Blog post by Curtis Spencer, January 2021
I’ve had it with 2020! I’m so glad that year is over, and now looking into 2021, it seems as though lives will get better, the economy will get better, the political angst is over (please, let’s keep it over) and it appears as if the vaccines are working, are getting to their destinations (even if there are logistical issues) and for most of us, we can see the light at the end of the long, long tunnel that was 2020. How does this all relate to Trade and Global Logistics? Here’s my take on it….
We are not going to go back to pre-Trump tariffs on Chinese goods. Those revenue streams are in place, via higher tariffs, and just about everyone, from unions, to Democrats to Republicans finally see China as the Trade bully that they’ve been for 20+ years. So, there’s no going back for now, which means that we are stuck with higher tariffs. Despite this fact, and the realization inside China that this fact is here to stay, the Ports of Los Angeles/Long Beach are being inundated with so many containers that the congestion looks like 2002! We don’t have enough empty containers to send back, we don’t have enough longshoremen to unload vessels, we don’t have enough truck/drayage drivers, chassis… the list goes on and on. What gives here? If the tariffs are so high, why are we long on demand for Chinese goods, and short on supply (of transportation, etc.) to get these goods to consumers?
Several reasons come to mind:
- Pent up demand in the USA: We haven’t gotten to go out and eat, drink, vacation or spend money like we did Pre-COVID-19, so we are spending money on old-fashioned retail goods!
- The ocean carriers, having learned from the past recession, laid up many ships and containers, taking them off the market in Q2 of 2020, and thus reduced the supply, raised prices and voila, the perfect storm that has allowed ocean carriers to make a PROFIT in 2020, while the rest of us are saying “What happened to the $1,850 container rate from Shanghai to LA?” It died in 2020. It’s now over $3,500 to move that same container. Lower the supply, raise the prices, and we are still not back to equilibrium. We’ll get there, but only in time.
- China got healthier, faster than we did from COVID-19. So that pent-up demand came back for the USA in Q3 2020 to present, and their factories geared up faster than anyone could re-shore or x-shore away from China. Chinese sellers and US buyers adapted to the tariffs and are making it work. One huge way US companies are mitigating those expenses are via the use of Foreign-Trade Zones. We’ve steadily seen a climb in the use of FTZs over the last 24 months, a steady stream on new Zone customers. That is good for us, good for the USA, and good for the companies feeling the sting of higher tariffs.
- E-commerce tripling its growth-rate in 2020: We saw e-commerce jump to 3 years’ worth of growth in just 1 year. That level of growth has never happened before, and believe me, this is only the beginning.
Don’t believe all the BS on the news about how “COVID-19 vaccine relief is stymied by poor logistics!” The logistics industry is humming along quite nicely. However, when you set up unrealistic goals for the vaccine distribution, and put incompetents in charge, the results won’t be healthy! Real logistics professionals need to be tasked with these kinds of problems, not state governments who are ill equipped and untrained in moving goods, and that alone would solve half of the issues. Setting realistic expectations is the other issue. Having said that, here is the current state of the logistics industry as we see it:
We still have a shortage of trucks, and the rates have gone through the roof. Long-haul truck rates are 200% of what they were in 2019. Shortage of equipment, chassis, drivers and COVID-19 is keeping supply tight, while demand has been improving. Why is there so much more demand than 2019? Because now double the number of truck trips are required since the number of car trips to the store flattened! Think about this in terms of cars parked at the grocery store in 2020, compared to today or how many cars were parked at the mall instead of today… the sheer number of us that bought goods online for front door delivery or pick-up, increased so much that demand for those drivers tripled last year. We are turning into the e-commerce nightmare that many in the industry have been preaching about for the last 5-10 years.
The exact thing that happened to ocean shipping happened to intermodal rail. Those cars got laid-up and parked in Q2 2020, and then we went on a shopping spree from the couch, which required goods delivery. Via ocean, air, rail and truck! It got so bad, that if you weren’t a top 10 shipper on the railroad, the railroads added $1,000, $2,000 per container to the rate! There weren’t enough empty rail cars to hold all the containers that were needed, and surcharges are still being charged to this day (LA-Chicago, LA-Dallas, etc.).
My partner Steve Schellenberg has this area covered, but here are some quick stats: When nobody is flying, either international or domestic; there are no belly cargo areas to deliver air freight, and full-on charter cargo delivery became the norm after Q2 2020. Rates that had been steady at $2.50/kilo forever flew up to $12/kilo! On some international flights, the rates even reached $20/kilo. If you take out 75% of the fleet, you can expect that the remaining demand will soak up the supply very quickly. More passenger plane conversions to dedicated freighters have happened in the last 12 months than occurred in the previous decade. This trend will continue. Amazon is adding planes, and DHL, FedEx and UPS all added to their fleets. Private cargo haulers are having a heyday charging ridiculous rates because there are no alternatives. AND…when you want PPE, and vaccine doses and other vital cargo that requires air freight, you can guess what will be in store for us in 2021 and beyond!
A few final thoughts
- Last-mile e-commerce facilities are now a must. Hear me, please, all of you EDC executives, city managers, etc. …let the malls convert. They are not coming back as retail brick and mortar. Those days are over. Salvage both the retail sales tax income, the jobs and the blight eradication by allowing for smart, well thought-out mall conversions to last-mile fulfillment centers. It only makes sense and becomes a win-win for all involved!
- We’ve got to re-think the jobs of long-haul trucking in several key areas:
- More transit hubs, where hand-offs can occur, leading to a more productive, efficient truck moves and family time for the labor! This works! Make it work!
- Much better pay for truckers, including 401Ks, health insurance and paid vacations. There are millions of young men and women who don’t go to college. If they can make $60-$80,000 per year trucking, in situations where they can get home each night, and the systems just get more efficient, this can be done!
- Autonomous trucking and platooning can also help, but these hand-off centers are KEY for any of this to work. It’s coming, it will be slow and expensive, but this also helps the driver shortage conversion.
- For Trade/Tariff Mitigation, if you are not using an FTZ, you owe it to yourself and your company to re-look or look for the first time at the cost benefits of FTZs. They are not rocket science: the software to run them has gotten much more sophisticated and much easier to manage. Very large Zones are now managed by one remote individual with a compliance back-up. These are not the Zones of old anymore.
- We WILL get over COVID-19. It’s just been the largest, most scary global crisis that has faced us, and it hit when we were least expecting it. It’s getting better now, and we can plan on how we move on, so let’s all MOVE ON. Go get your shot, get your second shot, and re-engage with LIFE.
Thanks everyone, until next time!