NewsLens April 2022 – When will things return to normal?

May 6, 2022

Periodically we are asked when things will return to ‘normal’ (personal aside, you have to love open-ended questions). The short answer is that we believe contract rates will begin to move close(r) to ‘normal’ in 2024.

Periodically we get the question about when things will return to ‘normal’ (personal aside, you have to love open-ended questions). The short answer is that we believe contract rates will begin to move close(r) to ‘normal’ in 2024.

1. Current data suggests the second half of 2022 is going to have its similar challenges in volatility, capacity, and delays as the second half of 2021, suggesting 2023 contract negotiations won’t start on much better footing.

Note: this doesn’t preclude sub-cycles in the spot market given seasonality and specific trends, and spot market should be seen as distinct from the bigger / contract picture.

2. Supply chain disbursement is taking place.

Sourcing disbursement will not have the hoped-for material effect in the short term. Even with stable and supportive government policies, it took China decades to build their infrastructure. But sourcing strategies will disperse – expect a range of outcomes including capital intensive on-shore solutions, near-shore networks (similar to the automotive industry) and continued migration of manufacturing to other, low-cost, labor markets. Though it will take time.

Route disbursement already started taking place in 2021 as shippers sought to evade the various bottlenecks (e.g., SoCal ports through pushing to USEC and rails by transloading and trucking inland).

Look for significant innovation here with notable developments at the “early mile” (the point at which the carrier hands the shipment over) – as a pressure relief valve for ports to divert volume (and therefore a virtual extension of the ports), as strategic cost plays (e.g., lower space / labor expenses vs port-adjacent locations) and as a place to add supply chain capabilities.

3. Of the US government initiatives, we’re bullish on momentum from the FMC Data Initiative – combined with market innovations – having a material effect.

It seems reasonably clear as of this writing that the FMC will put something forward like the National Ports Information System (originally proposed by the FMC about a decade ago) to store and present data elements such as vessel arrival, container destinations (so that containers can be more rapidly pulled from the port), and container availability.

While the outcome of the specific initiative will take time (measured in years), expect to see the effects of information-sharing among participants starting to take place – in the form of terminals cooperating with BCOs for longer-term storage at off-site locations or coordinating use of rails to expedite moving containers to inland points.

4. High transaction retailers (e.g., Albertsons, Amazon, Costco, Home Depot, Walmart) will continue to invest in capacity (i.e., ocean transport, space, or truck transport) as those companies are best situated to get the returns on investment.

More interesting will be what happens down-market and whether a player such as American Eagle or Shopify can aggregate the transactions of smaller retailers to do something similar and become more of a wholesale 3PL operation.

Aside from a general view of contract rates, how one looks at these trends is specific to one’s role and market competencies – some of which we already noted or suggested. Additionally, we expect the FMC Data Initiative to negatively impact scaled visibility vendors such as FourKites and Project44, and we strongly recommend freight forwarders invest current incremental margin dollars to boost their digital capabilities to catch up to the ‘digital freight forwarders’ – and better align the valuation multiples of those entities (although, in the spirit of full transparency, that last part is talking our own book since that is a core part of our business).