Major ocean carriers have announced higher Panama Canal surcharges and fee adjustments and are actively rerouting transits to limit or avoid the Canal because of the Panama Canal Authority’s ongoing water-saving draft restrictions and booking changes.
Retail Industry Leaders Association said consumers are prioritizing value in product purchases
The catalog of supply chain shocks keeps expanding. Droughts, typhoons, war, soaring energy prices, and tariffs have rerouted and slowed down global trade. But opportunity exists amid this disruption.
The strategies and services retailers and logistics providers deploy will separate the winners from the losers.
Supply chains built decades ago have been revamped by people’s ingenuity. With all the talk of AI, one thing is for sure: trade is founded and fortified by personal relationships and boots on the ground. Yes, technology speeds production, but you need people at the beginning, middle, and end of the supply chain to make and move freight.
The best operators, manufacturers, and retailers in the world have contingency plans for all kinds of circumstances. Looking for options is key to resiliency. These options hinge on decisions about sourcing, manufacturing, negotiations, and moving goods efficiently at the best price.
“Retailers already placed their bets,” said Brian Kobza, chief commercial officer at IMC Logistics. “They imported early, and now we want to really make sure we're relatively ready for what this fourth quarter is going to look like.”
The engine of a country’s economy is its people.
Consumer demand and consumption fuel trade. In theory, more trade = more $$$ for the manufacturing, transport, and retail industries. Trade has grown exponentially over the last several years, but the costs associated with moving that freight have also increased.
Depending on the product, consumers are spending more money on their groceries. Filling up their cars and sending packages via ground or air freight have skyrocketed. Americans who heat their homes in the winter with oil, propane, and other petroleum fuels will soon face a wallop to the wallet with nosebleed costs.
These compounded expenses have trade participants concerned.
”It has been widely reported that bananas are up 33%, coffee is up more than 20%, and the conversation around affordability is real and happening nationwide,” said Gene Seroka, executive director for the Port of Los Angeles. “The American Family is being affected. We've seen a variety of other products that have been hit by tariffs, and supply chain issues based on trade policy.”
One of those trade policies- the new trade war with Canada.
Seroka warned that U.S. tariffs on select Canadian goods will inflate the costs of rebuilding homes in Southern California after last year’s wildfires.
“Softwood lumber coming from Canada is a huge import for United States businesses,” said Seroka. “We also see a variety of other products from energy to plastics, steel, iron ore, going up as well. The all-important automobile market, where parts, components, and finished vehicles typically rotate back and forth across borders multiple times, could also be hit with several tariffs in total, making that average price of an American vehicle at 50,000 US dollars go even higher.”
Brian Dodge, president and CEO of the Retail Industry Leaders Association (RILA), said during a Port of Los Angeles briefing their members are watching consumer discretionary spending carefully.
“This is our priority as we look into the back half of the year,” said Dodge. “We're seeing behaviors that suggest that even in the face of this strain, people are prioritizing value, products that solve problems, that spark joy, that create experiences. This dovetails nicely with the expectations of the holiday shopping season…. There's a cause for optimism.”
But remember retail numbers can be skewed. You need to look at the unit sales versus overall sales. A retailer can sell fewer units but report higher sales because of inflation.
Retailers are trying hard to square that inflation circle with pulling forward freight and other cost-mitigation strategies.
Casey General Stores, third-largest convenience store chain and the fifth-largest pizza brand in the United States, beat estimates for its first-quarter earnings, but the stock fell 10% because same-store sales growth didn’t meet expectations. Peter Boockvar, one of my go-to econ sources, provided great analysis of Casey’s in his latest Boock report.
Boock referenced several key quotes from the CEO on the analyst call, including this one on consumer reaction to higher gasoline prices: “We’re seeing exactly the type of behavior that we would expect to see. Fewer gallons per trip, but more trips made, which ultimately accrues to our benefit if we have more people coming to the store. People are trading out of premium and mid-grade and opting for regular or higher ethanol blends of fuel; the higher ethanol blends of fuel carry a higher margin for us than clear gasoline.”
Dodge explained retailers have many levers to pull to mitigate the impact of increased costs. Some of those levers include sharing shipping costs with supply chain partners, front-loading freight to avoid higher tariffs or energy prices, and using IEEPA tariff refunds to offset higher fuel costs and absorb longer warehousing costs.
These are solutions within a company’s control. Unfortunately, many things are not, such as the massive decrease in refinery capacity.
Refinery Crunch
Crude prices continue to be the headline, but they don’t reflect the true reality of the energy crunch. Not factored in: the lack of global refinery capacity.
Oil must be refined to be used.
Iran has bombed Middle East refining capacity, Ukraine is obliterating Russia’s refineries, and refineries in the U.S. and other nations are running at full tilt. Nearly 9% of global refining capacity has been lost.
This is why the price of refined goods such as diesel is going up.
About two-thirds of all cargo moving in and out of the Port of Los Angeles is moved by truck. Seroka said 1,200 trucking firms are registered to do business at the port; the majority are small to medium-sized businesses.
“They are getting hit with fuel prices that are up 50% on the diesel side,” said Seroka. “The closure of the Strait of Hormuz is debilitating to many segments of economies around the world. Jet fuel prices are up. Refineries have shifted from traditional gasoline to diesel and now to jet fuel to get it to places that really need it. We're even seeing our great marine oil terminals here at the Port of Los Angeles blending these products and shipping them to nations that really need inventory. This is something we haven't witnessed in many, many years.”
The truck posts on the DAT One Load Board show that spot rates are up substantially year over year.
Trucking experts tell me that while higher diesel prices are financially painful, larger carriers have been able to weather diesel fuel price increases because they can negotiate better pricing, as competition is far lower due to immigration and licensing enforcement.
“If diesel keeps climbing and rates remain flat, we can expect small carriers to begin exiting in greater numbers as profits turn negative,” warned Dean Croke, principal analyst for DAT iQ. “We’re not quite there yet, but it’s close”.
Large truckload carriers can add the full fuel surcharge, explained Croke, so they’re mostly insulated, as the surcharge covers somewhere between 90-95% of fuel costs (MPG varies this % a lot).
“For spot market carriers who can’t pass through the fuel surcharge on top of the linehaul rate, they are much more exposed,” said Croke. “A small carrier is only able to negotiate 50% of today’s $0.79/mile fuel surcharge into the load rate, then they are still making a small profit, but about half the profit they were making before the war.”
Intermodal Moves
The higher diesel prices have pushed more freight onto the rails. This is boosting profits for the major railroads.
Not only did August volume reach a new monthly record, but the year-to-date volume through August was also the highest ever, according to the Association of American Railroads (AAR).
Fifteen of the 20 major carload categories saw year-over-year gains in August. This pushed total monthly carloads to their highest level in nearly seven years. Broad-based factory expansion has supported gains in chemicals, metals, construction materials, and other rail-served commodities.
But while this is a cost savings for shippers and a boost to rails, Kobza said the switch from road to rail is actually compounding the trucker crunch.
“On intermodal, you need a drayage provider on the front end and the back end (of the container move),” said Kobza. “So it may take that long haul truck off the road, but it actually adds more business and more volume and demand on the drayage trucking side. So it is an interesting dynamic shift.”
This shift will continue as the prices at the pump keep rising.
West Coast Solution?
Adding to these challenges, trucking and rail companies along the West Coast anticipate larger freight volumes in the coming months.
More U.S. companies are expected to bring additional freight into the West Coast ports instead of going through the Panama Canal and unloading at East Coast ports.
It’s all about mitigating Mother Nature.
The Panama Canal Authority has already instituted draft restrictions and reduced vessel transits to conserve water ahead of the “Godzilla El Niño.” In an interview with me, Ricaurte Vasquez, then administrator of the Panama Canal Authority, said the upcoming El Niño was expected to last longer, and the “soil is drier now, so there is less water retention currently in the surrounding areas and the watershed, which makes things more complicated.”
Shippers are being charged additional Panama Canal surcharges and fees from the major ocean carriers. The ocean carriers are also actively rerouting transits to limit or avoid the Canal.
Mediterranean Shipping Company (MSC) announced regular weekly calls to the Port of Long Beach with its megamax container ships exceeding 23,000 TEUs starting in September.
“If that doesn't signify demand on the West Coast, that should be it,” said Kobza.
IMC, along with its partner Kuehne + Nagel, announced an extra loader vessel departing China this September and arriving in Los Angeles in early October. This is to ensure replenishment products arrive before China’s Golden Week (October 1 to October 7).
Like water, trade will always flow by the path of least resistance. The ability to pivot by creating services to move and receive freight is one of the most underrated stories of the last decade. We all know the supply chain has been taken for granted in the past, and it’s happening again.
Calling logistics “resilient” oversimplifies what is happening in real time. We are witnessing mankind’s power to excel in the face of uncertainty.