Let’s talk about some potentially good news.
On the President's recent visit to Los Angeles, he met with the heads of the International Longshoremen and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). After the meeting, the ILWU and PMA issued a joint statement acknowledging that while they don’t expect a new contract to be established by July 1, when the current contract expires, both parties have said they’re committed to keeping the ports open.
While shippers and carriers may have breathed a sigh of relief, there are some very important issues to resolve and thus, some concerns about what will happen if the negotiations drag out.
One top concern is that the longer this goes on without a contract, the more likely it is that there will be a slowdown at the ports as the ILWU works the ports "according to the rules." A Logistics Management article covering the negotiations pointed out that based on what has happened in previous negotiations, there is a distinct possibility that there will be some level of disruption if there is the perception that the parties are not negotiating in good faith.
Some experts have highlighted the fact that the ILWU has some significant leverage in these negotiations. In 2021, the ocean carriers and terminal operators had record profitability. It was also a year where the country also got a glimpse of what happens when the ports get congested. In short, no one wants to see the ports shut down or see a significant reduction in productivity. The PMA is on record that they want to see a higher level of automation. Suffice it to say, the ILWU doesn't think too highly about that idea.
Add it all up and you can see why it may take a while to reach an agreement between the ILWU and the PMA. The Biden Administration is on record as stating they will not invoke Taft - Hartley and force the ILWU to work without a contract. But they have tempered this with statements that keeping the ports open and operating productively is extremely important for the health of the economy - especially as we head into the November elections.
More Good News! Inversion of spot rates to contract rates in the ocean market.
Another item on the good news front, for shippers at least, is the decline in spot rates on ocean moves that’s resulted in an inversion of spot rates to contract rates. In fact, in the "whoever thought this would happen" category, we have seen instances where the spot rates are below the contract rates and containers are moving below the $10,000 per container threshold.
Does this foretell a freight recession? Or does it simply reflect the uncertainty in the market and the impact of the disruptions at the Chinese ports due to the prolonged Covid restrictions? It’s too early to tell.
One thing we are sure of is that now, more than ever, you could benefit from having a contingency plan that addresses the variability in the supply chain. If you have any questions or could use some ideas for how to put together a great plan, we encourage you to get in touch.
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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