Hanjin Collapse May Push West Coast Trucking Rates Higher

Written by Mark Montague, manager of industry pricing for DAT Solutions. This is one in a series of periodic guest columns by industry thought leaders.

Mike Montague headshot

Mike Montague. (Photo: DAT Solutions)

The collapse of Hanjin Shipping Co. has been a focus for supply chain executives in recent weeks, but the impact on trucking in the United States is only beginning now.

Truckers can expect rates to go up, putting more money in their pockets. This is the result of a domino effect caused by the bankruptcy of Hanjin, one of the world’s largest container shipping companies.

Its collapse has created turmoil in the shipping world, leaving ships floating outside of ports with no way to pay for unloading cargo. Hanjin still has dozens of ships out at sea, and at one point there was as much as $14 billion worth of cargo floating on the world’s oceans with no destination that would accept it. The company filed for receivership in South Korea late last month and for bankruptcy protection in the U.S. a few days later. Hanjin was unable to work its way out of a mountain of debt piled up from years of steep losses and overcapacity in the shipping industry.

Although Hanjin appears to be moving toward a resolution in terms of how to manage all that freight, the ripple effects of the shipping giant’s bankruptcy will continue to plague the global supply chain in the coming weeks and months.

In the U.S., the impact will be felt primarily by shippers who have to wait longer than planned for cargo to arrive from Asia.

The lion’s share of Hanjin cargo has yet to arrive at its destination, and many shippers will be scrambling to make new arrangements. Those rescheduled dockings will be competing for berths during October, a busy time at West Coast ports. The Los Angeles-Long Beach ports complex is the biggest in North America by far, so additional congestion there could add to pressure on outbound freight volume and rates within the next few weeks.

For cargo that includes consumer goods, the pressure will be intense to move it to distribution centers and retail outlets before the Christmas shopping season.

Something similar happened in 2014, when the labor contract between the International Longshoremen and Warehouse Union and the Pacific Maritime Association, which helps negotiate contracts for employers at ports on the U.S. West Coast, expired. Nearly 20,000 longshoremen and other dockworkers were without a contract for nearly six months as negotiations dragged on.

Productivity slowed, and shipping companies and their customers scrambled to reschedule cargo to avoid the threat of missed delivery windows.

How did this play out in the trucking market?

Let’s look at load-to-truck ratios on the spot truckload freight market, which measure the number of available loads compared to the number of available trucks to haul them. (Spot truckload freight is defined as a load that is not under contract between a shipper and a carrier.)

In June 2014, when the ILWU contract expired, the van load-to-truck ratio in the Los Angeles area was an average of 4.6, meaning there were 4.6 available loads in the area for every available van.

Hanjin freighters docked at Port of Long Beach

Hanjin freighters docked at Port of Long Beach. (Photo: Hanjin)

By October 2014, the load-to-truck ratio was 9.8 — more than double and unusually high. There were a lot of $3-a-mile spot rates coming out of L.A. to Denver, Las Vegas and Salt Lake City. Spot rates in the outbound lane from L.A. to Phoenix approached an all-time peak average of $2.57 per mile, not including fuel surcharges.

The load-to-truck ratio began to fall sharply in November, however, when productivity at the ports slowed to a crawl. Ships waited in berths or anchored offshore. Freight moved again in fits and starts until all Christmas retail merchandise was on the way to its final destination. By early January, with the slowdown in full effect, demand for outbound freight transportation from the Los Angeles market fell off a cliff. There was plenty of cargo to move; it was just stuck in the ports. And those $3-a-mile rates? They were sharply down, closer to $2 a mile.

Let’s fast-forward to present day.

This year, the load-to-truck ratio hit 5.5 loads per truck in June and dropped down to 1.5 in August. That’s a typical seasonal pattern. In the first half of September, the ratio rose to 2.3 loads per truck, also a typical trend.

After Hanjin’s announcement last week, the load-to-truck ratio in Los Angeles surged from 2.3 to 4.6, with shippers eager to clear their goods out of the area and avoid the type of backlogs they experienced a little more than a year ago.

While the Hanjin situation affects far less freight than the West Coast labor dispute did, congestion is already a problem.

Currently, there are some 500,000 Hanjin containers stacking up in the ports and adjacent container yards that the company cannot move promptly. Some of the containers are mounted on over-the-road and intermodal chassis owned by other shipping players, and now they are unavailable for freight moves by other companies. A chassis shortage at the port typically leads to shipping bottlenecks in the rail intermodal segment.

Related: Shipping Container Surplus Recycled Into Homes, Stores

While all of this is going on, the Midwest and Northwest are reporting strong fall harvests, adding to demand for dry and refrigerated vans. Weather events, including floods and hurricanes, have tied up capacity in August and September, and there is ongoing demand for trucks in the affected areas, to assist with disaster relief and rebuilding.

All these factors are in the mix, and when Hanjin is added, the rate outlook is much brighter for truckers in the coming weeks and months.

Editor’s note: Mark Montague is manager of industry pricing for DAT Solutions, which operates the DAT network of load boards and RateView rate-analysis tool.

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