Cowen Ports State Conference Call: ‘Railways Biggest Bottleneck Ahead’


Written by

Jason Seidl, Matt Elkott and Elliot Alper, Cowen and Company

Photo BNSF

Widely reported excess freight from China due to shutdowns seems overpriced, and a potential backlog ahead (expected to arrive in the last week of June) is likely due to increased inventory, equipment issues and a struggling rail network. Our panelists – the head of a West Coast port, the CEO of a drayage company, and the CEO of a container consolidator and intermodal company – were optimistic for 2022, but expect a softer in 2023. Consumers continue to lean on “Dinner and Disney” in a spending shift.

Inbound freight has been fairly stable over the past eight weeks despite lockdown headlines in China, with only a slight increase in the coming weeks despite the lifting of restrictions in Asia. As some of the largest ports in China (Shanghai) experienced closures, retailers and management teams turned to other smaller ports in China to transport goods, normalizing many movements of goods despite large discouraging titles. There has been a slight increase in freight over the past two weeks on the Port of Los Angeles/Long Beach, but this appears to be largely following seasonal trends. The real challenge is that retailers push orders forward (back to school, fall fashion, even holiday season) so far in advance, which can create high and unnecessary congestion, which our panelists plan to achieve more. later this month and the first week of July.

Lessons were learned last year at the Port of LA/LB, and the biggest bottleneck over the coming weeks and months will be the rail network. The majority of goods entering ports were take-out inventory (patio furniture coming in from Asia in September and not needed until spring). Railroads have struggled to keep up, especially on the West Coast (despite a hiring frenzy), and equipment and labor continue to challenge the system. One panelist said the rails don’t have a quick fix and will take at least 2-3 months to see improvements from their end, which could hamper intermodal growth in the near term, in our view. Because there are still problems with network fluidity, western railways cannot take on as much freight as shippers would like. A panelist shared an anecdote that a retailer is paying thousands of dollars a day in demurrage charges because inventory is stored in containers in Chicago. This retailer has little choice but to issue the check because there is no available warehouse space, which is always at a high price and (except in an economic downturn) is quickly absorbed. .

There continues to be a backlog of vessels, equipment and space in all major markets, and while dwell times have improved at ports, they have not improved at destinations.

Labor negotiations on the West Coast will almost certainly not conclude until June 30 (when they expire), but that is expected and should not cause concern. All parties, including the White House, are watching very closely and are unlikely to let negotiations go too far. As for the infrastructure bill, there’s about $17 billion for ports, but it’s too early to say where and when they’ll be (applications are due this summer and projects take 1-10 years) ).

Panelists shared their thoughts on how COVID has shaped the future of supply chains. An e-commerce revolution has created a “couch culture”, forcing retailers to build hundreds of warehouses across the country, instead of 2-3 major hubs, putting pressure on capacity and development. Consumers were once the last mile drivers. Another panelist said he doesn’t believe the idea of ​​offshoring or offshoring will play out as much as some think, but instead companies will rely on ‘nearby storage’ and hold a much larger inventory base in their warehouses, so they’re not “running out of key ingredients” like many were through COVID.

From a macro perspective, all panelists spoke of a somewhat bullish outlook for 2022, but see some softness in 2023. Most retailers are forecasting a softer year, with volumes in Asia (not due to the closures) down 10%, according to a panelist. One panelist cited the emerging “Dinner and Disney” trend as consumers shift their spending significantly away from physical goods. Finally, new shipbuilding will come online next summer, which should reduce congestion (and pricing) if freight is not yet normalized.

Key words: Cowen and company, review

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