© 2018 IHS Markit. All Rights Reserved.

JOC Container Shipping Outlook Presented by

Bill MongelluzzoSenior Editor

© 2018 IHS Markit. All Rights Reserved.

2018-A Most Unconventional Year in the trans-Pacific

• It was a roller coaster ride in the eastbound Pacific

• Carriers removed 3 weekly strings to West Coast and 1 to East Coast

• Cargo rolled in Asia and spot rates soared

• Carriers deployed extra-loaders and spot rates stabilized at a high level

• Blank sailings scheduled when volumes dropped

• Trade war uncertainties prompted importers to front-load holiday and spring merchandise.

• 25% percent tariffs delayed until March 1

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0%

1%

2%

3%

4%

5%

6%

7%

2015 2016 2017

Year-over-year change

US import peak season gets steeper

Source: IHS Markit © 2018 IHS Markit

Year-over-year change in August-November US import TEU volume

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

Shanghai-US East Coast Shanghai-US West Coast

Trans-Pacific spot shipping rates' year-over-year gains grow

Source: Shanghai Shipping Exchange © 2018 IHS Markit

Year-over-year change in Shanghai Containerized Freight Index spot rates per FEU

© 2018 IHS Markit. All Rights Reserved.

Intermodal rail capacity tight

• Shippers drove freight to intermodal, but capacity constraints limited how much could shift from truck.

• Railroads stopped taking new contract bookings out of Southern California, months ahead of the peak season.

• Intermodal traffic up 6.7 percent this summer, led by a 16 percent surge in trailer on flatcar, according to IANA.

• UP-CSX interchange adjustments in peak season created big challenges. CSX announced cancellation of 300 origin-destination pairs Jan. 3 (on top of about 300 cancelled in 2018)

• IPI spot rates from L.A. were higher than truck spot rates on some lanes!

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$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

LA-Chicago LA-Dallas

Domestic US intermodal spot rates out of Los Angeles spike

Source: Intek Freight & Logistics © 2018 IHS Markit

Door-to-door spot rate per 53-foot intermodal unit

© 2018 IHS Markit. All Rights Reserved.

Paying more for door to door

• Drayage spot market rates shot up 20 percent to more than $2 a mile last year Spot truck rates remained high well into the fall.

• Some shippers considered dedicated drayage with multiyear commitments to secure capacity.

• FTR reported early peak season had trucks operating at 98 percent of capacity in August.

• Several peaks throughout 2018 for trucking. Will 2019 be marked by peaks and valleys as well?

Although conditions eased somewhat in late 2018, regional capacity shortage remained.

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Widening tariff exposure

• About 50 percent, or 5.1 million TEU of the 10.7 million TEU a year that the US imports from China, were exposed to the two rounds of tariffs the Trump administration in 2018

• $16 billion in tariffs took effect in August in first round of $50 billion.

• $200 billion more in the works. A 10 percent increase took effect Sept. 17. Big hike to 25 percent postponed from Jan. 1 to March 1, 2019.

• Another peak in shipping expected in late January before Feb. 5 Chinese New Year factory shutdowns in Asia.

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37.6%

8.3%

7.0%6.0%

3.7%

37.4%

LA-LB

NY-NJ

Savannah

Northwest SeaportAlliance

Oakland

Others

LA-LB to bear brunt of latest round of US tariffs

Source: IHS Markit © 2018 IHS Markit

Share of laden import TEU volume for $200 billion in US tariffs on imports from China

© 2018 IHS Markit. All Rights Reserved.

Pain at the bunker pump

• Downward pressure on ocean freight rates last spring was partly offset by $55 per-TEU emergency bunker fuel surcharges. Bunker rates were up 50 percent over 2017

• Most beneficial cargo owners pay bunker surcharges based upon a pre-determined index. Emergency surcharges were paid primarily by small and midsize shippers and NVOs.

• Carriers were anxious to recoup some of their losses from disappointing service contracts last spring, so they increased bunker fuel surcharges

• BIG changes coming 1-1-20 with IMO’s low-sulfur fuel requirement, with analysts predicting 37-50 percent hike in bunker fuel costs. Price hikes could start later this year.

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$275

$295

$315

$335

$355

$375

$395

$415

$435

$455

$475

Price per metric ton

Bunker fuel prices jump

Source: IHS Markit © 2018 IHS Markit

Average cost of ISO 380 bunker fuel across Shanghai, New York-New Jersey, and Rotterdam

© 2018 IHS Markit. All Rights Reserved.

Fewer vessel slots meet higher demand

• The three major alliances — 2M, Ocean, and THE Alliance — each suspended a weekly service to the West Coast effective Aug-Sept., reducing total weekly capacity from Asia about 6 percent.

• 2M Alliance plus independent Zim in September reduced weekly service to the East Coast by one string, reducing total East Coast capacity 1.3 percent

• Capacity cuts main reason why spot rates remained high from July until December, peaking at $3,739/FEU to East Coast and $2,529 to West Coast

• Spot rates now below $3,000 East Coast and $2,000 West Coast

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6.0

6.5

7.0

7.5

8.0

H1 2014 H1 2015 H1 2016 H1 2017 H1 2018

TEU

Growth in US imports from Asia slows but remains slightly elevated

Source: IHS Markit © 2018 IHS Markit

Laden US import TEU volume with year-over-year change

+6.3%

+2.7%

+2.8%

+5.9%

+3.4%

© 2018 IHS Markit. All Rights Reserved.

Staying ahead in a fast-changing carrier industry • Through mergers, acquisitions and

one collapse, the number of major container lines will have fallen from 20 to 10 in a period of three years.

• Alliances help carriers manage capacity but give BCOs fewer options

• Carriers now use blank sailings to reduce capacity and extra-loaders to increase capacity on ad-hoc basis

• Despite positive signs of carrier discipline, latest spurt of mega-ship orders by Mediterranean Shipping Co. and CMA CGM may spur others to follow suit.

• Were the front-loading of shipments and the spot rate hikes that occurred from capacity discipline enough to push carriers into the black in 2018? What strategy will be used in 2019?

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• On Dec. 18, 2017, most commercial truck drivers were required to use electronic logging devices rather than paper logbooks to record working hours.

• Shippers found it harder to secure trucks for shorter hauls, as drivers and carriers refused trips that would leave them unable to find backhauls. That lengthened transit times in the US, sometimes adding an entire day.

• The ELD mandate also affects drayage drivers who don’t have to spend time finding a chassis as well as a load.

• Truck registrations, representing real trucks on the road, not order boards, rose swiftly last year, but didn’t prevent a capacity crunch.

ELD mandate reshaped US trucking market

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Truck driver ‘is the real asset’ in ELD era

• The truck driver, not the truck, is the real asset carriers offer shippers, and drivers increasingly are in short supply. That shortage helped trucking rates to rise in 2018, as carriers boosted driver pay.

• Carriers also levied more and higher surcharges as well as raising rates, increasing rates on some shipments by hundreds of dollars

• Hub Group last year levied surcharges on some shippers in Chicago, L.A., Seattle, Dallas and Atlanta on excess freight. J.B. Hunt limited the amount of excess freight accepted from shippers in certain markets.

• While intermodal volumes are expected to remain elevated, forecasts indicate the growth will be primarily driven by the domestic market, with shippers looking to move some freight to rails.

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Q4 2018 meltdown worst in LA-LB since Q1 2015

-- Unexpected surge in container volume due to front-loading of holiday merchandise followed by spring merchandise-- Distribution warehouse filled up in summer and stayed full through end of year-- Importers parked import containers at warehouses for weeks, which generated a huge chassis shortage in Southern California--Congested terminals ran out of slots for truck appointments--With yards full, terminals could not accommodate 29 extra-loaders in November and December--Terminal operators refused to accept return of empty containers-- Detention and demurrage claims soared

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Shippers turn to transloading for flexibility

• Transloading has risen steadily in LA-LB, largely a result of demand for more flexibility to meet difficult-to-predict e-commerce demand.

• This is a boon for carriers since they get their containers back faster, but there are fewer 20s and 40s for inland exporters.

• Intermodal intact shipments in SoCal down to 36.5 percent from 47 percent in 2001; transload up to 42.2 percent from 32 percent in 2001

• CenterPoint is building a facility dedicated to transloading in Oakland port to capitalize on this trend.

• There is risk that shippers lose visibility in the transloading process.

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© 2018 IHS Markit. All Rights Reserved.

Global container volume will continue to grow

• IHS Markit statistics: global container trade expanded 4.9% in 2018, and will grow 4.1% in 2019 and about 4.7%/year through 2025.

• IHS Markit: GDP growth came in at 3.1% for 2017, well above the 2.5% in 2016. GDP growth 2018 (est) 2.9% and 2.6% 2019 (est).

• However, Trump tariffs creating huge confusion on trade prospects

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Container capacity growth restarts • CMA CGM ordered nine 22,000- TEU

ships, and Mediterranean Shipping Co. placed orders for 11.

• During a Q2 2018 earnings call, Maersk Line CEO Soren Skou said there’s no business case for ordering new container ships in near future and that holding off on orders would benefit the entire industry.

• The deployment of a large number of ultra-large container ships in Asia-Europe will continue to send tonnage cascading down to trans-Pac and other trades in next two years.

• Ideal size for trans-Pacific trade is considered 10,000-14,000 TEU

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• Carriers say they need rates of $1,600 to $1,700 to the West Coast, though some analysts put the break-even costs at $1,200 to $1,300.

• Carriers possibly ended 2018 in their trans-Pacific services with a profit, but they need higher contract rates this spring if the wild gyrations of last summer and fall are to be avoided

Trans-Pac spot rates and service contracting

• Carriers have limited ability to manage capacity other than blank sailings and suspending weekly services.

• Trans-Pac capacity increased about 8-9% in 2018, front-loaded in first seven months of the year.

• Service contract rates in 2018: West Coast $1,100-$1,200/FEU; East Coast $2,200-$2,300.

• When spot rates hit $2,300 and $3,300, shipments were rolled last summer and fall

$900

$1,400

$1,900

$2,400

$2,900

$3,400

Shanghai-US East Coast Shanghai-US West Coast

Trans-Pacific spot rates stay above $2,000 to US West Coast

Source: Shanghai Shipping Exchange © 2018 IHS Markit

Shanghai Containerized Freight Index rate per FEU

© 2018 IHS Markit. All Rights Reserved.

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• West Coast share of Asian imports down to 65.7 percent from 78.4 percent in 2005.

• Mega-ships give BCOs low-cost options to East & Gulf Coast ports with 2016 Panama Canal expansion

• Increased transloading shows impact of e-commerce.

• Main gateways are set: Vancouver, Seattle, Tacoma in PNW; Oakland; LA-LB; Houston; Savannah and Charleston; Norfolk; NY-NJ.

• BCOs with high-value shipments favor West Coast transloading to Ohio Valley/mid-South for time-sensitive merchandise.

Shift in cargo to the East and Gulf coasts continues

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Contracting shift from carriers to NVOs

● NVOs’ 0.4 percent year-over-year gain in Asia import market share in 2017 to 43 percent slowest of the last decade probably increased further last year.

● NVOs have gained Asia import share in every year since 2006 except for 2012. NVOs now control 44.6 percent of US imports from Asia

● BCOs attracted to NVO service, tech capabilities, network optimization.

● Greater investment in technology helped carriers slow share loss, but focus on customer service needed

● Maersk on-line bookings seek to cut out the middleman.

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US Shippers react to coastal contract talks

● Coastal market share data shows shippers do respond to longshore contract events. Even a perceived threat of disruption can cause diversion

● Concern over ILWU contract negotiations in 2008 led to jump of 1.6 point in East Coast-Asia import share in 2007 and 1 point in 2008.

● Same scenario in protracted ILWU-PMA dispute of 2014-15. East Coast share rose 1 point in 2014 and 3 points in 2015.

● ILWU-PMA and ILA-USMX contract extensions should produce stability next few years.

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BCOs turn attention to turn times • BCOs eye terminal truck times closely, making it a bargaining factor in contract negotiations.

• Most LA-LB terminals have trucker appointment systems. Oakland, New Orleans, Vancouver, Virginia, and GCT-Bayonne have them.

• Development of port portals (GE Transportation) will enhance information sharing and set stage for predictive analytics.

• Extended gates reduce turn times and expand port capacity. Who pays?

• Chassis shortages and restrictions on return of empty containers causing trucker delays in LA-LB.

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• BCOs are benefitting from use of technology throughout the supply chain, but true end-to-end cargo visibility remains elusive.

• Advance shipment data is available, but it is not being shared in the logistics supply chain

• Ports are championing the idea of port information portals through which all supply chain participants can access shipment information as much as two weeks before vessel arrival.

• Terminal operators and equipment providers could better use predictive analytics to marshal labor resources and ensure sufficient chassis, but BCOs must to more consistent in returning chassis to the terminals.

• BCOs will not fully benefit from terminal operators’ developing trucker appointment systems until the latter can predict container availability two to three days in advance of cargo release at the terminals.

BCOs turn attention to turn times

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West Coast Ports Challenges and Opportunities• W.C. ports invested heavily in

terminal expansion past 10 years a/c mega-ships and now have excess capacity.

• W.C major challenge: improve productivity to handle 14,000-TEU+ ships to better handle BCO cargo.

• LA-LB, etc., are leaders in appointments, extended gates, repurposing land for dray-offs.

• Turn times in LA-LB 85 minutes; truckers want 60 minutes or less. Unexpected cargo surges last month increased turn times in LA-LB

• Ability of W.C. ports to compete with East Coast and Canada compromised by high rail intermodal rates.

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• BCO takeaway: Can West Coast ports improve cargo velocity enough to regain lost market share and handle big ships?

10%

12%

14%

16%

18%

20%

22%

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18

% over two hours

LA-LB turn times over two hours hold steady after improvement

Source: Harbor Trucking Association © 2018 IHS Markit

Share of average truck turn times longer than two hours in ports of Los Angeles and Long Beach

© 2018 IHS Markit. All Rights Reserved.

Measures to improve terminal efficiency paying off

• PierPass extended gates in LA-LB preventing long lines with 85-minute turn times at most terminals. Move to flat fee late last year?

• Container dwell times was consistently below 3 days in LA-LB until fourth-quarter cargo surge pushed dwell times above four days.

• Vancouver,B.C., still struggling with 5-day-plus turn times

• POLA-GE Transportation’s cutting-edge information portal expected to foster improved data-sharing among supply- chain partners up to two weeks before vessel arrival.

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Industrial Real Estate Market• West Coast port city vacancy rates

among the lowest in the US (3.5%) L.A. County is lowest at 1.2%

• L.A. rental rates in Q2 up 7.7 percent from Q2 2017 to $10.08 per SF

• All sectors contributing: regional & import distribution, e-commerce

• Direct importers, retailers, food distributors, 3 PLs all looking for space

• Gap between “A” and “B” properties is narrowing. “C” properties snapped up if in right locations (urban core)

• Inland Empire not as tight, but still the favorite location for big-box DCs

• Declining vacancy rates, increasing rental costs should continue at least into 2019

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0%

1%

2%

3%

4%

5%

6%

7%

Los Angeles Inland Empire Seattle

Industrial real estate vacancies fall up and down the US West Coast

Source: Jones Lang LaSalle © 2018 IHS Markit

Share of vacant properties by quarter and market

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

Los Angeles Inland Empire Seattle

US West Coast industrial real estate rents climb

Source: Jones Lang LaSalle © 2018 IHS Markit

Average rent per square foot

© 2018 IHS Markit. All Rights Reserved.

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