The Global Shipping Crisis
Record Import Volumes, Strong Economic Drivers, Conflict & Inflation Uncertainty
The global shipping crisis carried over into another month. February 2022 started with record year-over-year container import volumes versus 2021. February was consistent with logistics community expectations about strong demand and bookings in 2022. The economy and hiring also continue to be strong. Consumer expenditure data shows continued high demand for goods and supporting supply chain activity. Inflation and the Russia/Ukraine conflict could be the factors that depress the heightened consumer demand, but it’s too early to tell. The March update of the logistics and economic metrics Descartes is tracking point to a sustained impact on global supply chains.
In this Article...
February continued the record month trend for U.S. container import volume.
February continued the very strong start to 2022 with another record for container import volume (see Figure 1). Container import volume was down 3% from January 2022, but up 12% from January 2021 and 38% from February 2020. Considering that February this year was 3 days shorter than January, which equates to 9.7% fewer days to process shipments, it was actually a stronger import month than January. One factor that may be driving the high February volumes is importers accelerating their shipments in advance of any issues that may stem from the International Longshore and Warehouse Union (ILWU) negotiations. Another month effectively exceeding the 2.4 million container import mark indicates that the chronic supply chain disruptions (e.g., delays, variability, etc.) importers and the logistics community have been experiencing are not abating in the short-term.
Figure 1: U.S. Container Import Volume Year-over-Year Comparison
Source: Descartes Datamyne™
The shift from West to East coast continues.
Importers and logistics services providers (LSPs) continue to shift volume away from the major West Coast ports. Comparing the top 5 West Coast ports to the top 5 East Coast ports in February 2022 versus May 2021 shows that, of the total import container volume, East Coast ports now represent 44.0% of the imports while West Coast ports represent 42.6%. In May 2021, the split was West Coast 47.4% and East Coast 39.5%. All top West Coast ports declined in volume while all top East Coast ports increased (see Figure 2). The Port of Los Angeles righted its three-month container import processing decline and moved to the top spot at 409,464, still down from it high of 530,432 in May of 2021.
Figure 2: Top 10 Port Container Import Volume Shift
Source: Descartes Datamyne
Continued and stronger improvement in the Retail Inventory to Sales ratio.
The Federal Reserve Economic Data (FRED) retail inventory to sales ratio showed a more significant improvement (see Figure 3) of 0.08 to 1.16 for the latest update (December 31, 2021). The retail inventory to sales ratio is an important indicator of retailers’ ability to keep goods on physical or virtual shelves. The ratio improved but is still relatively low compared to pre-pandemic numbers. The continued record U.S. container import volumes may be one of the reasons the ratio improved as retailers try to measurably catch up on depleted inventory positions.
Figure 3: FRED Retailers: Inventory to Sales Ratio
Strong consumer demand and another strong jobs report put more pressure on supply chains.
Goods purchases by consumers is one of the most significant drivers of high import volumes and the resulting global logistics challenges. The ratio of personal expenditures of goods to services reversed course and increased by 2.4% to 54.0% (see Figure 4) for the latest reported date of January 1, 2022. A breakdown of the data shows that personal consumption was up in all three categories - goods, non-durable goods and services - by an overall 2%; however, durable goods purchases increased 9.7%. The Omicron variant’s decline has made it more of a nuisance than a determining factor impacting purchases or supply chain velocity.
Another indicator of a continued strong economy, higher demand for goods and related supply chain activity is the Federal Reserve Unemployment Rate. The early March jobs report showed a decrease in unemployed workers of 0.2% to 3.8%, reversing February’s report of a slight increase and translating into 678,000 jobs created—also significantly more than expected. The unemployment rate continues to approach the February 2020 pre-pandemic and historical non-wartime low of 3.5%.
Figure 4: Personal Consumption Metrics
Source: U.S. Federal Reserve Economic Data & Descartes
What could slow this train down? Inflation and the Russia/Ukraine conflict might.
A strong economy and hiring environment is the force behind the record demand for consumer goods and the import volumes the U.S. is experiencing; however, there are not enough goods to meet demand and inflation has been on the rise since mid-2021. February 2022 consumer prices were 7.9% higher than the same period in 2021 and the highest it has been since January of 1982, according to the U.S. Department of Labor. However, as the January 1st reported consumer goods expenditures show, the current level of inflation may not be enough to curtail expenditures and decrease import volumes.
Energy has been cited as a significant inflation factor and this is where the Russia/Ukraine conflict may accelerate inflation and help slow down consumer demand. Russian oil represents approximately 8.6% of the total oil consumed in the U.S., according to the International Energy Agency. The decision of the Biden administration to stop importing Russian oil will tighten the fuel market. This has been anticipated in the market as gasoline prices increased 50 cents per gallon in the first week in March alone, according to the U.S. Energy Information Administration. In addition, according to Ship & Bunker, ocean carriers are seeing record fuel costs of almost $1,000 per ton for very low sulfur fuel oil (VLSFO).
Another factor to consider is the impact of sanctions that are being applied to Russia, Belarus and the breakaway portions of the Ukraine. Sanctions apply to not only these regions, but also to specific companies and people. The impact of these sanctions is not limited to the conflict region and, in many cases, apply globally. While Russia in particular has more of a mid-tier stance in global trade, the impact of sanctions on specific industries could be significant.
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What to watch in 2022.
The big question on the minds of importers and LSPs is when, or if, a decline in import volume will occur in 2022. In addition, several significant one-time events could exacerbate the ability to move goods globally. Here’s what Descartes will be watching:
- Monthly TEU volumes between 2.4M and 2.6M. This consistently high level will continue to stress ports and inland logistics until infrastructure can be enhanced. February container import volume was slightly below 2.4M TEUs, but significantly higher than any other February in the past.
- Port wait times. If they decrease, it’s an indication of improved port processing capabilities or that the demand for goods and logistics services is declining. As of early March they are not declining.
- FRED Inventory to Sales Ratio. Retailers are still suffering from out-of-stock situations and want more inventory because of availability variability. If the ratio doesn’t increase, it means that retailers aren’t catching up and the demand for goods and logistics services will be inflated. February saw good improvement, but the ratio still has a way to go to reach pre-pandemic numbers.
- Goods to services ratio and goods spending. This is the root of the current situation. If the pandemic continues to curtail services spending by consumers and the economy stays strong, the “stuff economy” will continue to drive heightened import volumes. The latest numbers show increased purchasing, particularly of durable goods. The February jobs gains points to potentially more consumer spending in the future.
- Continuing impact of the pandemic. New variants are driving shock waves through global supply chains. Whether it’s cities in China on full lockdown, swaths of employees out sick or country-based restrictions, a lack of resources will constrain the ability of supply chains to recover. COVID’s impact lessened significantly in February, particularly in North America and Western Europe.
- ILWU contract negotiations. The negotiations could be uneventful or they could turn port operations and supply chains upside down in the first half of 2022 and possibly beyond. No change in February.
- 2022 Beijing Winter Olympics. Coming right after the Chinese Lunar New Year, China’s desire to reduce pollution could curtail manufacturing and logistics operations and reduce the ability of importers and LSPs to use the traditionally lower volume import season to catch up. February’s container import volumes showed no signs of an impact from the combination of the Chinese Lunar New Year and the Beijing Olympics.
- Inflation and the Russia/Ukraine conflict. Inflation may be the only way to slow down the strong U.S. economy and ultimately help to alleviate the global logistics capacity-related problems that exist. The Russia/Ukraine conflict is already making its mark on fuel costs in early March.
No concrete signs of a break in the action. February U.S. container import volumes were yet another record. Other important factors such as the most recent consumer expenditure and jobs numbers point to continued high levels of demand for goods and hence supply chain activity. This data reaffirms that it will be some time before the pressure on supply chains and logistics operations begins to lift. The wild cards are inflation and the impact of the Russia/Ukraine conflict. Descartes will continue to highlight key Descartes Datamyne, U.S. government and industry data in the coming months to provide insight into the global shipping crisis. Our current perspectives and recommendations are largely unchanged, with the exception of one new short-term recommendation in bold below:
- Evaluate the impact of inflation and the Russia/Ukraine conflict on logistics costs and capacity constraints. Ensure that key trading partners are not on sanctions lists.
- Shipping capacity constrained? Rationalize SKUs to ship higher velocity and margin goods to maximize profitability.
- Focus on keeping the supply chain resources you have, especially drivers. The old adage “a bird in the hand is worth more than two in the bush” definitely applies here. Building trips to reduce stress and improve quality of life to retain drivers is now as or more important than wage increases.
- Accelerate inventory coming in through West Coast ports now or use alternate ports as a hedge against upcoming ILWU contract negotiations.
- Shift the movement of goods to less congested transportation lanes to improve supply chain velocity and reliability. Total transit time is important, but so is supply chain predictability. Evaluate alternative transportation lanes into the U.S., including entry through northern and southern borders and inland ports.
- Evaluate supplier and factory location density to mitigate reliance on over-taxed trade lanes and regions of the globe that are potentials for conflict. Density creates economy of scale but also risk, and the pandemic and subsequent logistics capacity crisis highlight the downside. Conflicts do not happen “overnight” so now is the time to address this potentially business disrupting issue.
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