One of the most difficult jobs in forecasting is calling out inflection points. This requires precision on the dual question of “what is going to happen, and when?” It only takes being wrong on one of these two to produce a result that is well off the mark.

Nevertheless, calling out significant turns in the market is probably one of the most valuable services a forecaster can provide, so here it is: the intermodal sector is quickly approaching a point of change and it’s going to be a big one. The sector will move from a situation of equipment scarcity and congestion to one of equipment abundance and better cargo flows. The change, when it does arrive, is going to occur at a speed that will take many by surprise.

There is a natural tendency for us to project the current situation out into the future and to expect that when change does occur, it will take place gradually. For example, a poll that was taken at a major supply chain event back in June 2018, when the federal electronic logging device (ELD) mandate had taken a big chunk of trucking capacity out of the market, asked, “In a year from now, will truck capacity be tighter, as tight, or looser than it is today?” Only 4 percent got it right, stating that capacity would be looser. In fact, only 23 percent thought that things would begin to loosen up even after two years.

Of course, with hindsight being 20/20, we know the situation reversed sharply after 2018 and capacity was relatively abundant in the following year.

Today, the ingredients for a similar pivot are falling into place. Domestic freight demand is softening, evidenced by a decline in spot market dry-van rates. Contract rates are not yet sending such a clear signal, but movements in contract rates tend to lag those of spot rates by about six months and are generally much less volatile.

In the case of intermodal, however, the dominant force is international cargo, which accounts for approximately 70 percent of all intermodal activity when counting transloading as well as intact containers (IPI). Demand in that sector is holding strong, and import data for August does not show much — if any — decline.

But with ships still queued up for unloading at most major US ports, inbound volume is not necessarily the most relevant statistic. The question is not how effectively the ports are unloading the ships at the front of the queue, it’s how many loaded TEU are arriving at the back end. In general, the vessel backlogs are shrinking, which means it’s only a matter of time before port throughput and the subsequent inland supply chain links begin to see the effects.

‘Liberating’ capacity

Meanwhile, new equipment is flowing into the system, and ISO container capacity has already eased. Sufficient box supplies in Asia have led the ocean carriers to ease up on their efforts to get boxes back there as quickly as possible. They are now back in the IPI game, and ISO boxes are once again moving inland in quantity.

At the same time, new domestic containers are flowing into the North American fleet. Even chassis suppliers are reporting that production bottlenecks are beginning to ease, with new units flowing into their fleets at an accelerating pace.

The biggest remaining impediment to normalization of freight flows is warehouses clogged with inventory, leaving no room for additional inbound cargo, leading to the use of containers — and chassis — as mobile storage. How long will it take for this situation to begin to improve? My opinion is that substantial progress will be made as we move through late fourth quarter and into the first quarter of 2023. Once that happens, the knock-on effects will allow pressure throughout the system to abate.

Once the system gets some breathing room, things are going to improve with surprising speed. At that point, the question will turn from “where can I get more equipment?” to “where can I store these idle units?”

Lars Jensen, CEO of Vespucci Maritime and a fellow JOC analyst, estimates there are 4 million TEU of excess containers in North America right now. These are containers that are surplus to what would be required given normal equipment velocity. How much equipment is that? “Enough to build a wall of containers, eight layers high, across the entire US-Mexico border,” according to Jensen. Finding a home for these boxes that does not consume precious marine and rail terminal space needed to maintain cargo flow will be critical.

Other equipment types will see similar, if less acute, versions of the same problem. Improving cycle times will create substantial equipment capacity out of thin air. In a recent Intermodal Association of North America (IANA) seminar, John Woodcock, director of fleet telematics at railcar provider TTX Company, estimated that domestic container cycle times had deteriorated from pre-pandemic levels of about 2.3 loads per month to a current level of 1.7 loads per month. That means that the industry needs 35 percent more units to handle the same volume. It may not get all the way back to pre-pandemic levels anytime soon, but even a partial recovery is going to liberate a lot of new capacity.

And there are certainly things that could impede this recovery. One major potential problem has been removed, at least for the time being, following a tentative settlement between railroads and labor unions that averted a nationwide strike. However, this issue could flare up again if the proposed agreement is rejected by union rank-and-file members.

In a similar vein, the ongoing West Coast longshore labor negotiations present a major risk. The longer the talks drag on, the more nervous the markets become. This will at a minimum prolong the diversion of freight from the West Coast to East and Gulf coast ports. Further, if significant labor-related disruptions, which have not been seen thus far, take place, then all bets are off when it comes to system-wide recovery.

Setting these uncertainties aside, supply chain managers would do well to prepare for the upcoming sea change. It won’t be a “bloodbath,” an “apocalypse,” or a “tsunami;” it will be a return to normalcy. But a return to normalcy will still feel very different from the superheated environment of the past couple of years.