In the face of international uncertainties – the most recent being the United Kingdom’s vote to leave the European Union in a move dubbed the “Brexit” – consumers appear to be reticent about spending, despite positive economic factors on the home front, according to Ben Hackett, partner of international maritime strategy and trade logistics firm Hackett Associates.
Hackett, whose firm produces the National Retail Federation’s Global Port Tracker report, said this dynamic is behind his prediction that the San Pedro Bay ports should only expect to see a half percent growth in imports and a slight decrease in exports this year.
Mike Keenan is the Port of Los Angeles’s director of planning and strategy. He expects the port to experience an overall cargo traffic increase of 3% to 4% this year. (Photograph by the Business Journal’s Larry Duncan)
According to officials at the ports, who have somewhat higher expectations for the year than Hackett, financial pressure on the shipping industry and slow economic growth in China are also at play in their own modest cargo forecasts.
Hackett referred to his half percent import growth projection as “not very good” for the San Pedro Bay ports but did note that he expected them to do better than West Coast ports overall. The issue isn’t that cargo is moving away from the ports of Long Beach and Los Angeles, according to Hackett. Rather, it’s “weak trade” across the board.
Weaker than expected consumer demand has led to an imbalance in the inventory-to-sales ratio for retailers, which Hackett said is currently “dangerously high in terms of it possibly being a precursor to lead into a recession or [economic] weakness.” The inventory-to-sales ratio is about 1.40, down from 1.41 in the first quarter, he noted. This figure means retailers have inventories that cost about 40 percent higher than the total revenues they’re earning in sales.
There are several factors contributing to less than robust consumer demand, but all of them have one characteristic in common: uncertainty. This uncertainty is being spurred by a mixed bag of economic data that’s making consumers unsure as to the nation’s standing, instability in the Middle East, “the Trump factor,” and most recently, Brexit, according to Hackett.
Hackett, who happens to be British, said the process of Great Britain leaving the European Union (EU) will take two to three years. “That allows time to negotiate the free trade agreements,” he said. “Unless the EU wants to destroy its industries, it will enter into free trade agreements.”
Jon Slangerup, CEO of the Port of Long Beach, has pulled back on his earlier forecast that the port would see 3% to 3.5% growth this year. Since the first quarter, he has readjusted his outlook to 1% or 1.5% growth in overall cargo volumes by the end of the calendar year, he told the Business Journal.
“It has an awful lot to do with the declining consumer demand around the world, particularly in non-U.S. markets,” Slangerup said of his adjusted outlook. “The U.S. still has decent demand, but that’s even way off. Almost all of the retail associations you might talk to, who had a pretty robust view four or five months ago, have a much more modest view for this year as a result of how everything shifted so fast.”
Slangerup noted that while the inventory-to-sales ratio for national retailers is “still high,” he expects inventories to diminish over the next month or so, with retailers then starting to replenish inventories starting in July. But the ratio doesn’t indicate any red flags, in Slangerup’s view.
“They built up a tremendous amount of inventory because the growth rate was robust last year,” Slangerup said of retailers. Last year, the port nearly surpassed its best year ever for cargo growth, partially because the port experienced a surge in cargo traffic following its recovery from a prolonged period of congestion, he explained. “I think that it’s a healthy, normal cycle. But it’s just smaller growth numbers than we and the industry had predicted.”
Slangerup also pointed out that Chinese manufacturing has been slowing down, and because the country is responsible for a major chunk of the port’s business, the trend has been felt at the port. “The good news is that was picked up by some of the neighboring Asian economies, so on a net basis there’s the same amount of manufacturing going on,” he noted. Asian countries with expanding manufacturing sectors are largely clustered in the southeastern portion of the continent, including Vietnam, Thailand, Indonesia and Malaysia, he explained.
While the Port of Los Angeles typically budgets with the expectation of 2% to 3% cargo growth annually, this year the port is expecting an increase of 3% to 4%, according to Mike Keenan, the port’s director of planning and strategy.
Year to date, the Port of Los Angeles is pacing 8.6% of last year’s overall cargo traffic. Keenan attributed growth to the port’s efforts to optimize the flow of goods through the supply chain and to win back confidence following the period of congestion it experienced from late 2014 to early 2015.
In Keenan’s view, consumer confidence in the U.S. is “fairly good” but hasn’t caught up with growth and stability in the overall economy. “But the longer people keep waiting for the shoe to drop and it doesn’t drop, that confidence builds,” he said.
Keenan said the “downside risk” is that as the U.S. economy’s growth outpaces that of China and other trading partners, the dollar becomes too strong to support an increase in exports.
Brexit has already caused the U.S. dollar to gain ground over other foreign currencies, Slangerup noted. “We had actually seen some improvement in exports in the last few months. I just have a fear that, until things stabilize with this British withdrawal from the EU, it’s hard to predict,” he said. “But I don’t think, at the end of the day, that it means much at all for the U.S. in terms of import or export. It’s such a tiny number.”
Financial stresses on the shipping industry are more at play in Slangerup’s outlook. The prices shipping companies are charging to ship individual containers are at historic lows, he noted. These companies invested in megaships before the Great Recession, when the outlook for trade was strong, he explained.
“We’re seeing a structural issue related to capacity because all these ships that are coming online this decade were ordered when there were very robust views of what the future looked like,” Slangerup said. “So all this capacity was purchased, and it’s coming online at a time when demand is down.” With capacity exceeding demand, shippers have had to lower their prices considerably.
“It’s probably never been as bad as it has been right now in terms of the financial pressure on that segment of the business,” Slangerup said of the shipping industry. “It’s coupled with the fact that the railroads are also recovering from some really serious shortfalls in volume and revenues and profits. So you have two major segments of the maritime business feeling tremendous financial pressure,” he explained. “And it has trickle down impacts on terminal operations. . . . It’s had a big impact.”
The shipping industry may look to major airlines for inspiration in solving this problem. “The obvious answer is the same answer that the airline industry struggled with over the last couple of decades and has now solved – and that is the ability to match capacity with demand,” Slangerup said. Airlines have formed alliances and consolidated, leveraging their combined resources to “cross-sell and manage capacity,” he explained.
In April, CMA CGM, China Cosco Shipping, Evergreen Line and Orient Overseas Carrier Line announced a new partnership called the Ocean Alliance. The move shook up existing alliances, leaving some shipping companies without partners.
“You’re seeing the realignment of alliances, which can cause problems for the ports in terms of which terminals are being called at,” Hackett said.
Another issue is that as more mega-ships are put into service, ocean carrier lines are going to have to reevaluate where to send them, according to Hackett. “They will show up on the West Coast just because there is nowhere else to put them,” he said.
Although the Panama Canal just reopened after an expansion to accommodate larger vessels, it is still unable to handle mega-ships able to carry more than 14,000 twenty-foot equivalent units (a twenty-foot-long container) of cargo, Slangerup noted. Many have speculated that the canal’s reopening might cause the San Pedro Bay ports and others along the West Coast to lose out on business, but Slangerup said any impact should be small. “The fear that a lot of people write about – that we’re going to see this big fall off in the West Coast business – is not based in reality,” Slangerup said.
Kurt Strassman, Southern California industrial and logistics market leader for CBRE, Inc., estimated that the San Pedro Bay ports might experience a 3% to 5% drop-off in business related to diverted trade through the Panama Canal. He called the decrease “nominal.”
“It’s interesting, you read so much about the East Coast ports benefiting from the Panama Canal expansion – and they certainly have benefited and will – but one of the things people sometimes overlook is that these ports just can’t handle one of these mega-ships . . . that are carrying large volumes of cargo,” he said. “You need port and business infrastructure, and that takes a long time. And the ports of Long Beach and Los Angeles have done a fabulous job of reinvesting to maintain a dominant market share in goods coming in to America.”
Although Slangerup’s projection for cargo growth isn’t as rosy as it was at the start of the year, he said that 2016 “is just a hiccup.” Moving forward, he expects 3% to 4% growth in the years ahead based on a long-term forecast recently completed by both ports. “Even with that modest rate of growth, we [will] more than double in 20 years, probably,” he said of cargo traffic.
Keenan also cited future estimated growth of about 4% a year, which he called “a fairly reasonable, very healthy growth rate for us to follow long term.”