How summer driving season fuels demand for tanker shipping

Despite a slow Memorial Day start, summer demand is expected to hike tanker rates in the months ahead.

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Americans hit the road en masse for summertime travel each year starting Memorial Day weekend, pumping up gasoline sales through Labor Day in early September. Summer airplane travel takes off, consuming more jet fuel. Europeans load up their cars and head to the Mediterranean beaches and inland lakes in July and August, consuming more diesel.

Fuel markets are even more volatile this summer than usual. As American and European vacationers burn more refined petroleum products en route to their holiday destinations, one of the world’s largest suppliers of refined petroleum products — Russia — is mired in war.

On one hand, crude prices are falling due to recession fears and elevated Russian exports. Lower crude costs are keeping the prices of gasoline, diesel and jet fuel in check.

On the other hand, Western inventories are low and consumption is strong, rapidly rebounding toward pre-COVID levels. The supply-demand balance — and thus Atlantic Basin tanker rates — could change quickly.

No gasoline price spike predicted

Analysts initially feared price-cap sanctions on Russian exports would spur global shortages and thus higher prices at the pump. That hasn’t happened. Sanctions are generally working as designed, curbing Russian export profits while simultaneously keeping global markets supplied.

U.S. gasoline prices averaged $3.58 per gallon on Wednesday, down 23% year on year, according to AAA. The Energy Information Administration (EIA) does not predict a summer spike. Rather, it expects average prices to fall to $3.20 per gallon by September due to “rising refinery runs from global and U.S. refineries.”

Erik Broekhuizen, manager of marine research at Poten & Partners, said in a recent report that 2023 U.S. vehicle miles traveled (VMT) are on par with 2019 levels, yet the EIA expects June-August gasoline demand to average 9.1 million barrels per day (b/d), down from 9.7 million b/d in June-August 2018 and 2019.

Declining demand despite firm VMT is due to higher average fuel efficiency, said Broekhuizen, who noted that 18.5% of new car sales are for gasoline hybrid vehicles, plug-in hybrid electric vehicles or electric vehicles.

Ship brokerage BRS said Tuesday, “The increasing energy efficiency of the internal combustion engine and recent changes in mobility — notably the still-high prevalence of work from home — suggest U.S. gasoline demand is unlikely to surpass its pre-COVID peak.”

This summer’s driving-season debut was weaker than expected. GasBuddy reported Wednesday that total demand over Memorial Day weekend was down 1.5% versus the same period last year. The expectation had been for a 6% increase.

“From a clean [refined product] tanker perspective, this year’s driving season has started out with a whimper rather than a bang,” said BRS.

Trans-Atlantic backhaul outperforming fronthaul

Summertime demand is eventually expected to boost product tanker rates.

The trans-Atlantic fuel trade is served by medium-range (MR) product tankers, particularly MR2s (tankers with capacity of 40,000-54,999 deadweight tons). American diesel and gasoline are traditionally exported aboard MRs to South America and European gasoline is shipped aboard MRs to the U.S.

Brazil recently replaced much of its imports of U.S. diesel with cheap cargoes from Russia. “Over half of Brazil’s nearly 200,000 b/d of diesel imports [in April] were made up of discounted Russian supply, with the U.S. share reduced to 21%,” said price-reporting agency Argus.

photo of a product tanker
Medium-range product tanker Hafnia Andromeda arrives in Houston. (Photo: Jim Allen/FreightWaves)

American diesel is now flowing to Europe instead of Brazil. “Contrary to previous years, Atlantic Basin MR demand is being led by demand to ship U.S. diesel to Europe,” said BRS. “MR earnings on the backhaul [eastbound] voyage are standing at a rare premium to [the fronthaul Europe-U.S. trade].

“Europe is looking for alternative supplies as it has backed out the 700,000 b/d of diesel it previously imported from Russia. 

“Indeed, the scale of this problem is now steadily being unmasked by recent draws in European diesel inventories that were built ahead of the EU embargo of Russian refined product imports.”

BRS said higher consumption during the European summer driving season should further boost demand for U.S. diesel. Meanwhile, the shift of Russian diesel toward Brazil “is yet another example of the reorientation of Russia’s oil flows adding ton-miles to clean tanker demand.”

Higher US imports on top of higher exports

The positive effect of the U.S. driving season on gasoline shipping demand should be layered on top of these other Atlantic Basin market trends.

Clarksons Securities put average spot rates for non-eco-design MRs at $34,400 per day on Wednesday, up 46% month on month but 15% below the 52-week trailing average.

Broekhuizen noted that U.S. imports of gasoline and blending components typically rise during the summer driving season. “We may see [U.S.] imports pick up over the summer while exports are expected to remain healthy as well,” he said.

“Under this scenario, the product tanker market should benefit from healthy trans-Atlantic flows as well as regular arbitrage opportunities.”

According to BRS, “Low inventories should help to support gasoline imports across this year. If imports do not maintain pace with demand, prices would likely be propelled higher, leading to an open trans-Atlantic gasoline arbitrage window.” The brokerage also noted that low U.S. inventories should make both gasoline prices and import levels more volatile, “which could potentially drive short-term spikes in MR2 hire rates.”

“All signs suggest that this summer should be bright for Western MR2 demand,” said BRS.

Click for more articles by Greg Miller 

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Port of Corpus Christi names interim CEO after Strawbridge exits

The Port of Corpus Christi has named Kent Britton interim CEO to lead the South Texas port until a permanent chief executive is found.

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Port of Corpus Christi commissioners have appointed Kent Britton as interim CEO, replacing Sean Strawbridge, who stepped down May 16.

Britton, the port’s chief financial officer, will lead the South Texas port until a permanent replacement is hired, according to a news release.

Kent Britton

“As interim CEO, my plan is to support my team at the [port] in advancing projects and commercial missions to best serve our customers and community stakeholders,” Britton said in the release. “From my post as CFO, I have worked closely with our executive leadership team and the port’s commissioners to foster a thriving port authority committed to reinvesting in its surrounding communities.”

The seven-member port commission approved Britton’s appointment in a unanimous vote Tuesday.

Prior to joining the Port of Corpus Christi in 2017, Britton worked as CFO for the Sherwin Alumina Co. His career spans more than 30 years in accounting and finance, including executive roles at Alcoa and Blackbaud Inc. Britton was promoted to CFO at the Port of Corpus Christi in 2019.

Britton’s appointment comes after Strawbridge announced he was resigning during the commission’s May 16 meeting. Strawbridge’s tenure as CEO was marked by considerable growth at the port, but he recently faced criticism over travel and food and drink expenditures.

The Port of Corpus Christi has been in operation since 1926 and is the nation’s largest energy export gateway and one of the largest seaports in total waterway tonnage. Corpus Christi is on the Gulf of Mexico, about 130 miles southeast of San Antonio.

The port’s commissioners on Tuesday also announced Shey-Harding Associates will launch a nationwide search for a full-time CEO.

Watch: Spot rate forecast predicts summer doldrums.

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Cargo volume mixed at Gulf Coast ports in April

Container volume at ports in Houston and New Orleans fell in April, while Corpus Christi was bolstered by crude oil exports.

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Container flow in April decreased at ports in Houston and New Orleans, while crude oil exports boosted Corpus Christi.

Port Houston reports 8% decline in container volumes

Port Houston’s total container volume slipped 8% year over year (y/y) in April to 307,879 twenty-foot equivalent units.

Port officials said container volumes are slowing amid an expected softening of the U.S. freight market.

“We are continuing to see a slight softening of import cargo compared to the volumes in 2022,”  Roger Guenther, Port Houston’s executive director, said during the port’s monthly meeting Tuesday. “Container cargos are normalizing as we projected in the budget for the year, so we’re pretty much spot on what we thought would happen so far. We do see a little softening with the exports as well.”

Total import containers fell 12% y/y in April to 155,128 TEUs, while total export containers dipped 3% y/y to 152,751 TEUs.

Steel imports remained a bright spot for the port in April, up 17% y/y to 442,037 tons. Port Houston also saw 8% y/y growth in general import tonnage in April, totaling 810,983 tons.

Loaded exports were down 4% y/y at 110,318 TEUs in April, while loaded imports fell 14% y/y to 140,720 TEUs.

Guenther said that Port Houston’s container exports overall continue to outpace 2022 volumes, due in large part to the demand for plastic resin. In total, more than 1 million loaded TEUs were handled from January through April.

“That’s the fastest the port has surpassed the 1 million mark, earlier than any other year,” Guenther said.

Mike Shaffner, Port Houston’s director of operations planning and technology, said bulk commodities moving through the port include coal and petcoke, which can be used as fuel or feedstock in industrial products.

Shaffner also highlighted BNSF’s recent announcement that it is expanding service between Port Houston and the railway’s intermodal facilities near the Dallas-Fort Worth metroplex, along with Denver, beginning June 2.

“The Alliance, Texas, to Barbours Cut service will operate on Tuesdays and Thursdays, while the Denver service offering will be on Fridays,” Shaffner said. “We recognize the Dallas area as an important region, and we are pleased to see this opportunity return with BNSF.”

During April, ship calls declined 11% y/y to 683 vessels, while barges calling at the port fell 8% to 352.

Port of Corpus Christi reports 16% increase in crude oil shipments

The Port of Corpus Christi saw an 8% y/y increase in total cargo to 16.7 million tons in April, led by exports of crude oil, dry bulk and liquid bulk cargo.

The port handled 10.3 million total tons of crude oil during the month, a 16% increase compared to the same year-ago period. Exports of crude oil for April topped 9.5 million tons, a 20% y/y increase.

Shipments of petroleum totaled 5.1 million tons during April, a 4% y/y decline. Exports of petroleum were flat y/y at 4 million tons for the month, while imports declined 15% y/y to 1.1 million tons.

Dry bulk cargo increased 21% y/y to 838,349 tons in April, while liquid bulk shipments rose 476% y/y to 74,856 tons.

Corpus Christi handled 196 ships in April, a 12% y/y decline, while barge calls increased 1% y/y to 486.

Port of New Orleans container volume and breakbulk cargo slip in April 

The Port of New Orleans’ container volume decreased 1% y/y in April to 44,724 TEUs.

Port officials said plastic resins, chemicals and coffee were the top containerized cargo during the month.

Breakbulk cargo fell 1% y/y to 162,156 tons in April, with steel and bagged cargo being the top commodities for the month.

The port handled 10,150 Class I rail car switches in April, a 21% y/y decrease. The port handles switching operations for six Class I railroads, including BNSF Railway, CN, CSX, CPKC, Norfolk Southern and Union Pacific.

Watch: Seko Logistics predicts no peak season.

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Sun still shines on South America’s container shipping trade

Not all cargo markets are back to pre-COVID “normal.” Container shipping rates to South America remain elevated.

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“Our ships are still chockablock full — that’s a good sign,” said Rolf Habben Jansen, CEO of Germany ocean carrier Hapag-Lloyd, during the company’s quarterly call earlier this month.

He wasn’t referring to all of the company’s ships, just those serving Latin America. Most of the world’s container trades have sunk back toward pre-COVID volumes and pricing. Most of the world’s ships are not chockablock. The South America trade is, at least temporarily, an exception.

“It seems to be a bit more robust than some of the others,” said Habben Jansen. “We have secured a very significant chunk of our business on contract. All in all, we’re happy with this trade.”

Freightos spot indexes

Spot rates fell back first in the trans-Pacific and Asia-Europe trades. The trans-Atlantic headhaul — Europe to the U.S. — held up much longer than the trans-Pacific or Asia-Europe but it too has now largely normalized.

Rate curves across the world’s container trades have followed virtually the same pattern but to different degrees and with different timing. Ascents and descents didn’t happen simultaneously and have varied in size.

The Europe-to-South America market is coming down from the peak more slowly, so rates are still considerably higher than in the pre-COVID “normal.”

The Freightos Baltic Daily Index (FBX) for Europe-South America West Coast assessed the average spot rate at $4,184 per FEU on Wednesday. That’s half of peak levels reached in mid-2022, but it’s still 3.1 times higher than rates at this time in 2019, pre-COVID. This index has been roughly flat for the past three months.

chart showing rates to South America
Spot rate in USD per FEU. Blue line: 2022-2023. Purple line: 2018-2019. (Chart: FreightWaves SONAR)

FBX’s Europe-South America East Coast spot assessment on Wednesday was $2,505 per FEU, more than double pre-COVID levels. This route hit a peak much later than other trades. As recently as February, it was at $4,000 per FEU.

chart showing rates to South America
Spot rate in USD per FEU. Blue line: 2022-2023. Purple line: 2018-2019. (Chart: FreightWaves SONAR)

Xeneta short-term and long-term indexes

Norway-based Xeneta tracks both short-term and long-term rates. It shows average short-term (spot) rates for North Europe to South America’s west coast at $3,545 per FEU as of Thursday, 2.1 times rates at this time in 2019, pre-COVID.

Hapag-Lloyd’s Habben Jansen pointed to the importance of contract rates, and Xeneta’s data highlights the upside. Carriers locked in high contract rates at the beginning of this year, with average long-term rates on this route now at $4,846 per FEU, 3.1 times pre-COVID levels and 37% higher than average spot rates. 

The spread between long-term and short-term rates has widened over recent weeks — the same dynamic seen in the trans-Pacific starting in mid-2022.

chart showing rates to South America
(Chart: Xeneta)

Xeneta’s data shows a similar rate pattern, albeit to a lesser degree, in the North Europe-to-East Coast South America trade.

It put Thursday’s short-term rates in this lane at $2,357 per FEU, double the average four years ago. It shows long-term rates averaging $2,622 per FEU, 2.5 times the average at this time in 2019. Long-term rates moved above short-term rates starting in January.

(Chart: Xeneta)

Meanwhile, South America’s rate resilience extends beyond the routes from Europe.

Current long-term rates from China to South America’s west coast average $3,728 per FEU, 2.4 times pre-COVID levels, according to Xeneta data.

In the U.S. market, both long- and short-term rates from the East Coast to South America’s west coast, via the Panama Canal, are still close to peak levels, averaging $2,840 and $2,734 per FEU, respectively. 

Long-term rates on this route are up 77% from May 2019, short-term rates 52%, according to Xeneta data.

Different import markets, different drivers

The plunge in shipping costs for U.S. imports is being driven by high inventory overhangs due to a “bullwhip effect.” American purchases of retail goods surged during the pandemic and importers overshot when consumption fell.

COVID-era dynamics were much different in developing countries such as those in South America, where pandemic policies and consumption did not follow U.S. patterns.

Hapag-Lloyd sees the region following a long-term growth trend, citing “increasing industrialization of emerging economies” and “additional opportunities for growth in container shipping in 2023 as a result of new economic and trade agreements.”

Click for more articles by Greg Miller 

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Giant tankers full of American propane are making waves

Large liquefied petroleum gas tankers are riding high on rising U.S. exports and higher Chinese import demand.

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Not all shipping sectors and shipping stocks are under pressure. Container shipping is mired in pessimism, crude and product tankers have disappointed, dry bulk faces tepid demand — but long-haul liquefied petroleum gas (LPG) shipping is bucking the bearish trend.

High-capacity LPG tankers that carry propane and butane are known as very large gas carriers (VLGCs). VLGC sentiment was grim heading into this year, given a heavy schedule of newbuilding deliveries expected to sink rates. Yet demand has increased faster than supply, at least so far.

“Initial fears of a market downturn due to poor Chinese PDH [propane dehydrogenation] margins, the global economy outlook and new vessel deliveries were proven wrong,” said Neils Rigualt, executive vice president of commercial operations at BW LPG (Oslo: BWLPG), during a conference call Tuesday.

VLGC spot rates are now $90,000 per day and have averaged $70,000 per day year to date, double levels over the same period last year, according to Jefferies shipping analyst Omar Notka.

“Doom and gloom. That was the majority view on the VLGC market in 2023. VLGC rates, however, are the strongest since 2015,” said Oeystein Kalleklev, CEO of VLGC owner Avance Gas (Oslo: AGAS), in an online post this week.

According to Clarksons Securities shipping analyst Frode Mørkedal, “VLGC rates continue to defy expectations.”

Shipping stocks in most of the other vessel segments are down year to date. Not so with the big three public VLGC owners. Avance, BW LPG and Dorian LPG (NYSE: LPG) are up 36%, 34% and 23% year to date, respectively.

In fact, these VLGC stocks have been rising for years. Since January 2019, pre-COVID, Avance is up over 540% and Dorian and BW LPG by almost 300%.

(Chart: Kpler)

Demand and supply

Propane is used for heating, cooking, equipment fuel and feedstock for petrochemical production. A major driver of VLGC volume is demand from Asian PDH plants that use propane to create propylene. Propylene is used to produce polypropylene for plastics production.

Argus reported that two new Chinese PDH plants have already come online this year. S&P Global said six new Chinese PDH plants should come online by year-end.

PDH plants can use propane or naphtha as feedstock. Naphtha is carried aboard product tankers. The cheaper propane is versus naphtha, the better for VLGCs and the worse for long-range product tankers. And propane is currently cheaper.

“Demand for naphtha has diminished with alternate feedstock propane prices at a discount to naphtha values since the end of February,” said Argus on Tuesday. “The shift pushed valuable ton-mile demand [demand in terms of volume multiplied by distance] into the gas-carrier segment.

That’s a big part of the demand side of the equation. On the supply side, VLGCs primarily load in the U.S. Gulf and Persian Gulf. Those volumes are rising.

(Charts: BW LPG Q1 2023 investor presentation)

The largest driver of VLGC ton-mile demand is U.S. exports to Asia, given the longer distance versus Middle East exports. Most U.S. Gulf exports transit the Panama Canal, with some taking the longer route around the Cape of Good Hope. The good news for VLGC owners: U.S. LPG exports continue to increase.

(Chart: FreightWaves based on data from Energy Information Administration)

North American LPG export volumes in the first quarter were the highest on record, Dorian Chief Commercial Officer Tim Hansen said during a conference call Wednesday. He noted that “propane inventories continue to build in North America,” while “Chinese demand is absorbing a lot of ton-miles.”

BW LPG CEO Anders Onarheim noted Tuesday that “recently announced capacity expansion for U.S. LPG export terminals will enable more LPG to be shipped in the years ahead, clearly positive for our market.”

The Panama Canal factor

The more problems there are at the Panama Canal, the better it is for VLGC spot rates. Incremental ton-mile demand is driven by U.S.-Asia flows. To the extent VLGCs cannot transit the Panama Canal, they must take the longer route via the Cape of Good Hope, hiking ton-miles.

VLGCs, which have a capacity of 84,000 cubic meters, were too large to transit the original canal locks. It was only after the larger locks debuted in June 2016 that they could take the shorter route to Asia via Panama.

As explained by Hansen during a conference call in February, VLGCs are smaller than other vessel types that traverse the larger locks: Neopanamax container vessels and LNG carriers. 

The Panama Canal Authority can make more revenue from larger container ships and LNG carriers than VLGCs. Most of the new ships on order are Neopanamax container ships and LNG carriers, implying that future VLGC passages may be more limited — a positive for future VLGC rates.

A VLGC transits the Panama Canal. (Photo: Flickr/David Stanley)

Meanwhile, Panama is now suffering a drought, reducing water levels in the canal and impacting transits.

“The Panama Canal is very volatile,” said Rigault. “It can jump suddenly from a couple of days of waiting time to 15 days. The water level now is very much on the low side. That means capacity of the canal will probably decrease further. So, it looks like delays and inefficiencies at the canal will continue.”

Pain still to come from orderbook?

The talk in the crude tanker and dry bulk sectors is all about minuscule orderbooks are and how positive this is for the future supply-demand balance. According to Clarksons, capacity on order of very large crude carriers (VLCCs, tankers that carry 2 million barrels of oil) is down to just 1.4% of on-the-water capacity.

In contrast, the VLGC orderbook is high, with tonnage on order at 22% of on-the-water capacity, according to Clarksons.  

The peak of VLGC deliveries is occurring this year. According to data from BW LPG, 45 new VLGCs will be delivered in 2023. Of those, 17 are already on the water.

(Chart: BW LPG Q1 2023 investor presentation)

“The bulge is in 2023 and early 2024. We will naturally see a pause after that because the shipyards are full,” said Dorian LPG CEO John Hadjipateras.

The question for VLGC owners and investors: Is rate fallout from newbuildings still to come or does current rate strength imply that global demand can absorb new capacity and LPG rates will continue to rise as capacity growth declines going forward?

Rigault said newbuilds will be partially offset by 36 VLGCs scheduled to go into maintenance drydocks through the remainder of this year.

He added, “We can clearly see the market is a little bit surprised at how well all the newbuilding deliveries have been absorbed. We can see that because the demand for time-charter coverage is increasing, with the players out there happy to fix [charters] for two to three years.”

Mørkedal of Clarksons is less optimistic. “Despite some relief from vessels in drydock, we are skeptical that ton-miles will keep pace,” he said in a client note on Wednesday. “A drop in rates seems unavoidable, barring any major disruption in the Panama Canal. The most likely scenario is a rate decline, albeit at a relatively high overall level.”

Earnings roundup

Of the three big public VLGC owners, Avance reports results on May 30, Dorian reported results Wednesday and BW LPG on Tuesday.

BW LPG  reported net income was $130.7 million for Q1 2023, more than double net income of $58.4 million in the same period last year. The latest period was “the strongest quarterly performance on record,” said BW LPG.

Dorian reported the highest quarterly earnings before interest, taxes, depreciation and amortization in the company’s history. Net income for January to March (its fourth quarter) was $76 million compared to $35.4 million in the same period last year. Earnings per share were $1.94, topping the consensus forecast for $1.48.

Dorian’s VLGCs earned an average of $68,135 per day, up 57% year on year. According to Nokta of Jefferies, Dorian is “flying high, yet still under the radar.”

Click for more articles by Greg Miller 

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Seko Logistics warns of puny peak season for shipping

More signs are surfacing that the second half of the year won’t be a panacea to the international freight recession. Seko Logistics says there won’t be a surge in orders that fuels transportation spending.

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This year’s peak shipping season could be anemic, and arrive later than normal, as merchants remain shy about pulling the trigger on new import orders even after clearing out excess inventory, freight transportation providers are realizing. 

Executives at Seko Logistics said during a virtual briefing with reporters on Monday that customers across industries, including fashion, technology, defense and medical devices, are being very cautious about placing purchase orders because of elevated uncertainty about the economy and consumer confidence.

That means the traditional wave of ocean and air shipments that starts mid-summer to fill store shelves for the holidays is more likely to be a ripple. Meanwhile, manufacturing in major economies is contracting.

“Our customers are expecting a mild peak that breaks toward the back half of the year unless there is some disruption that artificially tightens capacity, versus July, August and September,” said CEO James Gagne.

Logistics professionals and analysts were optimistic late last year that shipping volumes would start to recover from a sustained downturn in the spring once retailers got rid of overstocked goods they were stuck with when consumer spending shifted to services and supply chain congestion eased.

That hasn’t panned out. Inventory destocking took longer than expected, and retailers now are wary about placing new orders until there is more certainty about how inflation and a potential recession will impact consumer demand. Analysts say big-box retailers have finally brought inventory back to 2019 levels but aren’t ready for a full restocking campaign. 

Retailers are warning of slower sales in the coming months as shoppers pull back on discretionary and big-ticket items. 

Lowe’s on Tuesday cut its full-year outlook, in part due to projections that sales will decline 2% to 4%. Last week, Home Depot (NYSE: HD) also lowered its guidance because people are spending less on home improvement, while Target (NYSE: TGT) and Walmart (NYSE: WMT) said sales are cooling.

“There’s a huge question mark still out there in terms of underlying demand, at least in the next six to seven months. We’re actually seeing some of our customers just getting started to cut more orders” with overseas manufacturers, Gagne said.

Restocking will vary by industry, with bulky items such as furniture and exercise equipment potentially taking longer to bounce back.

“It remains to be seen which ones participate in this potential muted peak season, or whether they’re going to be able to wait until the Lunar New Year [in 2024] to revisit their inventory levels on a significant basis,” said Chief Commercial Officer Brian Bourke.

Chicago-based Seko Logistics is specializes in cross-border shipping, e-commerce fulfillment, heavyweight home delivery and returns management. It has more than 150 offices around the world.

Shipping line Maersk recently said it doesn’t expect the inventory clearance process to be complete until some point in the second half of the year, but management doesn’t have a clear sense when exactly shipments will pick up. The top official at the Port of Los Angeles last week echoed the notion that this year’s peak season will come later and be shorter

A feeble peak season will hurt profit margins and disappoint freight transportation companies that had hoped to make up for first-half weakness, especially on the heels of 2022 when the fall spike in business also failed to materialize. The difference last year was that the first half was strong as retailers pulled forward orders to avoid port congestion and delivery delays. 

Green shoots

Despite low expectations for a widespread surge in demand for imported goods there will likely be pockets of growth, especially for newer products. Merchants, for example, may have too much inventory in one category but not enough in others for the holidays.

Gagne said a fresh assortment of choices, especially in fashion, will spur consumer interest.

“People are very tired of buying the same old thing. When we start to see more new products coming back into the market, that’s going to drive a behavior with a consumer that we may not see as much manifested in today’s data,” he said on the conference call. 

And new product introductions could jump-start demand for airfreight, which has been in a slump for 14 months, as companies try to meet customer expectations in the holiday run-up.

Pallets are loaded inside a China Airlines Cargo 747-400 freighter. (Photo: Jim Allen/FreightWaves)

Global air cargo volumes are down 10%, with rates 43% lower than a year ago, according to market reporting agencies, because of the cooldown in trade and more belly capacity for cargo as passenger aircraft return to service after COVID.

Air cargo bookings have remained surprisingly resilient in many cases, said Brian Bourke, Seko’s chief commercial officer. Companies shifting some production away from China to minimize risk need more quick transport until new supply chains are fully established, and others never transitioned to a just-in-case model during the pandemic and need faster replenishment than ocean shipping can provide. And “preighters” —  passenger aircraft temporarily dedicated to freight operations — are still being used in Asia where many nations only recently reopened for travel and airlines are now working to reintroduce passenger networks.

Many all-cargo operators, outside of FedEx and UPS, have been slow to sideline freighters despite difficulty filling holds because they want ready capacity when the market turns positive, according to industry experts. Securing landing rights and permits, especially with growing geopolitical tensions in certain regions, is more difficult than in the past, and it’s easier to keep those assets in service rather than try to reinstate them, said Gagne.

Retailers, in response to shifting consumer demand and the slowdown in e-commerce sales, have shown serious interest since the start of the year in outsourcing the fulfillment component of their supply chain, particularly in the United States, Seko CEO said.

Online merchants are asking logistics companies for help to make their “inventory more fungible across wholesale, retail and then direct-to-consumer channels, to make it more agnostic” about which distribution channel is used, especially as warehouse rents skyrocket around the country, he said.

This month, for example, freight forwarder Flexport acquired the logistics assets of Shopify and will now offer import services as well as final-mile delivery to sellers using the platform.

Hans Hickler, Seko’s president of the Americas, added that businesses are much more interested, too, in redesigning their distribution networks to find locations that offer better efficiency and service.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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Shipping line fires back at bankrupt Bed Bath & Beyond

Bed Bath & Beyond “failed to manage its own supply chain” and “exacerbated the bottlenecks faced by other shippers,” alleges OOCL.

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Bed Bath & Beyond, now in Chapter 11 bankruptcy, insists it was a victim of shipping line greed amid the supply chain crisis.

It filed a high-profile complaint with the Federal Maritime Commission (FMC) on April 27 against Hong Kong-based shipping line OOCL, seeking at least $31.7 million in compensation. District court documents reveal Bed Bath & Beyond (BBBY) also sought at least $7.8 million from Taiwanese carrier Yang Ming.

OOCL filed a stern rebuttal with the FMC on Tuesday, casting the blame back at BBBY.

The shipping line said that during the supply chain crisis, ocean carriers faced “unprecedented challenges arising from spiking demand,” disruptions, congestion and COVID restrictions, causing “severe and protracted trans-Pacific vessel delays.”

OOCL said it “invested in providing new capacity and services” and “took no action to drive up freight rates nor … create artificial scarcity,” as alleged by BBBY.

In contrast, Bed Bath and Beyond “repeatedly and without explanation failed to manage its own supply chain, exacerbating the bottlenecks faced by other shippers and the ability of [OOCL] to reposition its containers to Asia in order to serve customers’ unprecedented demand for service,” said the carrier.

OOCL called Bed Bath & Beyond’s FMC complaint “an unfortunate campaign to distort and obfuscate the relevant facts, contracts and law in order to secure an unwarranted return.”

OOCL says service contracts were amended

BBBY’s claims against the shipping line fall in three categories: failure to meet the minimum quantity commitments (MQCs) under 2020 and 2021 service contracts, unfair use of peak season surcharges, and unfair detention and demurrage charges.

The bankrupt retailer claimed that OOCL agreed to an MQC of 2,100 forty-foot equivalent units for the contract covering July 1, 2020-June 30, 2021, but was 624 FEUs short, equating to extra shipping costs incurred by BBBY of $2.2 million.

It further alleged that OOCL was 1,363 FEUs short of the agreed 3,796-FEU MQC for the contract covering May 1, 2021-April 30, 2022, equating to extra shipping charges to BBBY of $9.4 million.

Not true, countered OOCL.

It said the 2020 MQC was mutually amended downward to 1,086 FEUs and the 2021 MQC to 1,531 FEUs. BBBY “did not utilize all the space that [OOCL] made available,” it maintained, noting that amended agreements with the reduced MQCs were filed with the FMC.

“There were no monthly or quarterly carriage requirements or guaranteed space per sailing in the contract,” continued OOCL. “BBBY is asking the [FMC] to invent contract requirements that were not bargained for or agreed to.”

FMC has no jurisdiction, says carrier

The container line further maintained that the FMC has no jurisdiction to decide the matter in the first place.

It said that under the Shipping Act, the law that regulates the container industry, “the exclusive remedy for a breach of a service contract is an action in an appropriate court.”

According to OOCL, the FMC “has long held that this … bars all claims premised on the obligation to meet one’s contract commitments. BBBY cannot unilaterally expand the agency’s jurisdiction by relabeling contract-based claims as Shipping Act violations.”

It said the Shipping Act of 1916 authorized the FMC to “broadly regulate the reasonableness of cargo service accommodations,” but the Shipping Act of 1984 “removed that authority with regard to service contracts” and the 1998 Shipping Act only barred unfair or unjustly discriminatory practices for cargo accommodation “in connection with service pursuant to a tariff.”

“Congress purposefully eliminated the Commission’s power to regulate the reasonableness of cargo space accommodations for service pursuant to a service contract in favor of a deregulatory market-based approach,” wrote OOCL in its FMC response.

Congress restored the FMC’s authority to regulate space accommodations under service contracts in the Ocean Shipping Reform Act of 2022. However, that law went into force after the period of BBBY’s claims.

“The commission cannot repurpose other provisions of the Shipping Act in novel and unintended ways in order to reclaim regulatory powers that Congress specifically removed,” said OOCL.

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Shipping line Zim gets hammered by high spot-rate exposure

Zim outperformed competitors on the way up and is falling faster than other carriers on the way down.

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Zim, the world’s 10th-largest container line operator, has sunk into the red as its boom-era contract coverage has crumbled under the weight of falling spot rates.

The Israel-based company reported first-quarter results Monday that were much worse than expected, causing a double-digit plunge in its share price in quadruple average trading. Shares (NYSE: ZIM) were down as much as 17%.

Zim reported a net loss of $58 million for the first quarter of 2023 compared to net income of $1.71 billion in Q1 2022. The analyst consensus was for earnings per share of 18 cents. Zim wasn’t even close. It posted an adjusted net loss of 50 cents.

Average freight rates sank to $2,780 per forty-foot equivalent, down 64% year on year and 35% sequentially versus the fourth quarter.

Rates were still up 36% versus Q1 2019, pre-COVID. But even so, Zim’s net loss was over twice as large in the latest period; net losses were $24.4 million in Q1 2019.

chart showing Zim spot rates
(Chart: FreightWaves based on data from Zim)

On a positive note, Zim still has an extremely large cash cushion to fall back on during the downturn, courtesy of windfall profits during the pandemic. It has total liquidity of $3.5 billion following the payout of its latest dividends, compared to $240 million pre-COVID. No dividends will be paid for the first quarter, given the loss.

Average rates fall faster than competitors’ rates

Zim is more exposed to the spot market and has a higher percentage of its capacity in the trans-Pacific than larger ocean carriers such as Maersk and Hapag-Lloyd.

This allowed Zim to outperform its rivals during the boom via higher average rates (including contract and spot). But it’s now paying the price for that strategy. Its average rates and earnings are declining faster than those of more contract-focused and geographically diversified carriers.

chart shoing change in spot rates for Zim, Hapag-Lloyd and Maersk
(Chart: FreightWaves based on data from Zim, Hapag-Lloyd, Maersk)

Maersk and Hapag-Lloyd’s earnings and average rates didn’t peak until Q3 2022. Zim’s peaked much earlier, in Q1 2022.

Other carriers continued to post strong results through the first quarter of this year, buoyed by high rates on one-year contracts that ran from May 1, 2022, to the end of last month. Maersk posted net income of $2.3 billion in the first quarter; it had a net loss of $656 million in Q1 2019. Hapag-Lloyd reported net income of $2 billion in the first quarter, 19 times profits in Q1 2019.

Trans-Pacific spot rates fell below contract rates starting Q3 2022, but carriers such as Maersk and Hapag-Lloyd claimed shippers continued to honor most of their contracts.

Maersk and Hapag-Lloyd executives said they did not reset high 2022 annual rates lower in midcontract to placate customers in the face of falling spot rates. They reported average rates and earnings that supported those comments.

CFO: Zim ‘fully exposed to the spot market’

“You have two types of rates. One is spot, the other is contract,” said Hapag-Lloyd CEO Rolf Habben Jansen on a call last August. “A contract means you commit yourself to a certain rate. There’s always a risk that during some periods, the spot rate is lower.

“But that’s no reason to say, ‘OK, we will lower the contract rate. That would mean the contract rate is a combination of a [fixed] rate and a downward adjustment if the spot rate is lower. If you do that, there’s no reason to have contracts anymore. It wouldn’t make any sense. That’s why we have two types of rates.”

Zim clearly has a different view.

The company’s CFO, Xavier Destriau, confirmed on a call in November that the company’s May 2022-April 2023 trans-Pacific contracts were reset lower in an effort to maintain long-term customer relationships.

Just how much Zim renegotiated those contracts became clear on Monday’s conference call. Destriau disclosed that the upside from legacy 2022 contracts was already completely wiped out in the first quarter.

“The decline in Q1 revenues was driven by our disproportionate exposure to the trans-Pacific trade and the absence of 2022 contract revenue tailwinds,” he said. “We do not benefit from any contract rates we may have secured last year on the trans-Pacific trade lane, so we are largely already today fully exposed to the spot market.”

Zim bets on H2 end to inventory destocking

Zim reaffirmed its full-year guidance on Monday, a decision Jefferies analyst Omar Nokta dubbed “surprising.”

That guidance calls for full-year earnings before interest, taxes, depreciation and amortization of $1.8 billion to $2.2 billion and earnings before interest and taxes of $100 million to $500 million. Even before Monday’s big Q1 earnings miss, the company’s guidance was above analyst consensus for EBITDA of $1.55 billion and an EBIT loss of $95 million.

Zim executives had little positive to say about the second quarter during Monday’s call, implying that all or virtually all of the gains they predict would have to come in the second half.

“Our underlying assumption [is for] improved freight rates and growth in volume driven by the end of the destocking cycle, with improved results in the second half compared to the first half,” said Destriau.

But this assumption remains theoretical. Zim doesn’t see an actual demand rebound yet. “Demand is still weak,” the CFO acknowledged. “The beginning of the second quarter was very much a continuation of the market environment that prevailed over the first quarter.”

chart showing Asia-US container spot rates
Zim is heavily exposed to Asia-East Coast spot rates. Blue line: spot rates in USD/FEU in 2022-2023. Purple line: spot rates in 2018-2019, pre-COVID. (Chart: FreightWaves SONAR)

Zim took contract pain earlier than competitors

The silver lining of Zim’s failure to hold the line on 2022 contracts is that it does not face the large second-half step down in contract rates that several other carriers do.

Maersk CEO Patrick Jany said during his company’s conference call that Q1 2023 “will represent the peak quarter of the year. The progressive erosion of contract rates toward spot levels will be the main element determining profitability in the next quarters.”

In other words, as Maersk’s new trans-Pacific contracts kick in, average freight rates, including both contract and spot components, will decrease as the year progresses.

Not so with Zim. It doesn’t face sequential pressure from the replacement of legacy contracts because it already lost the benefit of those contracts before the year began. Consequently, it doesn’t assume Q1 will be the peak of 2023, as Maersk does.

“We should not expect additional headwind in the quarters to come [from lower contract rates] as we already no longer had any tailwind supporting our revenue in the first quarter of 2023,” said Destriau.

New trans-Pacific contracts still not signed

Meanwhile, the current contract season does not sound like it’s going smoothly for Zim. Contract talks should have been done by now. They aren’t.

The carrier is targeting 50% contract coverage in the trans-Pacific, as in prior years. However, it has more contract volume to fill in 2023 because its newbuildings deployed in its Asia-East Coast service have higher capacity.

“Contract negotiations are still ongoing as we speak,” admitted Destriau. “They are taking longer. Some of our customers are still holding on [before] committing and agreeing to a rate.”

He explained, “Most of the trade lanes we’re currently operating in are generating revenue that does not allow us to absorb costs. We think that spot rates on most of the east-west trade lanes are not sustainable in the long term.”

Zim will not sign loss-making contract rates in line with current spot rates. “We are not doing that, which explains why we are not yet, at this time of year, fully finalized when it comes to agreeing with our customers on volume and rate commitments for the next 12 months,” said Destriau.

“It is precisely because some of our customers are pushing for rates below the minimum level we are willing to go — that is why it’s taking a little bit longer. We do not intend to lock ourselves into loss-making cargo.”

chart showing Zim KPIs

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Container shipping under pressure as peak season hopes dim

Trans-Pacific spot rates have pared earlier gains and remain at loss-making levels. Demand has yet to rebound.

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One of the earlier scenarios for container shipping’s 2023 peak season went like this: Importers would get cocky and keep much of their business in the spot market. Shipping lines would heavily curtail trans-Pacific transport capacity. America’s inventory overhang would evaporate just as holiday imports ramped up. Spot rates would jump — just as they did in 2020’s peak season after COVID lockdowns — and importers without sufficient contract coverage would get caught out.

No one’s really talking about that one anymore.

Inventory destocking has gone on longer than expected. Pressures on consumer demand are building. Trans-Pacific shipping capacity is not down as much as predicted. Spot rates bumped up in mid-April but have eased since and remain extremely weak.

The talk now is more about a moderate peak season at best, roughly in line with pre-COVID levels, with no fireworks.

Spot rates still extremely weak

Container lines implemented a general rate increase (GRI) in mid-April that was at least partially successful, finally clawing rates off the floor. However, they reportedly delayed planned GRIs in early May and mid-May, and are now looking at GRIs in June.

Spot rate indexes show mid-April gains have partially stuck but rates have edged backward more recently. “Rate gains seen in April have been slipping gradually,” said Jefferies shipping analyst Omar Nokta in a research note Friday.

The Freightos Baltic Daily Index (FBX) for the China-West Coast lane was at $1,497 per forty-foot equivalent unit on Thursday. That’s up 48% from before the mid-April GRI but down 14% from April 25.

Drewry’s World Container Index (WCI) for Shanghai-Los Angeles was at $1,823 per FEU for the week ending Thursday, up 9% from the week of April 13 but down 2% from the week of April 20.

The FBX China-East Coast index was at $2,302 per FEU on Thursday, up 10% from mid-April but down 14% from April 25. The WCI Shanghai-New York rate was at $2,825 per FEU, up 11% from the week of April 13 but down 1% from the week of April 20.

Spot rates in USD per FEU. Blue line: FBX China-West Coast. Orange line: WCI Shanghai-Los Angeles. Green line: FBX China-East Coast. Purple line: WCI Shanghai-New York. (Chart: FreightWaves SONAR)

On the contract-rate front, pricing of new trans-Pacific annual agreements coming into force this month is sharply lower than for contracts signed the prior year.

Xeneta reported Wednesday that long-term contract rates on the Asia-West Coast route averaged $1,893 per FEU. That’s down 70% from the company’s assessment of average long-term rates on this route in late November, albeit 30% higher than Xeneta’s current average spot-rate assessment.

Retailer progress on inventory overhang

Ocean carriers Maersk and Hapag-Lloyd have predicted that trans-Pacific volumes will rise in the second half due to and end to inventory destocking, supporting higher rates.

They pointed out that import volumes are below U.S. consumption as inventories are drawn. When inventories wind down, imports will align better with consumption, increasing volumes. The problem with this thesis is that consumption could go down in the second half versus the first, offsetting sequential gains from a return to inventory restocking.

This issue was a central focus of analyst client notes this week following quarterly results of mega-retailers Home Depot (NYSE: HD), Target (NYSE: TGT) and Walmart (NYSE: WMT).

Home Depot’s Q1 2023 inventories were still up 60% in nominal terms versus Q1 2019, pre-COVID. But Deutsche Bank transport analyst Amit Mehrotra maintained that “the vast majority of this likely reflects inflation.” On the consumption side, he pointed out that Home Depot “unit demand is already back to pre-pandemic levels” when adjusted for inflation.

Target’s inventories were down 16% year on year and up 30% versus Q1 2019, “implying unit inventory is about flat versus 2019 when adjusting for inflation,” said Mehrotra.

Evercore ISI retail analyst Greg Melich noted that Target’s sales growth since Q1 2019 exceeded its inventory growth, “suggesting that Target’s [inventory] overbuilding woes are behind them.”

Walmart President John Furner said on Thursday’s conference call: “Q1 last year would have been the peak of inventories. We worked through a backlog of something like 100,000 containers that had been delayed at ports. So, lapping those costs gets bigger as you look forward to the next quarter or so. When you get into the back half of the year, things tend to normalize.”

Concerns grow on consumption

According to Mehrotra, “The bottom line is that based on demand today, we think inventory levels are back to normalized levels. But the risk is more broad-based demand destruction as consumers pull back. Home Depot’s results clearly showcased demand destruction in the space that the company focuses on — home improvement.”

Mehrotra also noted that retail sales are still above where the pre-pandemic trend line would place them, meaning sales have further to fall as they normalize.

“U.S. retail sales ex-auto and gasoline were on a very consistent trend prior to the pandemic,” he wrote Friday. Extrapolating that trend suggests April retail sales excluding automotive and gasoline sales were 15% higher than the historical trend line on a nominal basis and 5% higher on an inflation-adjusted basis, he explained.

“This implies that monthly retail sales need to decline by 5% to normalize to the pre-COVID trend. Said another way, the large spread between where we are today and the trend is mostly explained by inflation, with one-third explained by a pull-forward in spending: 5% is due to pull-forward, 10% due to inflation.”

According to Jon Chappell, transport analyst at Evercore ISI, “Destocking has been a massive headwind to freight demand over the last year-plus and the near completion of this punitive process provides some credibility to the bottoming thesis.”

However, he warned that “the demand side and what retailers are solving for when contemplating ‘right-sized’ inventories is also a moving target, and is likely much lower — when looking at the upcoming peak season — than many would have expected at the start of the year.”

“So, progress for sure on the backward-looking inventory front, but still a lot of uncertainty left to play out as retailers must consider the pace of restocking in the immediate future,” said Chappell.

Bookings to the U.S. relatively flat since early March. Index: 100 = Jan. 1, 2019. (Chart: FreightWaves SONAR Container Atlas)

When could Christmas goods buoy imports?

The holiday goods trade is yet another peak-season variable.

Many of the holiday cargoes were already in the bookings pipeline at this time in 2022. This year, they’re being shipped later, which should theoretically provide some support to second-half volumes.

During a press conference in October 2022, Port of Los Angeles Executive Director Gene Seroka said: “September is traditionally a high-volume month for end-of-year products. Think toys and games, clothing, footwear and other products. Those holiday gift items dropped precipitously compared to [September 2021], mainly because they came in earlier. Our peak season was in June and July as importers moved up the arrival of these goods to bring some certainty to when they could get to market.”

The early peak season in 2022 was driven by fears of delivery delays due to port congestion and potential West Coast port labor unrest. Carrier schedules are not fully back to normal yet but there are no port queues this year. And importers have already switched supply chains to the East and Gulf coast ports to avoid the labor risk. Thus, there’s no need to rush holiday-goods imports.

Seroka said during a conference call Thursday that this year’s peak season will come later — and could be abbreviated.

“My estimation on peak season based on purchase orders that have already gone out and discussions with retailers, manufacturers and automotive companies is that we’ll probably see a relatively short peak season between the months of September and October,” said Seroka.

“That may start a little bit earlier for folks who want to ensure in-store and D.C. [distribution center] dates and it may run a little bit later into November if folks are trying to get that last-minute cargo through.”

Alan McCorkle, CEO of the Los Angeles’ Yusen Terminals, said during the same press conference: “What we’re hearing from our customer base is that … we will see a little bit more of a traditional peak. As we get into later in the summer months and into the fall, we’ll start to see volume pick back up to resupply for the holiday season.”

(Chart: FreightWaves based on data from ports of Los Angeles and Long Beach)

Click for more articles by Greg Miller 

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Reports: Port of Corpus Christi CEO resigns amid questions on expenses

Port CEO’s resignation came a day after a story aired on a local TV station about his alleged excessive expenditures.

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The chief executive of the Port of Corpus Christi, the No. 1 oil export port in the U.S., has resigned after a meeting where he was questioned about his business expenses, according to reports.

Sean Strawbridge’s resignation on Tuesday came a day after a story aired on KRIS-TV about his alleged excessive expenses, including $10,000 a month on food, drinks and snacks, World Series tickets, and a $202,000 trip to Tel Aviv, Israel, to visit desalination facilities.

Strawbridge’s resignation was announced after a heated port authority commission meeting where he publicly sparred with a commissioner, according to the Corpus Christi Caller-Times.

The seven-member port commission approved the terms of Strawbridge’s separation in a 6-1 vote after conferring in closed session.

The terms of his severance agreement were not disclosed. He will remain CEO until June 2.

In an interview with Reuters, Strawbridge defended his expenditures.

“All of my expenses to my knowledge are compliant with port policy and state statutes, and have all cleared the internal review process and approval process,” he said.

Strawbridge did not give a reason for his resignation but said the decision had been “in the works for a while” and called it “purely a personal decision.”

He joined the Port of Corpus Christi in 2015 as chief operating officer, becoming CEO in 2018.

Strawbridge is among the highest-paid port executives in the U.S., making over $750,000 last year in salary and bonuses.

“I am extremely proud of the incredible success of the Port of Corpus Christi over my eight-year tenure,” Strawbridge said in a statement. “From assembling the greatest team in the business to achieving record financial performance, we have accomplished many wonderful achievements together that have helped define my legacy here.”

The Port of Corpus Christi has been in operation since 1926 and is the nation’s largest energy export gateway and one of the largest seaports in total waterway tonnage. Corpus Christi is on the Gulf of Mexico, about 130 miles southeast of San Antonio.

During Strawbridge’s time as CEO, the port broke several tonnage records and started several major infrastructure projects, including the Corpus Christi Ship Channel Improvement Project, which received $157.3 million in funding last year.

The Port of Corpus Christi accounts for roughly 60% of all U.S. crude oil exports, according to research firm RBN Energy.

Commissioners for the port said Wednesday they intend to appoint an interim chief and will begin a search for a new CEO.

Click for more FreightWaves articles by Noi Mahoney.

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