Half of the freight passing through LA and Long Beach ports is from or going to China
The Los Angeles freight market may have found the bottom of its customary July ‘mellowing’ as inbound container rates surged on tariff fears, but there’s still very little clarity as to how big a risk more protectionism might be. This morning’s strong retail numbers suggest that the current expansion cycle still has legs; the next few weeks will tell us how strong fall will be for truckload rates.
After the July 4 holiday, the rate of turndowns outbound from Los Angeles began contracting: SONAR’s L.A. outbound tender rejection index (OTRI.LAX) fell from 18.55% to 14.59% by July 13. At that point, the turndown rate stabilized, and improved to just over 15%. The outbound tender rejection index measures the percentage of all outbound loads tendered from a certain market that are rejected by carriers. The direction and magnitude of movements in OTRI point to the balance of supply (truck capacity) and demand (freight)—the index increases when carriers reject more loads because they don’t have capacity or are trying to take advantage of higher rates on the spot market. Abrupt changes in OTRI can also be leading indicators of spot rate volatility.
The tender lead time for the Los Angeles market (TLT.LAX) has risen to exactly 2 days, but is still well down from the 2.35 day lead time shippers had given their loads earlier in the month. Tender lead time measures the duration between the time a shipper tenders a load and when the load is to be picked up, and indicates shippers’ attitudes toward freight market volatility. Los Angeles is running much tighter than the national average (TLT.USA) at 2.61 days.
We think that OTRI.LAX illustrates a stabilizing freight market in Los Angeles. Last week, container rates from China to the North American West Coast (FBX.CNAW) spiked on tariff fears as Asian shippers scrambled to lock down capacity and the container lines took advantage of the emotional market to pump their rates. Rates for a 40 foot container box jumped from $1,168 on July 1 to $1,661 on July 8, and stayed high at $1,632 for the following week. Those increases appeared to be unrelated to capacity tightness on the maritime side, but in a few more weeks, we’ll know if that lane has truly broken into a new range.
According to Stifel’s First Watch Maritime Industry Update dated July 15, containership idle capacity is hovering at about 1% (down from about 3% at the end of 2017), which should be a leading indicator for average charter rates to continue strengthening. The fact that containership idle capacity is staying so low tells us that transpacific trade flows of merchandise (as opposed to soybeans or crude oil) have not yet been significantly impacted by tariffs.
The dollar value of Chinese exports in June rose 11.3% year-over-year, only slightly slower than May’s 12.6% year-over-year increase, and China’s monthly trade surplus with the United States reached $28.9B in June, a record monthly high. China’s trade surplus widened in part because shippers rushed to push freight out of the ports before tariffs hit at the beginning of July, and partly because China’s economic growth slowed and the country imported fewer goods. The Port of Los Angeles estimated that up to 15% of the shipments moving through its terminals could be subject to Chinese and American tariffs, and more than half of the freight passing through the port is going to or coming from China. Meanwhile, the Port of Long Beach reported its busiest month ever in June, which saw 384,095 imported container boxes come in, a 14.5% increase year-over-year.
Last week, Fitch Ratings released a report arguing that while tariff risk to American and Chinese corporates is still limited, tit-for-tat retaliatory duties could raise credit risk and “in rare cases cause rating actions where issuers are already under pressure.” The report’s authors wrote that “Manufacturers may also be exposed to rising costs if suppliers are procuring inputs from China subject to a tariff. These impacts are unpredictable, with many large manufacturers, particularly in the technology sector, using China as one step in a complex supply chain. The imposition of tariffs on a range of manufacturing inputs could have a negative effect on cost structures and margins.”
The THE Alliance of container lines (Hapag-Lloyd, Ocean Network Express, and Yangming) said it would end its PS8 transpacific service, which will take 6,590 TEUs of capacity off the market beginning in late July. The last sailing on this service, which rotates between Tianjin, Qingdao, Shanghai, Pusan, Prince Rupert, Los Angeles, Tacoma, Pusan, Kwangyang, and back to Tianjin, leaves Tianjin on July 25. The move by THE Alliance does not represent a significant diminishing of transpacific capacity, though.
Dallas outbound turndowns (OTRI.DAL) also stabilized last week and are currently sitting at 21.28%, about the same rate as July 6 (21.26%). Dallas matters to the West Coast because it’s the natural entry point into the interior of the country from Los Angeles and Long Beach.
According to DAT’s RateView tool, spot rates between the two hubs have also stabilized. Dry vans from Los Angeles to Dallas averaged $1.99 excluding fuel in the month of June, and are averaging $2.01 over the past seven days. Dallas to Atlanta dry van rates are also holding steady: they averaged $1.80 exclusive of fuel during the month of June, and stayed at $1.80 over the past seven days. Stable spot rates leaving Los Angeles and Dallas reinforce the ‘re-balancing freight market’ thesis.
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