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Drayage Issues to Persist Through 2022

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Drayage Issues to Persist Through 2022

By Drew Herpich, Chief Commercial Officer, Transportation Insight & Nolan Transportation Group

Despite growing inflation concerns and increases in energy prices, businesses investments are up while consumers continue to spend. During Skechers’ first quarter earnings call on April 26, COO David Weinberg said, “We find the U.S. consumer is doing quite well, and we continue to have great sell-throughs, both our own and from what we hear from our third-party retailers as well. So right now, we haven’t seen any slowdown or any decrease in demand when product hits our shores and we can get it out…But currently, we could certainly deliver more if we get it.”

Indeed, supply chains remain tight in support of business investments and consumer spending. Despite some softening in the truckload (TL) market, there is no softening in drayage.

There is a slight reprieve on the US West Coast due to COVID lockdowns in several Chinese cities, but US East Coast ports are experiencing backups as shippers diversify their use of ports to lessen their exposure to the US West Coast ports. According to Sea-Intelligence Maritime analysis, Asian imports into the ports at Charleston, Savannah and Virginia increased 16% year over year during the first quarter.

Expectations are that backups along the east coast will continue for the next few months. “We fully anticipate vessels to backlog on the East Coast this summer and I don’t think Savannah is going to escape that,” said Griff Lynch, CEO of the Georgia Ports Authority.

In addition, once Chinese lockdowns are suspended, there are strong possibilities that US West Coast ports could see the return of significant backlogs and, at the same time, could potentially be faced with a strike or slowdown from the International Longshore and Warehouse Union (ILWU). The contract expires July 1, but analysts expect talks to be positive and continue into the month before an agreement is reached.

As a result, drayage will be pressured from port backlogs and from inland supply chains that remain constrained. Delivery expectations, transportation costs and warehousing space are among the pressure points that are driving drayage issues.

Delivery Expectations

Shippers continue to expect speedy deliveries to replenish and supplement existing inventories. However, due to port backlogs and inland congestion, many retailers including Abercrombie & Fitch, Bed, Bath & Beyond, and Asos.com noted missed sales during the Christmas holiday season due to delayed receipt of inventories.

Supply chains are like dominoes if not kept in check – a delay in the first-mile could likely impact the rest of the supply chain. Speedy deliveries are also expected in the last-mile of the supply chain.

According to a recent survey from technology provider FarEye, 38.9% of shoppers are unlikely to give retailers a second chance after a poor delivery experience. Delivery delays and poor communication contribute most to bad delivery experiences and 36.8% of consumers changed their opinion of a brand due to a bad experience.

Equipment shortages are also causing delivery delays as supply chain providers are also faced with supply chain issues. Containers are dwelling longer at ports either because importers are taking longer to unload the cargo or shipping lines roll export bookings, causing the turnover of chassis between customers to slow.

Manufacturers are responding to the need for more chassis but are struggling with hiring workers and procuring subcomponents. Chassis makers originally thought enough supply would be injected into the market by the third quarter of this year, but that timeline is now pushed into 2023.

So much cargo is flowing through US ports that regional warehouses are maxed out. As a result, importers struggle over what to do with the containers, leave them in the port, in a dray lot, or parked outside the warehouse. The first option results in demurrage fees, while the second and third options cause the chassis to dwell for a period of time. Of course, the best option is to work with a trusted supply chain partner that can manage the entire supply chain instead of just one part of it.

Warehousing

Real estate investment trust firm Prologis gave us an update on the warehousing market during its April 19 first quarter earnings call. The company sees the market for space remaining tight for some time. It noted that during the first quarter, occupancy didn’t experience the normal seasonal decline. Instead, it remained flat with the fourth quarter at 97.4%. “Even if retail sales declined 5% as consumers shift their spending to experiences versus goods, we project that the market will still require an incremental 800 million sq ft of space in US alone,” Hamid Moghadam, co-founder and CEO of Prologis, told analysts. “People are running to catch up on the demand that they’re seeing from their end customers and they’re not getting there. They’re always behind.”

Commercial real estate services company, JLL notes in a recent research report that a “supply crisis is coming soon in the market for US distribution center space, as new construction can’t keep up with demand.” Over the last decade, total US industrial inventory increased by 18%. But that overall growth was outpaced by the 24% rise in demand for industrial (mostly warehouse) space over the same period.

JLL also says the total cost to build a new warehouse, including labor, is up 21% over the last year.

Transportation Costs

In addition to warehousing costs, transportation costs are packing a punch for shippers. Regardless of transportation mode, the costs have escalated since the pandemic began in 2020. Strong consumer demand, capacity constraints, fuel costs and worker shortages have contributed to the high transportation costs. Additionally, insurance, driver pay and demand for trucks and tractors have also increased. If there are any green shoot in terms of transportation costs, ocean and trucking spot rates have declined in recent months as shippers shift to contracts to ensure consistency and capacity needs. But contract rates are, on average, higher year-over-year. However, we are beginning to see some contract rates slowly dip and could potentially decline further due to the economic uncertainties in the market.

Surcharges have also added to the transportation cost pain. In 2020, UPS and FedEx introduced a COVID surcharge to manage heightened demand. Today, the surcharge remains in place but has since been renamed demand surcharge.

The sudden jump in fuel prices in March, attributed to the Ukraine-Russia war, has led to double-digit fuel surcharges across all transportation modes including from parcel carriers.

The fuel pain will likely continue through 2022. The US Energy Information Administration (EIA) expects that global consumption of petroleum and liquid fuels will increase by 2.4 million billion per day from 2021.

However, this forecast is down by 0.8 million barrels per day as a result of downward revisions to global GDP growth.

Conclusion

A lot of uncertainty continues in supply chains and costs remain high. As a result, drayage issues will likely continue through the end of the year but perhaps not to the extremes noted in 2021.

While some backlogs at ports are expected once China’s COVID-lockdowns are lifted, US West Coast ports have been able to work down existing backlogs. But contract negotiations with the ILWU could negatively impact operations when the contract expires on July 1.

Meanwhile, capacity is loosening in the trucking and rail markets and consumers are beginning to balance their spending on goods and services as the pandemic eases. Inflation and other economic concerns, however, will drive uncertainty in supply chains. Shippers will likely turn to their supply chain partners in search of cost savings and assurances of on-time deliveries to ensure goods are available for purchase.

Drew Herpich is the Chief Commercial Officer (CCO) of Transportation Insight (TI) and Nolan Transportation Group (NTG) responsible for fostering and developing partner relationships with the most dynamic carrier offering in the industry.