Despite China COVID Lockdowns Earlier, Container Volumes Still Near Record Levels
RedStone Resource
July 1, 2022
Inside This Edition
Container Freight Rates Dropping, Still Historically Elevated
There are many questions about the drop in freight rates to ship containers between key ports around the world. Obviously, economic slowing is partly at play here. But the other factor could be the massive lockdowns across China in April and May and delays in getting goods ready for export in the meantime.
Diesel Balance Still Critical, Supplies Stabilized at Low Levels
Diesel inventories have inched up slightly in the past month at a national level and even in some of the harder hit regions in the northeast and mid-Atlantic, inventories have started to “inch” up slightly. But on a historic basis, many regions near 15-year lows and the risk of shortages is still a concern.
Shipper Conditions Index Improves
Although still at a negative 1.7 points, the FTR Shipper Conditions Index was closer to ‘balanced’ than it has been since September of 2020.
FTR added that they believe that the index will remain negative for the remainder of 2022, but the “days of double-digit declines” are over for now.
ECONOMIC BRIEFING
Despite China COVID Lockdowns Earlier, Container Volumes Still Near Record Levels
There is always a risk in running a story too early after a major, catastrophic event like Hurricane Ian. Official estimates of damage and structural surveys are still ongoing and could be for weeks. But the damage is historic, and the recovery effort could change many economic fundamentals across the country in the coming months. Early estimates suggest that more than 1.04 million homes were in the direct cone of impact of the hurricane as it came ashore as a Category 4 hurricane (just 5 mph from a Category 5). Estimates on cost damages are wildly different, but the range currently is running from $68 billion to $258 billion in personal property damages alone. That would not include the roads and bridges that were damaged, renovating and restoring waterways, ports, and other infrastructure.
As is always the case in an event like this one, the impact on the global supply chain could be significant. Lumber, plywood, and all types of construction materials will be in higher demand – just as the housing market was beginning to slow down and core construction materials were becoming more available for builders. This could reverse that trend and might create some additional tailwinds for US macroeconomic growth, especially in the construction and manufacturing sector.
But there is a downside. It could also slow down efforts to cool inflation and could keep the Federal Reserve guessing on how aggressive to be on interest rates, and if they tighten further because inflation remains hot, it might create additional threats for the rest of the country and impact housing activity in the process.
Container Freight Rates Dropping, Still Historically Elevated
There are many questions about the drop in freight rates to ship containers between key ports around the world. Obviously, economic slowing is partly at play here. But the other factor could be the massive lockdowns across China in April and May and delays in getting goods ready for export in the meantime. Ships loaded up with available freight and headed toward their destinations, but the next wave of prepared freight is still on assembly lines in China waiting for production and packing.
Container freight rates based on the Drewry Composite Index fell 3% over the last weeks of June and were 16% lower than they were a year ago at this time. However, they remain up to 3 times higher than they were prior to the pandemic. Higher operating costs are still a factor and capacity is still tight on some lanes. With US inland distribution congestion continuing to remain a factor the cost to move goods from original to final destination is still elevated, and that will continue to keep total landed costs elevated and overall inflation still above historic 10-year averages.
TRANSPORTATION BRIEFING
Diesel Balance Still Critical, Supplies Stabilized at Low Levels
Diesel inventories have inched up slightly in the past month at a national level and even in some of the harder hit regions in the northeast and mid-Atlantic, inventories have started to “inch” up slightly.
But on a historic basis, many regions near 15-year lows and the risk of shortages is still a concern. National days of supply of diesel have inched up to 30.6 days which is nearly 7 days more than it was a month ago, but it remains lower than the 35 days of inventory on hand a year ago.
More importantly, total production of diesel is running unchanged from last year’s levels, but exports of diesel and distillates has increased 1.3 million barrels a day and domestic consumption is roughly 3.7 million barrels a day. Total production is running 5 million barrels a day and imports are 143K barrels a day. Right now, production and consumption are roughly balanced.
But refineries are running at or above full effective utilization and at some point they will need maintenance (barring accidents or an environmental event like a hurricane in the Gulf refinery region). This tight balance between supply and demand and higher oil input prices continues to keep diesel prices at or near all-time highs and fuel surcharges 60-70% higher year-over-year.
Shipper Conditions Index Improves
Although still at a negative 1.7 points, the FTR Shipper Conditions Index was closer to ‘balanced’ than it has been since September of 2020. FTR added that they believe that the index will remain negative for the remainder of 2022, but the “days of double-digit declines” are over for now. Trucking capacity availability was improving slightly through April (the latest available), a condition that might have changed since the index was released.
Other sources show that trucking capacity may have tightened slightly across several markets, primarily those that have a heavy port presence and inland distribution demand as well as regions that are going through early season harvest activity.
The New York Federal Reserve’s Global Supply Chain Pressures Index is still showing historically strong global supply chain pressure. The latest data through May shows the global environment continuing to stabilize, albeit at some historically high volatility rates. Said another way, in a highly volatile world, we see some slight improvements in capacity and consistency across supply chain activity. But it remains challenging. The two indexes provide a slightly differing view of the severity of the current situation, but both agree that the trend is toward a slightly improving environment for shippers and perhaps more of a balanced relationship between the shipper and carrier communities.
