulk shipping association Intercargo flatly asserted. “There are significant flaws.”
A central criticism is that the formula is based on ship capacity, not cargo carried, when the goal should be to reduce the carbon intensity per ton of cargo carried.
According to Oldendoff, one of the world’s largest dry bulk shipping companies, “Ship owners and operators are already trying to increase fleet productivity by reducing empty legs, so they can carry more cargoes per year.”
A bulker that carries soybeans from the U.S. Gulf to China, then picks up a load of coal in Indonesia and drops it off in Europe on its way back toward the U.S. to get more soybeans for China will emit less carbon per ton of cargo than a bulker that goes from the U.S. to China, then sails empty all the way back to the U.S. The same “triangulation” concept applies to all shipping markets.
“Even though a ship consumes more fuel during laden voyages, the improved utilization [via triangulation] decreases the emissions per ton carried, which is beneficial for the environment and should be the objective,” argued Oldendorff.
That’s not how CII works. A ship can improve its CII rating by increasing its empty ballast time, which reduces fuel consumption — and increases emissions per ton of cargo carried. “The most inefficient vessel can achieve a good CII rating by simply ballasting with no cargo,” said Oldendorff.
According to a spokesperson for container shipping line MSC, “It would be far better to have an operational indicator that would reward more productive ships, including based on cargo carried rather than on a theoretical value that may not correlate to transport work performed.”
‘Slow steaming in circles’
Another criticism of CII: The equation’s denominator includes distance traveled. Thus, the shorter the distance traveled in a year, the higher (worse) the CII score.
Imagine if CII was in effect in 2021-22, when massive queues of container ships were stuck waiting off American and European ports, and hundreds of dry bulk carriers full of coal and iron ore were waiting off Chinese ports. Annual distance traveled for these vessels was severely impaired.
Port waits are usually outside the control of shipowners. The MSC spokesperson pointed out that the CII methodology “could lead to a situation in which a vessel’s rating would worsen simply because it spends more time in port.”
As Alphaliner wrote last month, “Ironically, this could lead to situations … where a vessel would be better off slow steaming in circles rather than waiting at anchor. The relatively low emissions from slow steaming are offset by additional steamed miles at an efficient ‘eco’ speed, whereas the lower emissions from anchoring are not. While such behavior could make sense to improve a ship’s rating, it is obviously counterproductive from an environmental point of view.”
Weather delays would have the same effect as port congestion, leading to lower scores for vessels deployed in regions with the worst weather (rough seas also increase fuel consumption).
In addition, there could be unintended consequences for average voyage distances, to the detriment of the environment.
According to Oldendorff, “As the CII formula uses distance in the denominator, longer voyages are favored and shorter round voyages are penalized. The likely consequence will be that less efficient ships will trend toward longer voyages, emitting more, while more efficient ships stay in the shorter trades. Meanwhile, there is no motivation to shorten trade lanes in the name of reducing emissions.”
Is CII a ‘toothless tiger’?
Then there’s the criticisms on enforcement. “We believe CII is a toothless tiger,” said Oldendorff.
What happens if a shipowner gets an “E” one year, or a “D” three years in a row, is forced to write up an action plan in its SEEMP, and doesn’t bother to follow the plan?
The IMO will review the enforcement question in 2025, but even if it agrees to add teeth, enforcement wouldn’t kick in until 2028.
Classification society DNV said, “In the meantime, we do anticipate that [failing to follow the SEEMP action plan] may have a focus with stakeholders such as flag [states], PSC [port state control], vetting and commercial parties, which may impose actions or restrictions. Whether failure to implement the SEEMP should be a detainable deficiency is still up for discussion.”
The weakness of the enforcement raises the question of how motivated shipowners will be to comply in 2023. What if ship charterers don’t care if the vessels they lease have a “D” or an “E”?
“Neither charterers nor owners should take a hard stance on a specific CII letter rating,” maintained Oldendorff. “The ‘D’ and ‘E’ ratings are acceptable transitional ratings during the current phase of the IMO CII regulations, provided that the SEEMP improvement plan requirements are adhered to.
“If charterers insist on a higher CII rating, shipowners will need to ask for indemnification from charterers for damages to the vessel’s CII rating caused by long port stays. Similarly, owners should not worry about how their ships are traded if they are out on time charter.
“This approach will solve the problem with the BIMCO clause not being workable and end the vicious cycle where all parties seek to be indemnified for theoretical damages that can’t be quantified.”
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For over 100 years, U.S.-flag ships carried lumber from the West Coast to the East and Gulf coasts. About 40 ships were regularly employed in this trade, making about 200 voyages annually. Additionally, more than 200 smaller ships — steam schooners affectionately called the Scandinavian Navy — transported lumber from the Pacific Northwest to San Francisco and Southern California.
An interesting feature of this trade was that many of the ships were owned by lumber companies that sought to control their supply lines. Since most sawmills in the West were located on navigable waterways, it was efficient to use ships to transport lumber to company-owned terminals or yards at Atlantic, Gulf or Caribbean ports.
In the days before port authorities, most seaports had coal piers owned by the railroads or mining companies. The same could be said for commodities such as grain, iron ore and bananas, as well as lumber. In 1960, for example, there were nine privately owned lumber piers in the New York port area.
Lumber rush meets Gold Rush
Unlike most trades, the intercoastal lumber transport business had a well-defined existence.
In 1848, a timberman named John Marshall constructed the first lumber mill for landowner John Sutter, on whose property gold was found and led to the storied California Gold Rush a year later.
Thousands of prospectors traveled to California in hope of finding fortune. These people, however, needed shelter and this fostered a massive construction boom.
In March 1850, the brig Oriental arrived from Maine with a cargo of lumber. Capt. William G. Talbot recognized the need for lumber in California and helped establish the Pope and Talbot Lumber Co. The company set up a sawmill operation in the Pacific Northwest to supply lumber for the growing California population. By 1854, lumber was also exported to the South Pacific and Far East.
The Klondike Gold Rush followed in 1896 and the Pacific Northwest lumber industry found another booming population to serve.
Weyerhaeuser, which became a giant in the U.S. lumber industry, started its West Coast lumber operations in 1900. The company found that the existing coastal carriers, such as American Hawaiian and Luckenbach, offered regular service but with unpredictable rates and capacity.
After World War I, the U.S. government offered wartime vessel tonnage to the private sector at very reasonable prices. Thus, Weyerhaeuser, like most lumber companies, purchased these ships and began its own shipping operations by the early 1920s.
The opening of the Panama Canal in 1914 also created a strong demand for West Coast lumbermen to meet the increased infrastructure requirements on the East Coast.
Within days of opening the Panama Canal, the ship Oregonian, owned by the American Hawaiian Steamship Co. and operated by the A.C. Dutton Co., carried the first full load of lumber through the locks en route to the Dutton Poughkeepsie Terminal in New York. By this time, a cargo of lumber could be shipped to the East Coast and then loaded in railcars and delivered back to St. Louis cheaper than moving the lumber across the Rocky Mountains by rail.
The Dollar success story
Capt. Robert Dollar, who was born in 1844 to a lumber family, ventured into shipping in 1895, after he purchased the 125-foot-long Newsboy, a steam schooner of 185 tons designed for the lumber trade. Dollar went on to build a fleet of similar vessels and greatly benefited from the Klondike Gold Rush.
In 1902, Dollar organized the Dollar Steamship Co. to operate a fleet of steam schooners between the sawmills of the Northwest and California. The company kept expanding its lumber assets and acquired lumber terminals around the country, including a 42-acre site at Hunts Point, New York.
Dollar kept building his fleet of oceangoing ships and eventually entered the Far East and other international trades.
The company used its acumen in the lumber business to ensure bottom cargoes for its ships. An example of this occurred when Dollar visited Japan. He found a forest of virgin oak timber that he purchased and cut up for railroad ties, which he then transported and sold to China.
Japanese oak was also transported on Dollar’s ships to San Francisco for sale to the Southern Pacific Railroad. The company continued to grow until the Depression of the 1930s, when it evolved into the American President Lines.
Dant and Russell was also one of the great American lumber companies at the time. The company took the advice of Robert Dollar, who said the only way to guarantee space to one’s lumber operation was to control the transportation system. Thus, Dant and Russell formed the U.S.-flag States Steamship Co. in the late 1920s, along with Pacific and Atlantic Steamship Co. that operated on the intercoastal route as the Quaker Line.
Like most the intercoastal carriers at the time, including the Shepard and Morse Lumber Co.’s Shepard Line, 75% of the vessel capacity was loaded with lumber and the remaining capacity available for California canned goods.
Over the years, these lumber companies frequently chartered ships from other steamship companies, such as Waterman, States Marine, Isthmian, Luckenbach and Maritime Overseas, to supplement their fleets.
A unique feature of the intercoastal lumber trade during the age of steam was that most of the ships were built for World War I and World War II service. The Liberty ships became the prime carriers after World War II.
US lumber sails to the end
Calmar Steamship Co., founded in 1927, was unique in the lumber trade. It was founded by Bethlehem Steel to carry steel products from the Baltimore Sparrows Point steel mill to the West Coast. The company relied on West Coast lumber to reposition their ships to the East Coast. Calmar operated as a contract carrier westbound while offering a common carrier service eastbound. In early 1960, Calmar was the first company to offer pre-slung packaged lumber.
With the advent of steel imports from Japan in the 1960s, coupled with the arrival of more efficient foreign-built bulk carriers, U.S. lumber companies started losing market share to Canadian sawmills. This market shift forced Calmar to end its intercoastal service in 1975 with the last sailing of the Portmar in June that year. Thus, after 125 years, the last dedicated intercoastal lumber carrier sailed into history.
Four U.S. lumber companies, however, attempted to reenter the maritime trade in the 1970s by chartering a large barge that was originally built to transport pipe for the Alaskan oil pipeline. After 16 trips, the venture ended.
Today, the American railroads dominate the transport of West Coast lumber throughout the U.S.
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Mediterranean Shipping Company (MSC), the world’s largest ocean carrier, is facing ongoing fallout from multiple drug smuggling cases that occurred over three years ago.
Bloomberg Businessweek published an in-depth investigative report Friday that said the U.S. government is pursuing the shipping giant for $700 million or more in penalties and could move forward with a forfeiture case against the 2018-built container ship MSC Gayane.
Over 20 tons of cocaine worth over $1 billion were found in containers aboard the MSC Gayane in June 2019 when it called in Philadelphia. It marked the largest cocaine seizure in U.S. history.
Also in 2019, 1.6 tons of cocaine were found aboard the MSC Carlotta when it called in Newark, New Jersey, and 537 kilograms of cocaine were discovered aboard the MSC Desiree in Philadelphia. Peruvian authorities found 2.4 tons of cocaine on the MSC Carlotta, and Panamanian authorities found 1.3 tons of cocaine on the MSC Avni.
Eight seafarers aboard the MSC Gayane pleaded guilty and were sentenced to a combined total of 50 years in prison. They admitted to using the ship’s crane to load the cocaine from speedboats while the vessel was on the high seas off South America, then hiding the drugs in the ship’s containers.
U.S. prosecutors allege that Montenegrin Goran Gogic — arrested in Florida in October and now in custody in New York — oversaw the logistics of getting the cocaine from South America to Europe (stopping in the U.S en route) aboard the MSC Gayane, MSC Carlotta and MSC Desiree, liaising between crew members involved in smuggling, who were mostly Montenegrins, and Balkan drug cartels.
MSC reputational fallout
The Bloomberg article stated the cocaine smuggling cartel “infiltrated” MSC. William McSwain, U.S. Attorney for the Eastern District of Pennsylvania prior to January 2021, told Bloomberg: “We certainly didn’t see MSC as a victim in all this.”
Robert Perez, a former Customs and Border Protection (CBP) deputy commissioner, told Bloomberg the U.S. government was greatly interested in knowing “how high the influence of the narco-traffickers lay within this company.”
The shipping line responded Saturday: “MSC strongly objects to Bloomberg’s headline claim that the subversion of a small number of seafarers from Montenegro, in what remain very specific circumstances, amounts to the ‘company’ being ‘infiltrated’ by a drugs cartel.”
“The company and everyone in it are victims,” said the shipping line in a victim impact statement filed in court in April 2021. The company said it had “suffered significant financial and reputational damage” and that “the Gayane incident is an unwanted and undeserved stain on [the company’s] record” that was particularly distressing to the Aponte family, the owners of the shipping line.
MSC financial consequences
MSC said in its victim impact statement that it would spend more than $100 million on enhanced anti-smuggling measures from 2019-25. In its media statement Saturday, it said it invested “far in excess of $50 million in 2022 [on security efforts] and will continue to do so in future years.”
In addition, the shipping line could face financial costs from penalties levied by the U.S. government. According to the Bloomberg report, “MSC and the U.S. government are now locked in a legal battle that has taken place largely out of public view.”
Bloomberg reported the U.S. government was initially in discussions with the shipping line to substantially reduce the $700 million-plus in statutory penalties ($1,000 per ounce) in return for various security measures. Those talks broke down and the shipping line informed CBP “that it planned to contest the penalties,” Bloomberg reported.
Bloomberg further reported that the U.S. Attorney’s Office of the Eastern District of Pennsylvania is “building a civil case arguing that MSC …must forfeit the [MSC Gayane] or a substantial portion of its value.”
MSC did not refer to the penalties or forfeiture issues in its media statement. The company did not respond to repeated requests for comment on these issues from American Shipper.
A spokesperson for the attorney’s office told American Shipper it “cannot comment on anything regarding the details of a forfeiture proceeding in this case.”
CBP seized the MSC Gayane on July 4, 2019, in the wake of the historic drug bust in the Port of Philadelphia. CBP commenced a forfeiture action on the grounds that the vessel was used to facilitate a smuggling operation.
The 11,600-twenty-foot-equivalent-unit ship was valued at the time at $85 million and was on lease to the shipping line from owner Meridian 7, an entity linked to JP Morgan. The ship was released on July 12, 2019, after MSC placed $10 million in a CBP security account and provided CBP with a $40 million surety bond.
The shipping line and Meridian 7 agreed to a long list of requirements as part of the consent order allowing the vessel’s release, including:
For MSC to disclose everything it knows about the criminal conduct of its employees, crew and officers in relation to the MSC Gayane incident.
To facilitate all interviews requested by U.S. authorities with any employee of MSC.
To assist the U.S. with serving any subpoenas of MSC crew or employees whether inside or outside the U.S.
To refrain from taking any retaliatory actions against any employee cooperating with the U.S. and make a reasonable effort to prevent crewing agencies from doing so.
If the government ever finds that MSC violated the consent order, the penalty could include — but is not limited to — forfeiture of MSC’s funds on deposit.
If the government does go ahead with a forfeiture case against the ship and wins, MSC agreed as part of the 2019 consent order to sail the MSC Gayane to a U.S. port within 90 days for handover. The difference between the current value of the ship and the $85 million it was valued at in 2019 would be taken from the security deposit.
Three key drivers shaped ocean shipping markets in 2022: the end of the container boom, Russia’s invasion of Ukraine and China’s worsening economic and geopolitical situation.
Here’s a look back at this year’s coverage of how each driver impacted shipping rates and volumes.
Container shipping boom finally winds down
The traffic jam of container ships stuck waiting off U.S. ports reached an epic peak as this year began. There were 109 container vessels waiting off Los Angeles/Long Beach on Jan. 9, with around 150 waiting off all U.S. ports combined (story here).
Shipping spot rates eased from stratospheric 2021 highs but remained exceptionally strong in the first quarter, buoyed by congestion and inventory building. The timing couldn’t have been worse for U.S. importers negotiating 2023 annual contracts that started May 1. They agreed to unprecedented contract price hikes (story here).
The Southern California queue whittled down through the spring. But like a game of whack-a-mole, congestion popped up instead on the East and Gulf coasts. Shippers, fearing disruption when the West Coast port labor contract expired on July 1, switched volumes to other coasts (story here).
By the end of July, the countrywide count of waiting ships was all the way back up to around 150 — marking a second peak — driven by East and Gulf Coast congestion (story here).
The number of waiting ships has been falling ever since. The Los Angeles/Long Beach queue was effectively gone by late August and officially declared dead in November (story here). The total number of ships waiting off all U.S. ports was down to around 50 by this month.
U.S. import volumes remained strong through August, then began falling sharply starting in September, led by declines at West Coast ports. By November, declines were countrywide (story here).
The moderate spot-rate decline in the first half of this year accelerated in August and September — spot rates fell off a cliff. More recently, the pace of spot-rate declines has slowed (story here).
Spot rates have sunk below annual contract rates signed early in the year — to the dismay of shippers that signed those contracts. In many cases, annual rates have been adjusted lower mid-contract and more volumes have been shifted to spot (story here).
Ocean carriers face major challenges ahead, given sinking spot rates, lower contract rates kicking in halfway through next year (if not sooner) and a massive flood of new ships that’s about to hit the water (story here).
However, carriers are far from in distress, still pocketing billions per quarter. Profits didn’t peak until the third quarter of 2022 (story here). Carriers are entering this down cycle with enormous cash cushions. Some analysts believe there is a path through the minefield ahead (story here).
Russian invasion resuscitates tanker business
The pandemic was not a “black swan” — it was a known risk — but it had black-swan-like effects on shipping. Just as the pandemic eased in early 2022, world trade was shaken by yet another historic event: Russia invaded Ukraine, setting off the largest armed conflict since World War II, one that could become much larger at a moment’s notice.
Container shipping fallout has been limited. Major shipping lines immediately “self-sanctioned” and pulled services from Russia. Given Russia’s small market size, this had little effect on container lines (story here).
Tanker markets, in contrast, have seen huge changes.
First, Russia throttled down pipeline deliveries of natural gas to the EU, then someone blew up the pipelines. The EU needed to fill its stockpiles by this winter, prompting an armada of liquefied natural gas tankers to deliver cargoes from the U.S. Gulf (story here).
The profits on LNG cargoes shot so high that charterers snapped up most of the remaining tonnage on long-term contracts so they wouldn’t miss out. Due to the resultant lack of spot vessels, LNG shipping spot rates rose to around $500,000 per day (story here) — the highest day rate paid for any kind of cargo transport ship in history. Rates have since fallen back to $200,000 per day.
In June, the EU voted to ban seaborne crude imports from Russia starting Dec. 5 and products imports starting Feb. 5 (story here). Trade routes began to shift before those dates. More Russian exports flowed to China and India. The EU replaced Russian imports with cargoes from the U.S., Brazil, West Africa and the Middle East.
The longer voyage distances of the replacement routes pushed up spot rates for crude tankers (story here) as well as product tankers (story here).
As 2022 draws to a close, the big question is how EU sanctions on tanker insurance will affect Russian exports to non-EU countries. The G7 and EU price-cap plan is designed to keep sanctions from reducing volumes too much while still curbing Russian oil income. It might work in practice even if it doesn’t on paper (story here).
No matter what happens with the price cap, it has been a banner year for crude and product tanker owners. Stock investors and traders reaped the rewards of war-juiced tanker rates. If 2021 was the year of container stocks, 2022 is the year of the tanker stocks (see story).
The China factor
No country is more central to shipping than China. It is the world’s largest importer of dry bulk cargo, the largest charterer of crude tankers, the second largest importer of LNG and the largest source of containerized export cargo.
China is the world’s largest shipbuilding nation. Its factories construct over 90% of the world’s containers. It boasts seven of the world’s top 10 container ports (story here).
When China stumbles, so does shipping. China stumbled in 2022. The International Monetary Fund expects China GDP growth of only 3.2% this year, down sharply from 8.1% in 2021. Investment bank Evercore ISI expects China growth this year of only 2%.
China’s demand for dry bulk imports was battered by a property development crisis and COVID lockdowns (story here). Pandemic measures decreased the mobility of citizens, curbing fuel demand and thus demand for tanker imports. Lockdowns simultaneously snarled container cargo supply chains (story here).
U.S. imports from China slowed faster than overall imports. China Beige Book CEO Leland Miller warned that “the China growth story is over now.” (Story and video interview here.)
China’s economic malaise is just part of the story for shipping. The other involves geopolitical tensions. First came China’s allegiance to Russia in the wake of the Ukraine invasion. Then came live-fire military exercises off Taiwan (story here).
Shipping market participants are now openly talking about and planning for the possibility of a future war between the U.S. and China. As with the pandemic and the Ukraine-Russia war, a U.S.-China military conflict does not meet the definition of a black swan but promises the gravity of consequences associated with one.
“What happened this year has amplified and emphasized that you’d be foolish to depend on a steady supply at a low cost from China, given what might happen geopolitically,” said Paul Bingham, director of transportation consulting at S&P Global (story here).
For energy shipping, a future U.S.-China war is “almost not even worth worrying about because the consequences are so big,” said Flex LNG (NYSE: FLNG) CEO Oystein Kalleklev (story here).
“If that happens we’re all screwed. Russia and Ukraine would look like a small bump in the road. You would have an energy shock like you’d never seen before. The whole world economy would stop.”
Volumes at the ports of Los Angeles and Long Beach deteriorated even further in November, with no rebound expected until the second quarter of next year — possibly even the second half.
The Port of Los Angeles had 13 “blanked” (canceled) sailings in November, following 20 in October. Carriers will blank 11 more sailings this month. “We haven’t seen numbers like those since the start of the pandemic,” said Port of Los Angeles Executive Director Gene Seroka during a press conference Wednesday.
Jeremy Nixon, CEO of shipping line Ocean Network Express (ONE), told the press conference his company has been blanking about 20% of its sailings since October and expects to take out about half its capacity around Chinese New Year, which will be celebrated in 2023 on Jan. 22.
“It doesn’t surprise me for a moment that we’re seeing negative growth rates compared to last year because 2021 was off the charts in terms of volumes,” said Nixon.
West Coast import plunge continues
Los Angeles reported total November throughput of 639,344 twenty-foot equivalent units, down 21% year on year (y/y).
Empty containers came in at 242,148 TEUs, exports at 90,116 TEUs.
Imports sank to 307,080 TEUs, down 24% y/y and 9% versus October. This November’s imports were 17% below those in November 2019, pre-COVID.
Both Seroka and Nixon pointed to the continued absence of a West Coast port labor contract as a key culprit. The previous contract expired on July 1, pushing volumes to East and Gulf Coast ports. “Once that last remaining question mark is taken off the table, we’ll hopefully see more cargo coming back to the West Coast from this East Coast ad-hoc routing,” said Nixon.
At the neighboring Port of Long Beach, total November throughput came in at 588,742 TEUs, down 21% y/y. Empties totaled 204,313 TEUs and exports totaled 124,988 TEUs.
Long Beach’s containerized imports fell to 259,442 TEUs, down 28% y/y and 12% compared to October. Imports this November were 11.5% below imports in November 2019, pre-pandemic.
No rebound until 2nd half of 2023?
Asked about the outlook for 2023, Nixon highlighted the impact of the Lunar New Year holiday. It is being held earlier than usual next year, and Nixon believes factories will be offline longer than usual.
“It looks like most of the factories in China and Vietnam are going to take quite a long break this time,” he said. “Typically, they will take two weeks off. [In 2023] we’re looking at four to five weeks. Factories will close around Jan. 7 and [the break] will run till about Feb. 6. Then there will be quite a long ‘rain shadow’ afterwards as it will take time to get production up and running.
“We’re prepared for a very soft February in terms of sailings coming out of Asia,” he continued. Given two-week sailing times across the Pacific, he said “that will manifest itself for LA arrivals as a very soft February and March as well.
“We’ll probably see some pickup in seasonality around March, April and May,” he noted.
Seroka said, “We also see some normality coming back into play in Q2 and beyond if we can flush out a lot of the inventory at the retail level and push it through during these holiday season sales.”
According to Nixon, “It’s going to be a slow first half for cargo volumes. But we expect at some point there will be a rebalancing. When that comes, probably toward the second half of 2023, it’s going to be back to business as usual.
“Traditionally, in the U.S. market, we see a quick correction. It tends to go into these things earlier and come out of them quicker than our other container shipping markets.
“One thing we’ve learned is that things go up and things go down, but when we get periods like this, when the cargo volume drops away, it normally indicates that at some point down the line, cargo volumes will come back up again above the average median. And if there is a very long period of low cargo volume, that generally means there will be higher cargo volumes later on.”
The Georgia Ports Authority said the year-over-year 6.2% volume drop in November is not a bad thing.
“Container trade at U.S. ports is returning to a more sustainable growth pattern, which is a positive development for the logistics industry,” GPA Executive Director Griff Lynch said in a Tuesday news release. “Along with the addition of more than 1 million TEUs of annual capacity, a slight reduction in demand will mean faster vessel service as we work to bring a new big ship berth online at Garden City Terminal in July.”
The Port of Savannah in November handled 464,883 twenty-foot equivalent units, 30,866 TEUs less than the same month last year. Still, the port’s rate of growth has jumped from pre-pandemic levels of 4% to 5% annually to 28% since November 2019, according to the GPA.
The GPA said the impact of inflation and a shift in consumer spending contributed to a reduction in manufacturing and subsequent container demand. Weather also played a role in November’s volume decrease, as the Savannah River channel was closed to the largest vessels when the East Coast was hit by Tropical Storm Nicole.
The Port of Savannah moved 552,800 TEUs in October. That was up 9.6%, or 48,460 TEUs, from October 2021. It was the port’s second-busiest month on record, behind only August of this year, when it handled 575,513 TEUs.
Lynch said Tuesday the lull has allowed the Port of Savannah to reduce its current vessel queue to 17 container ships, down 43% from Nov. 1, when there were 30 vessels at anchor. The GPA expects to entirely clear the backlog by early January.
The GPA also expects early 2023 volumes to be healthy — but not overwhelming.
“While we are planning for a moderation in the container trade, we expect volumes to remain strong, though shy of the historic highs of the past year,” GPA Chairman Joel Wooten said. “Announcements from automakers and other manufacturers coming to Georgia, as well as an array of their suppliers, will mean healthy increases in trade over the long term.”
Nissan North America announced in September that it had chosen the Port of Brunswick as a new point of entry to serve U.S. markets.