US restocking cycle to boost container demand
Retailers in the US overestimated the impact of the pandemic on consumer demand. As shoppers return, they have found inventory levels at record lows, prompting a surge in imports.
Container shipping could continue to benefit from high import levels in to major consuming economies even during the traditional fourth-quarter slowdown.
THE US is at the beginning of what is likely to be one of the biggest restocking cycles in its history, with the benefits set to flow through to container shipping over the next two to three quarters.
“We have had one of the biggest post-recession recoveries in the US in final demand in the goods economy,” said Aneta Markowska, chief US economist at investment bank Jefferies.
Consumption in the economy was still below pre-pandemic levels, she said, but there had been a decoupling between goods and services during the pandemic.
“The service economy remains impaired by social distancing but goods demand has surged, supported by fiscal policy,” said Ms Markowska.
Goods demand was six percentage points higher than it was prior to the pandemic and a similar scenario was seen in the housebuilding market.
“Nobody anticipated demand to be this strong this quickly,” she said. “As a result, we have inventory to sales ratios that are at record lows,” she said.
The supply side of the market had failed to keep up during the pandemic, partially due to supply chain issues during the first and second quarters, and partially because retailers had been caught off-guard by the sudden surge in demand.
There was also a change in the way producers were looking at the supply chain, with an increase in “precautionary inventory” expected.
“This is a trend that has been under way for a decade and it makes sense following a gradual increase in geopolitical instability, global weather events and health events, not to mention the trade war, all of which make a case for holding disrupt supply chains and make a case for holding higher inventories,” Ms Markowska said.
“And with interest rates low, the opportunity cost of holding more inventory is zero.”
The strength of the US economy had taken many by surprise after the sharp recession in the second quarter. But while the labour market had taken “a massive beating”, strong fiscal stimulus packages meant personal income in August was actually up 4.4%, despite the historic fall in employment.
Final consumer demand would depend on fiscal policy continuing, but even without any further stimulus, personal income growth would still be 2.5% more than before the downturn.
“If you look at total personal income, it looks like we didn’t have a recession,” said Ms Markowska.
Moreover, the trend towards inventory restocking was not dependent on final consumer demand.
“Based on what has been spent and how much supply has lagged, just to get the inventory-to-sales ratio in retail back to normal levels would need a lot of imports,” she said.
“One beneficiary of this will be transportation and logistics, and because the inventory restocking is skewed towards consumer goods manufactured in Asia, we’ve already seen imports surge, with a lot more to come.”
David Kerstens, transport analyst at Jefferies, said that container demand had recovered faster than expected following lockdowns, leading to the surge in container freight rates seen on the transpacific.
“Based on the restocking cycle in the US, and potentially in Europe as well, the outlook for the fourth quarter is favourable,” he said. “Volume on the Asia-Europe trade is showing signs of recovery, although not as strong as we’ve seen on the transpacific. But it definitely accelerating from the 2% growth we saw in July. The seasonal downturn will likely be less severe.”
Shippers in Asia were also noting that forward booking demand was strong into November.
“Some carriers believe that demand will be strong into January as well, with no slowdown over Christmas.”
Container volumes and rates usually slip after the Golden Week holidays, but this year could see them stay high right through to the normal pick-up in activity ahead of the Chinese New Year in February.
Source: Lloyds Loading List