Maersk North America president on returning to Baltimore port and the shipping outlook

Hi, I’m Lauren Larocco and joining me now is Charles van der Steen. He is President of Maersk North America. Charles, thank you so much for joining us. First and foremost, you know the, the company reported earlier last week as it relates to earnings, but let’s dive deep into North America, which of course is your bailiwick. You know from logistics and services, they saw significant growth in volumes, margins as the company said were unsatisfactory at a level due to low utilization in terms of some of the warehousing and the short term challenges. Can you kind of dive into that a little bit more in detail? Absolutely. And thanks for having me, Lori. Happy to be back with you again. Yes, you’re right. You would have seen when Vincent spoke to our numbers last week, the call out on our logistics and services was made in relation to specifically the margins and then specifically within North America, the margins in what we refer to as our Maersk Ground freight services. The short and the long story effectively is one that is anchored to the bigger message and that’s one of growth. So when we within North America our last four years of course expended our organization acquiring additional services, additional skills, additional infrastructure. We also created the pathway to drive growth into more landsides, connected services bolted onto our ocean. What we’ve seen at the back end of last year 2023, the growth within those services was material, material to such a level that we had to admit that by the time we got into the full peak season of Q4, the growth was such that we came to a 30 to 35% growth month on month. Which as you would have heard last week really meant that that level of growth was almost too much for the organization to absorb. Without at the same time having to make some trade-offs in relation to what it would mean to our margins. Ensuring that we would keep the service levels to our customers high. Which meant that we simply spoke and needed to spend more money to ensure continuity of our customers and at the same time build the infrastructure to service what was going to be a significantly larger organizational landscape in terms of volumes than we had anticipated to begin with. You know what is, what does it look like in terms of those ground logistics. I’m hearing that a lot of shippers are using rail over over trucking as of right now, particularly from the West Coast to the East Coast as we’ve seen you know some diversions going over to the West Coast. What are you seeing in terms of growth rail, rail between between rail and trucking, Lori? We don’t really see a very pronounced different trajectory than what we would have seen in the previous quarters or years. We do see and then we’ve spoken about this also when we met a little bit earlier in the year. We do see some diversion taking place in the sense that some of our shippers have decided to take percentages of their overall flows into North America from the East Coast into the West Coast, which has led to indeed a small increase of the rail activity simply because that still continues to be the most cost efficient way to get your flowers from the West Coast towards the East Coast. But the way we look at at least it has not been a material shift and we also don’t see it to be a structural shift. It’s probably more situational than anything else. No worries. And how, how are things going with Mexico as it relates to the build up there, your investment there as well as the anticipation of more imports coming in? Yeah, quite well actually I’m, I’m happy to say. So the the month on month growth into the Mexican port in our case that Lazaro continues is basically on a what is today for us at least a journey of seven consecutive months of growth. And we also see that the growth actually has a slightly different composition than it would have had a year ago where we do see more flows now moving to Mexico that ultimately have a destination that is within the US as opposed to a destination that was going to be just for Mexico. So we see a slight shift in terms of how our network, our vessels into Lazaro are ultimately composed between US destination and Mexico destination. And then we see on the back of what is a month and month grounds the potential for this to lead by our estimations to continue for what is the rest of year until the end of year. So quite good actually. And and the origin of those containers, where are they coming from Asia and and then Asia is of course a broad area, but in most of the case the usual strongholds of age and origin. So that would still be of course China, but includes also quite a bit of Southeast Asia, Vietnam being the most prominent one. And then when it comes to the trans loading of of the containers, how, how are they getting over here to the United States? I I normally get a call out two different quite different flows or quite different streams 1. Very traditional. You just touched upon it for the regular rail connection in the US. So one is traditional in which we basically move the containers through a rail connection into Texas and in some cases all the way up to the Midwest, which really means nothing more, but also nothing less than a a regular flow as and when it would be entering through Prince Rupert in Canada or through LA Long Beach in the US and make its way to an inland location. So that’s move number one in which we take the container of course onto our terminal, put it onto rail and then move it to its final destination in the US including everything that comes with it. So that’s flow #1, which is because of what is now available on the bill side, a easier path than it would have been a little bit over a year and a half ago. But it’s also a path where more customers are eager to bolt that into their supply chain planning as one of the, yeah, the the, the alleys that they would take to get their goods into North America. And then specifically the US If you then look at the second flow that actually is more prone to what we call our fulfilment customers. So those customers that do not necessarily need their flows all the way into the US Midwest or or Texas if you will, but want to feed their fulfillment centers in Mexico and from there feed into the North American market using a last mile service component either pure truck or by parcel delivery. And as a result actually have their fulfillment footprint for the US now no longer based in the US but based out of Mexico. Which that means that we also bring the containers into last row. Bring them into the facility which could be in different locations across the border of Mexico and the US and induct them into our fulfilment footprint and from their feed into the final mile anywhere in the US out of all the different tentacles that that that the company has and and it and and we’ve talked about this before. You’re more than an ocean carrier and clearly with this discussion you know investors out there you know should be aware at this point when when we’re talking about investment, where are you guys beefing up particularly when it comes to Mexico because it’s you know that’s still in its infancy right compared to the more mature areas within North America that you’re operating in. Where are you spending your investment dollars so to speak in anticipation of stronger trade going into and going into Mexico and then into the United States. I would say three things turned out in terms of the most dominant pillars of investment in Mexico. We spoke about one of them previously and that’s clearly is our terminal operations in anticipation of what we expect to be a continued growth of what we expect to be continued growth also in need for additional value added service in the terminal. That’s clearly the initial bucket not new initially started already back roughly in 2021, but continues to be a focal area simply because of the the longer term impact and investments in a terminal complex will always have. But that without a doubt will continue. The second touched upon it just now that really is in this fulfilment space where there’s a pretty large need and ask for continued capacity along the border of North America and Mexico for pure fulfilment capacity, not just in buildings but also in skills that come with it. So what we will see if you now take 2023 start of year until end of year 2024 is what will be A5 fold increase of our footprint. And bearing with me that’s that was a small footprint at the beginning of 2023, but will be a quite sizeable one at the end of this year. And we expect that to also continue next year. So that sits in additional buildings, additional campus buildings that will help us provide fulfilment capabilities into the US market. Then the third one is a little bit connected, but I would say very passionate on my agenda because I think it’s it’s one that normally gets or stays under the radar is, is the cross-border trucking space or the cross-border lenside space where many of our customers have indicated that within their international supply chain, the ability to run what they would call as a fluid operation between Mexico and North America is heavily contingent on the complexity or the ability to manage the complexity of cross-border operations, which on one side is the actual trucking capacity, trucking quality. But on the other side, the availability of transload locations on the border that allow you to navigate between what are two different markets in terms of capacity play, trucking environment, etcetera. So our ability now back to the point of not just being this ocean provider to within that big escape scope of the global supply chain allow our customers to bring their flows into Mexico, but then also integrate them with flows of manufacturing in Mexico, which clearly are increasing plays into this third pillar which then sits on strategic investments in capacity, Rd. capacity and strategic investments in pure transload locations across the border. What kind of volumes are you anticipating in the next year or two when it comes when it comes to that, yeah, we’re we’re at this stage if if you look at the volume in this page, you look at trucking volume. So we look at moves that that are not so much shipments but moves and we look at well anywhere between 50 to 100,000 moves of pure increase which is roughly I would say for us at least a 10 to 15% increase. You know we’re we’re talking about you know strength and trade routes. Out of all the routes that you service for North America or bound for North America, where do you see the most growth and what has you most excited and Lori, that mean in terms of flows, international flows from the Oceanside, Yes, I’m going to give you a very broad answer because the excitement is across the board. We are and and I think this is the oddity of what 2024 holds for us. We, we we had named and labeled 2023 the year of normalization and we are labeling 2024 as the year of reinvigoration and that really is mostly driven by the fact that the growth of flows into North America and then specifically the US is outstripping any previous expectation and and where of course based upon last you would have expected some level of regression to the mean if you will. So pre 2019 normalized flows and growth, but in fairness all since the beginning of the year the, the actual overall growth out of Asia and out of Europe into the US has superseded any of our expectations. What do you think is driving that? That’s a very good question. Well, the one thing that is driving it by pure metrics seems to be the US consumer, the US consumer and and they’re spent into goods continues at a level where most analysts including our own but certainly also external ones had predicted that the taper off and for the spend on services to increase to somehow get back to a somewhat normalized pairing between these two. Once more, pre COVID, what we are somewhat I guess, taken aback by is that the strength of the spend on goods as opposed to services continues at a very high pace. So the one thing that sits behind it clearly is the US consumer. What sits behind that right now, the only way we can look at it is the continued spend on goods as opposed to services. The key question for all of us will be, does that strength continue also as we go into the second-half of the year next year or will that at some stage indeed somewhat taper off Right now, there’s no sign, at least not in the foreseeable future for that to taper off. What does peak season look like for you? Because that’s in theory the second-half. Yeah, we, we’re getting very close to that, Lori, give it another five to six weeks and we’re in it. We are predicting a normal peak season. So we are predicting a normal imbalance in terms of how much the first part of the year and the second part of the year will produce. And right now there’s nothing that indicates that it would be a a slower peak scene or or a bigger peak season. We we believe in normalized peak season which on balance, yeah would indicate that anywhere anywhere between 4 and 7% and depending on the industry that can be more skewed. Of course retailers more skewed than others sits in that latter half of the year and and are you looking at peak season starting in June or July, June. We would normally always see the first indications in June, the first real big campaigns for some of our customers, specifically those that are exposed to back to school and everything that comes with it that already starts in June. And and how, how is the threat of a longshoreman strike on the East Coast impacting any type of impacting any type of imports coming into the East Coast? Are you going to see more volumes coming in in June versus say July? That’s not what we see at this stage Laurie. The the the only and and quite subtle change that we’ve seen is the one we’ve touched upon a few minutes back is we do see some recalibration towards the the West Coast in in in mitigation of risk. But we haven’t seen and I’m assuming that’s what you’re alluding to any pulling of any pull forwards or flows into the East Coast to be ahead of what could potential be a disruption. So the only small nuance that we see a little bit more over the West Coast but also that is not extremely pronounced. You know, let’s turn to the Port of Baltimore, would love to get an update from you as it relates to the services that you guys are doing right now for the clients that have containers on the Dolly and as well as your outlook if you will in terms of the timetable, it is very fluid. So that’s understandable. But but what can you tell us in terms of what you’re seeing as of right now? Yeah, so, so let me confirm. It is indeed extremely fluid and as of course it’s a it’s a horrible tragedy when we look at what actually has been at the at the core of this and how it happened from a pure practical point of view. And and when we look at the the customers and their shipments that are in play, we’ve seen 200, little less than 200 containers taken off the Darling in the course of the last nine days. At this stage, there is no immediate planning to take more off the Darling and that’s almost entirely linked to the ability to float it and make sure that we can actually get it into the port. We at this stage have helped our customers both to create mitigating solutions through either Norfolk or Newark, both of the road or through shuttle. And we’re in the midst of planning what should be a complete resuscitation of our service towards and from Baltimore. At this stage planning as as you probably also have seen is is for the channel to be open again for sizeable vessels by the end of May. And our current planning we’ll see in the next 5 to 10 days our network team to then based upon how the progress continues be able to re include Baltimore as a full blown component within our network for end of May starting June. And really they’re the only ambiguity or the only uncertainty is the clean up activities. And as of when we think the channel will be open, it’s amazing how quick, I don’t think people realize how quick and nimble you have to be in order to strategize. I mean 5 to 10 days when you’re moving these behemoths on the water. There’s a lot that goes into that type of planning. Can you kind of dive in and kind of give that secrets to the sauce? Of course. He kind of explained of what kind of factors and planning that goes into the re allocation of putting that port back into service for you. Yeah. And. And you’re right. I’m not sure if it’s a secret sauce, but it certainly is a sauce that takes a lot of effort within the organization to pull off. To a certain degree. We’ve been, I would say, blessed in quotation, Mark, because you can’t really speak about that by the fact that we were already forced. As a result of the Red Sea situation, to really take a super deep look at our network at the beginning of January, end of December, where the unfortunate developments there of course forced us to take a really deep look at our global network and how the rerouting around the Cape needed to somehow both bring in additional capacity, but also additional timelines to still keep the network whole. That activity by and large has been the same here for Baltimore. So a lot of what the teams would do as these situations happen is is almost a a a multi channel calculation of how the impact of one port omission now feeds into the cascading effect across what are the adjacent terminals, the ideation ports and then how the cascades back all the way into the global network. What does it mean for some of our vessels calling upon Indian ports with a destination for Baltimore. How do we now make sure that that cargo actually makes its way to Baltimore throughout a Norfolk or Newark. So normalized in a normalized environment, this process would take between 5:00 and seven months to really take place in a structural and ultimately a long term fashion when you reset your network. What we’ve now been faced with back in January, we had to take anywhere between 3:00 to five weeks as opposed to that longer period to pull it off for the global network. In the case of Baltimore, we had to take three to five days to do the same. So a lot of things have to come together. We’ve in 2024 of course had the experience as to what it meant at the beginning of the year that we could deploy and be more agile at the end of, yeah, what was ultimately the month of March, April. You know, the Houthis have recently announced that the, you know, they’re expanding their attacks into the India, Indian Ocean in the Arabian Sea. It’s lengthen the journey for the vessels. How much additional time is that impacting the North American freight? We all know of course it’s the European shippers that are being more heavily impacted. But what about here as it relates to this expansion threat from the hoodies, Difficult to say this stage, Laurie. I think the the, the time, so the transit time probably will not be impacted more than it has already been impacted. So you’re looking at maybe two to three weeks depending on the the normal routing of the original vessels. It probably sits more in the uncertainty of whether or not the for by now has been a pretty stable embedment of the new network. It’s our new normal for lack of a better term where of course some of the disruptions that we’ve seen and the widening of the the scope of potential attack might potentially lead to temporary longer routings that will go still around the Cape, but just have an impact of anywhere between one and two days. So the the big impact in terms of timing, we would already have seen barring of course a severe escalation even further than what it has already done. Right now. You know the company announced last week that they’re releasing more than 125,000 additional containers as a result of the Red Sea. How many of those containers are are for Europe and how many approximately would be for any North American freight? Yeah, that’s that’s difficult to say you would you would have to look at this from a global network perspective because containers are flow throughout the entire network. So that number is crucial for our ability to keep our network fluid and to continue to have an ability to pick up cargo at origin. Whether that origin is in Asia, whether that origin is in the Middle East, Europe or the US or the other way around doesn’t really matter. It’s it really should be seen as an influx into the big pool of containers that allow us to keep the global network fluid. And and finally you know we had, we saw the return of some of the surcharges just because as you’ve pointed out you know the longer transit time, the fuel costs when it comes to the cost of the container, some the the price of containers has gone up marginally. What kind of transitory inflationary headwinds are you seeing as we head into peak season and if we might anticipate some additional charges or or increases as a result of all of this uncertainty? And and then you mean in particular just to the broader ocean freight environment, I think a lot of of what we see as potential inflationary development is, is what you would have heard already last week. It sits on on three main components. One is clearly the considerably higher bunker cost, so the the fuel costs and and not just because of us utilizing more but also the actual fuel costs themselves because of what has happened geopolitically has gone up. That is a significant part that will drive costs up which ultimately you will most likely see translated into rates. Two is the capacity needs for the feed into what is now the longer transit time for almost every carrier out there is built upon bringing in additional vessels. For some carriers, it might mean rerouting some of their vessels from other trades. For most, it will actually mean bringing in chartered vessels. So additional capacity from the market, which as you might have seen in the market itself have significantly increased in terms of their daily rates. So you’ll see a need to bring in more capacity as a peak season will also bring the total volumes up. Transit times continue to be prolonged and as a result, you’ll see a capacity needs that will still be there. And right now, you would have heard global capacity has been absorbed for anywhere between 6 to 8% and that will probably be higher when you just think about what it means for Europe. So that capacity part is, is the second most dominant part. And then of course, thirdly, which is linked to the second, you’ll see for those carriers that need to reroute some of their capacity to where they need it the most, yeah, they will have to reroute it from some of their trades. And the opportunity costs that sit within that trade will of course ultimately feed into a need to recover some higher cost on those trends. And and what’s your outlook for for here in North America? Do you feel comfortable in terms of the capacity of what you’re foreseeing with with the potential orders coming in for peak season and just what’s going on right now with the jockeying, if you will, right, of capacity because of the Red Sea and all the other headwinds? Yeah, I would, I would, I would tell you what I tell most of our customers, the way things look today, capacity is going to be a challenge across the board in the industry, including for North America. North America, we spoke about it last time as on one side, the impact, the network effect, if you will, the Red Sea maybe not as close to the impact as Europe would be, but the network effect is significant. And then of course, within that network effect, the effect for the East Coast on the reduced throughput of the Panama Canal combined with the overarching growth that a peak season would bring along. So our recommendation is to for all of our shippers, regardless of their industry, to stay close to the market, to make sure they stay close to their strategic partners and make sure they stay as close as they can to their forecast of volumes. Because our prediction is that that capacity will be a challenge based upon what we can see happening in the Red Sea. There’s no immediate expectation that they will settle down unfortunately, which means that, yeah, this, this is going to be in for some disruption for some time to come. When when you talk about capacity and the tightness, can you, can you quantify like a ballpark of how tight it could get? And that’s so that’s back to the 6 to 8% that is sucked up in the actual overall flow. All right, wonderful. Charles van der Steen, president of Marist North America, thank you so much for joining us on State of Freight.