A Window into U.S. Trade: Container Activity in the Wake of Disruption

April 08, 2020
We spoke with Neely Mallory III, CEO of Mallory Alexander Logistics, on the freight container market during the COVID-19 pandemic.

In our continuing coverage of the logistics and supply chain in the age of COVID-19, Lewis Hart, head of Commodities & Logistics at Brown Brothers Harriman, interviewed CEO Neely Mallory III of global freight forwarder Mallory Alexander Logistics to discuss current activity in the freight container market.

There is perhaps no greater barometer of U.S. trade than activity in the container market. The U.S. imports some 66,000 TEUs1 and exports roughly 31,000 TEUs each day, which together account for between 20% and 25% of the country’s GDP. As COVID-19 continues to wreak havoc on economic activity, Mallory shares his on-the-ground insight into what’s happening in China and what that could portend for an eventual U.S. rebound.

Brown Brothers Harriman: The COVID-19 situation originated in Wuhan right around December 31, 2019. Talk about how the beginning stages of this health crisis affected containers leaving China.

Neely Mallory III: We believe that COVID-19 hit mainstream news on December 31 last year but had some areas of concern in Hubei province prior to that date. Wuhan traditionally ships auto parts, high-tech goods and medical goods. Goods usually move intermodal down the Yangtze River, but Shanghai province shut down this flow on January 30, 2020. This is when export container volume started slowing. Then the real drop in volume came after the Chinese government escalated controls on the spreading virus during Chinese New Year.

BBH: About three months later, what are you seeing on the ground in China? Are container shipments picking up, and by how much?

NM: We thought we would see an uptick in March. So far, we are back to two-thirds of our normal export volume. We first saw an uptick in South China – Hong Kong and Shenzhen – in early March. They are now back to 90% of normal volumes. In North and Central China, we are back to 60% of normal volumes, and that uptick came in mid-March. We thought in April we would see a dramatic increase in bookings and container volumes, but all is not looking good. U.S. importers are starting to cancel orders due to the impact of the shelter-in-place restrictions and just a general fear of recession as the virus starts to affect the U.S.

BBH: With the pandemic spreading across the world and now in the U.S., we are hearing of container shortages. Is your team presently able to get containers to the right place at the right time? 

NM: When the China trade deal was signed, we really saw an uptick in export bookings and believed we would have an excellent export year through July 31, the end of the United States Department of Agriculture marketing year. We are very focused on U.S. exports, most of which is agriculture, pulp, paper and forest products. Most of these commodities originate in the middle of the U.S. I was in Dallas a few weeks ago and saw firsthand the container shortage facing exports – driven by the lack of import volumes and further shortages at the large intermodal centers. This is not just Dallas; Memphis, Kansas City and Chicago are also experiencing shortages.

The lofty increase in activity that followed the signing of the China trade deal is unlikely to re-emerge during the COVID-19 period. Many commodities have also dropped dramatically in price with two outcomes. First, some buyers are canceling older, high-priced purchases. Second, with the lack of ocean equipment, shipping dates are not being met, and very few letter of credit extensions are being granted, also resulting in lost sales up and down the supply chain. There is much talk of new sales based on the lower-priced commodities. I think we will have a net gain between cancellations and new sales. These two scenarios are not focused on China alone, but all U.S. agriculture buyers.

BBH: Have you seen other disruptions in the supply chains for containerized freight? Are container terminals open for business? How about other slowdowns in the movement of container freight?

NM: So far, there have been temporary closures of the Port of Houston for virus fears, but they reopened about 12 hours later. We have also heard the Port of Miami and Port Everglades have cut back shifts due to reduced volumes.

BBH: In the energy markets, we’ve seen a demand shock from COVID-19 and a supply shock resulting from the OPEC-Russia dissension. As a non-vessel operating common carrier, you have unique insight into the containerized freight markets for energy. How has container freight pricing changed in the past few months? Do you have any thoughts on where it’s going?

NM: Fuel surcharges are set on a trailing quarterly basis, and although we have seen oil prices drop, we have yet to see price drops in low-sulfur fuel or bunker costs. It may be coming, but the implementation of IMO 2020 compliance is also a factor.

In terms of Trans-Pacific Eastbound rates, we thought that once we saw shipping pick up out of China, container rates would spike, but they have not yet done so. Many thought they would have to buy their way on to ships in April with the return of big volumes to fill empty U.S. shelves. The ocean carriers have recently increased blank sailings to support prices, and due to the low demand, we continue to see low rates and do not expect any major changes in the near term.

BBH: When and if container terminals are shut down, how will demurrage and detention charges be processed?

NM: As for detention and demurrage issues at the ports, we have asked the terminals “what if” and have not been given an answer, but when the uptick comes in April or July, we expect major congestion and an infrastructure that cannot keep up with import and export demands. To get the goods moved, we are going to need all ports on all three coasts hitting on all cylinders.

Don’t forget something along the same subject as detention and demurrage, and that is rail storage, which importers pay when the railroads and their customers – the ocean carriers – don’t perform. We have been bracing for this with the projected spikes in volume in April, but this may also slide back a few months.

Ports are advising that detention, demurrage and storage will be charged in full at Los Angeles/Long Beach, as they will need to run extremely efficient operations to get the much-needed medical supplies moved timely.

BBH: Neely, thanks for chatting with us. We look forward to continuing the conversation as the situation evolves.

1TEU = twenty-foot equivalent unit; the standard unit size of an intermodal container. TEU figures cited exclude empty container volumes.

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