Commentary: Coronavirus sickens US economy, could kill container volumes

Container imports into the 10 largest U.S. ports dropped 10.2% in February, an acceleration from January’s 3.5% decline and similar to December’s 12.5% drop.

The one-two punch of the China tariffs and the coronavirus crisis drove the February downturn. Vagaries related to the Lunar New Year holiday also make single-month comparisons in these early months less meaningful. However, broader actual measures point to a consistent downward trend. The six-month trailing numbers are down for the sixth straight month — to a 6.7% decline — and the 12-month trailing numbers are down for the 10th straight month — to a 2.2% decline.

My anticipation was that if the tariffs still in place remained, the downward pressure on volume for the first nine months of 2020 would approximate a 10% decline, similar to the actual fourth-quarter experience. The coronavirus has changed everything. Its impact on February inbound volumes was moderate but will not ramp up considerably. What started as supply-related disruptions in China has now grown exponentially into demand- and supply-related disruptions across the world. The impact on inbound container volume into the U.S. in March will be significant.

With this recent unprecedented deceleration in economic activity, the U.S. is now in a recession. The depth and length of that recession remain to be seen. We are in a vicious cycle in which steps to stem the health crisis are creating supply and demand shocks, with ripple effects resulting in more disruptions. For example, just the flow-through economic activity effects from the declines in inbound container volume we’ll see will be material. Similar knock-on effects will be playing out in countless ways across many industries in the weeks and months ahead.

The primary catalyst for changes in inbound container volume to the U.S. for the many months to come will be the economic impact of the health crisis. The overall container volume figures will provide a timely and tangible benchmark each month on the level and trend of these changes. At some point, the effect of the virus will be abated. It would, however, be a mistake to ascribe all the declines we will see in container volume as temporary and reversible. The crisis will likely result in structural changes leading to permanent changes in container volume. And as long as most of the China tariffs remain in place, my analysis is that inbound volume will be some 10% less than it otherwise would be.

In February, East and Gulf Coast port volume declined 1.4% (versus a 1.6% decrease in January), while West Coast ports decreased 17.9% (versus a 5.1% decrease in January). That larger-than-usual dichotomy was driven by more Asian trade at West Coast ports, the voyage distance difference where China catalysts show up on coastal ranges at different times, and a continuing structural shift.

The structural shift relates to the mid-2016 expansion of the Panama Canal, allowing more economical mostly water service to the East Coast. This is affecting the coastal mix by transitioning some loads that previously were offloaded on the West Coast and moved via doublestack rail to eastern points. East and Gulf Coast ports were 47.8% of top 10 port volumes for the past three months, compared to 43.3% for 2015, the last full year before the expanded Panama Canal went into operation.

Ports with the strongest February performance were Charleston, South Carolina, up 13.5%, and Houston, up 3.5%. The weakest performance in February came in at Los Angeles, down 22.5%, and Long Beach, California, down 17.9%. The table below shows all of the 10 ports ranked by imported container volume for December, January and February. Volume for those three months is shown with year-over-year percent changes for them as well as the last 12-month periods.

The table shows ports ranked by imported container volume. (Courtesy John McCown)

February data for New York and Savannah, Georgia, is estimated at the percent change both reported for the three-month period ending Jan. 31 as their actual data won’t be released until next week at the earliest. Seattle/Tacoma volume is combined and not separately disclosed, but historical data confirms each is among the top 10 ports.

For the three months ending Feb. 29, East and Gulf Coast ports declined 3.1% compared to a 13.3% decline at West Coast ports. That spread is wider than the past 12 months, when East and Gulf Coast ports grew 2.8% and West Coast ports declined 6.3%. The best performers over the past three months were Houston, up 4.4%, and Charleston, up 2.3%, with the worst performers being Seattle/Tacoma, down 18.2%, and Los Angeles, down 15.1%. 

Over the trailing 12-month period, the best performers were Houston, up 5.9%, and Charleston, up 5%, while the worst performers were Seattle/Tacoma, down 9.1%, and Long Beach, down 9%.

Container exports are less relevant and typically backhaul lanes have less valuable cargo. February total export volume was 65% of import volume. While outbound loads grew 8.8% in February, a good part of that was driven by a 28% surge in Houston’s petrochemical-related loads. Houston and Oakland, California, were the only ports where exports exceeded imports in February, both with a 123% ratio. At the other end of that imbalanced system was Los Angeles with a 50% ratio in February.

The impact of the coronavirus and all of its economic ramifications will now completely drive the container volume story in 2020. Its impact on China will make achievement by China of its Phase One commitments nearly impossible. That may rekindle trade tensions that were put on hold with the agreement in January. Where that would go is speculation at this stage, and it is likely that subject won’t be focused on until the health crisis abates.

Unfortunately, if and when both the health crisis and the tariffs go away, it is unlikely we’ll see a springback to pre-tariff levels for the United States. When obstructed, trade flows change and new networks and patterns are developed. They won’t automatically snap back when the obstruction goes away. One reason for this is that even after they go away, some companies will remember the tariff volatility and want to hedge their supply chain vulnerability. The globalization of components and parts across almost all industries has resulted in the tariffs and health crisis making companies more aware of the risks from unanticipated events. This will likely result in changes and refinements that impact container volume.

Before getting to that, we will first experience unprecedented declines in container volume that will adversely impact an industry already beset with many challenges.