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Containers are transferred from freight trains to trucks.
Image Source: Picture Alliance, Getty Images
Transloading, a logistics strategy utilized by trucking companies to alleviate container backlog during the pandemic, is gaining popularity once more. This trend is happening as U.S. West Coast ports are experiencing a rise in the volume of containers being redirected from the East Coast.
Transloading involves transferring cargo either from a truck to a rail or vice versa. According to logistics firms interviewed by CNBC, there is an increasing demand from U.S. importers for this service. This is a result of the diversions in the Red Sea and restrictions in the Panama Canal, leading importers to shift their freight along new routes.
"We're observing a significant shift in cargo movement from the East Coast to the West Coast," shared Michael Aldwell, who is the executive vice president of sea logistics at Kuehne + Nagel, during an interview with CNBC. He mentioned various factors contributing to this shift, such as challenges in the Panama Canal and Red Sea, as well as the potential risk of a labor strike at the East Coast and Gulf ports."
The February Transportation Intelligence report from economic forecasting firm FR indicated that in 2023, 65-70% of U.S. imports were transported inland through transload, which was an increase from less than 60% in 2021.
Chris Sikora, who is the director of port services for CH Robinson, mentioned that their logistics company has expanded its transloading operations at ports across the country. This is in response to retailers and suppliers showing a preference for smaller shipments of goods.
"The issue of inadequate or excessive space has led to this," remarked Sikora. "We are relocating a variety of items, from kayaks to clothing."
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Retailers can reduce transportation and soft labor costs associated with imports by $500-$1,000 through transloading. Sikora states that with the rise of e-commerce, smaller businesses importing around 3,000 containers annually are turning to transloading as a solution.
– Logistics experts mention that the increasing utilization of transloading is due to U.S. importers spreading their cargo across multiple international ports to enhance agility. Rather than consolidating at one port for further distribution, the freight is divided overseas into multiple containers that sail to different ports closer to their respective distribution centers. This method of shipping smaller freight loads helps importers save both time and money.
The ongoing global supply chain challenges are expected to drive an increase in transloading activities.
"Seize the opportunity to move some cargo now when there are no traffic jams. Establish a transload supply chain through the West Coast to avoid setting it up during a crisis," advised Aldwell.
Picture Alliance | Picture Alliance | Getty Images
Tim Robertson, CEO of DHL Global Forwarding Americas, mentioned that transloading has increasingly become a valuable option for introducing flexibility into the supply chain. The company has now established multiple transloading facilities on both the east and west coasts.
The increase in the amount of cargo being transported from the East Coast to the West Coast was initially highlighted in February in the ITS Port Rail Ramp Freight Index.
Paul Brashier, vice president of drayage and intermodal at ITS Logistics, mentioned to CNBC that there has been a notable increase in demand. In response, the company is activating previously unused capacity following the Covid period to meet this demand.
"We have been asked to bring on more capacity to meet our clients' needs during the anticipated surge in the third and fourth quarters," Brashier stated. "There is a projected increase of 75-80% in transloading demand."
The idea proposed by Sikora about shippers taking containers to various ports closer to their final destinations and transloading is reflected in the Department of Transportation's Import data.
"It reduces time by a third, reduces transportation needs, and gives clients flexibility," Sikora explained. "The demand from shippers has significantly increased due to their use of multiple distribution centers."
The rise in global supply chain challenges is leading to increased demands for an earlier peak shipping season and greater use of transloading services.
Bryan Kempisty, the CEO of PortX Logistics, informed CNBC that the company typically anticipates supply chain slowdowns and disruptions 18 days in advance. This advanced notice allows customers to make decisions regarding containers that may need to be redirected to another port or have their freight transloaded.
He mentioned that the delays in the Suez Canal and Panama Canal have led to a nearly 20% rise in traffic to the West Coast ports. If a journey that used to take 30 days now takes 60 days, the peak season could shift to June due to market disruptions, affecting decisions on transloading, according to Kempisty.
Matt Schrap, CEO of Harbor Trucking, representing truck companies servicing West Coast ports, notes that typically, 30% of incoming containers are destined for rail transport, while 70% are transported by truck.
"About half of that will be transloaded," Schrap mentioned. "In our ports, transloading containers is a regular occurrence, and we have the capacity to handle more."
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Transloading is a beneficial service for trucking companies as it can improve their profits by cutting down costs related to container use and fuel, while also enhancing resource efficiency.
Bruce Chan, director of global logistics & future mobility at Stifel, mentioned that the logistics industry is currently facing a crucial turning point due to the significant changes in how retailers and importers are strategizing their supply chains.
"According to Chan, West Coast transit makes sense from the perspective of supply chain efficiency, general efficiency, and ESG principles. To keep major shippers engaged, logistics companies must adapt quickly to the evolving supply chain complexities, offering a variety of services and making investments."
He mentioned that with the growing number of transportation points in the logistics system, it would be beneficial for transport companies like J.B. Hunt, ITS, and CH Robinson to bring freight to up to five different ports.
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Susquehanna International Group analyst Bascome Majors mentioned J.B. Hunt, along with two other major intermodal providers, Hub Group and Schneider, as the companies poised to benefit the most among publicly traded transportation companies. This benefit is due to a potential shift of East-to-West Coast port activities resulting from labor disruptions and increased transloading off the West Coast.
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In addition to companies like Schneider and JB Hunt, Union Pacific railroad is expected to benefit from the shift in freight, as stated by Jason Seidl, an analyst at Cowen Group specializing in air freight and surface transportation.
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"This presents an opportunity for Union Pacific to increase its market share by providing a consistent, reliable, and user-friendly transportation service," Seidl stated. "The main challenge for intermodal transportation is enhancing the consistency of their operations. With truckload rates still low, providing quality service is crucial."
<p>Investments in intermodal transportation by Schneider and Knight-Swift can enhance their appeal to long-term investors in comparison to the more cyclical truckload sector. The truckload industry tends to attract hedge funds seeking short-term trading opportunities.</p>
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<p>According to Chan, drayage providers like Universal Logistics Holdings have a significant presence on the West Coast in the current switch to intermodal transport. He also mentioned that the trucking industry is experiencing an increase in cross-country shipments due to their higher costs.</p>
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The recovery in West Coast container volume is expected to have limitations. According to Chan, the market share between the West Coast and East Coast likely won't reach historical 10-year levels, but it may stabilize around a 50/50 split. in the short term, there's an anticipated increase in traffic to the West Coast due to the threat of a strike by the International Longshoremen's Association, as well as diversions via the Red Sea and Panama Canal.
But the freight industry is currently experiencing low contract rates following a period of recession. While Chan mentioned that moves of 10%, 20%, or 30% are notable, it's important for investors to recognize that rates have significantly decreased in recent years.
"I anticipate a recovery, but it may not be very strong," mentions Chan. "The market still has an excess of capacity, so there is a need for a reduction in trucking capacity."
Insights on Mexico's Increasing Cross-Border Trade Relations
The opportunity for transloading is also on the rise in Mexico.
"We are noticing a growing interest in cross-border activities," Seidl mentioned. Seidl referred to the Surface Transportation Board's approval of the merger between Canadian Pacific and Kansas City Southern last year, which has resulted in more and improved options for shippers. Additionally, he highlighted the strength of Genesee & Wyoming's rail-ferry service between the ports of Mobile, Alabama, and Coatzacoalcos, Veracruz, crossing the Gulf of Mexico."
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D'Andre Larry, who leads intermodal operations at Uber Freight, a subsidiary of Uber Technologies, mentioned to CNBC that customers are inquiring about the increasing cross-border traffic market.
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"We operate a large and successful cross-border business unit focused on Mexico, which sees significant traffic flowing in and out of the country," Larry explained. "At the border, we handle transloading, offering intermodal and trucking services from Mexico. Customers often turn to intermodal options to save money and reduce their carbon footprint."
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