Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Okay. Welcome, everyone, to the Ocean Market Update Webinar, hosted by Expeditors. My name is Nicole, and I will be the host today for the webinar. And I'm just going to go through a few ground rules and then I will pass it off to our presenters today. So first and foremost, we are going to have about 45 minutes of presentation material and then about 10 or 15 minutes for questions at the end. If you do have any questions, please put them into the Q&A window, which is at the bottom of your screen. If we don't get your questions today during the webinar, we will definitely follow up with you via e-mail after the webinar took place today. In addition, we are going to be sending out the slides that you will have access to if you complete a short feedback survey that is sent to you via e-mail after the webinar. So without further ado, I'm going to go ahead and introduce our speakers quickly. So we -- today, we have with us Adam Kord and Mike Barba. They are both at our corporate office in Seattle and lead our Americas Ocean team -- and I'm sorry, I skipped over our upcoming webinar slide. So I will just go through that briefly before I hand it off to them. So we have some upcoming webinars next week. We have a domestic market update and a dumping -- I'm sorry, -- this is the wrong webinar title, but it is a custom-focused webinar on duties and how to manage duties with U.S. return goods. So without further ado, you will get access to the slides at the end and you'll be able to register for those, but I will hand it off to our presenters, Adam and Mike to walk us through the Ocean Market.

Thanks, Nicole. I hope the audio and video are okay. I think it is. We checked it out a little bit beforehand. We're going to take you through a presentation today. I am the Director of Ocean Business Development, Mike Barba. I sit here in our corporate headquarters in Seattle and my cohort to my left, I guess -- to my right on the screen. And I'm in the office right next to Mike here in Seattle, Adam Kord, and I lead the Ocean product as Director of Ocean Cargo Services for the Americas. Thanks for your time today. Yes. So we're going to take you through a presentation. We divide it up a little bit so that we can both give our comments. We'll do our best to look at the Q&A and answer questions that we can. But if we don't get to your question in the Q&A after the presentation, we'll follow up with you directly via your local Expeditors contact. So I think the presentation will be interesting today. I will start by telling you from a legal perspective, this is our disclaimer. So -- and this is important because what we're just making sure you understand is that we have [indiscernible] and it is information that we get in the public domain, the presentation. We're not sharing with you anything that's proprietary to Expeditors. We did to the best of our knowledge, our research on this, and the information, again, just from the public domain, what we're presenting to you is information that we look at all the time, and we draw conclusions or we try to draw conclusions, we hope you'll draw the same conclusions. We'll go through this, and I think you'll find it interesting. But again, I wanted to make sure that we, of course, put our disclaimer up. Any of you that have attended our market webinars before, our market presentations, we talk about levers. And the reason we talk about levers is because they create behavior in the market place. These levers create circumstances in the marketplace, situations. And they don't change. They're the same. It's supply and demand, capacity is supply, demand is the amount of throughput, the amount of cargo that's going through the system. Operating expense of carriers, they behave very differently if they're operating expense is low versus whether their operating expense is high, the first 3 levers drive then their financial wherewithal, their financial performance, and they absolutely behave much differently when they're making money versus when they're losing money. And we all know they're making a lot of money right now. And finally, outside factors. And so the last lever, outside factors, there were years when there's not that many outside factors, but as in the last 2 years, tremendous amount of outside factors, global pandemic, and we'll take you through a little bit of how we got to this point. This did not happen overnight. But there's others such as environmental issues. There are geopolitical issues, a tremendous amount of scrutiny now within the United States, in particular, on the carriers and how they bill the Ocean Ship and Reform Act. We'll talk a little bit about that. These are all outside factors that create behavior or ripples in the marketplace and drive what's going on out there today. So we get asked a lot of times, like, well, how did we get here? And this wasn't overnight. I mean, this started back in 2018 and 2019 where tensions really began to mount between United States and China and a tremendous amount of speculation about retaliatory tariffs in 2019, the tariff wars, they exacerbate trade deficit imbalances because cargo owners, really fearful of what potentially could happen, begin to pull inventories forward in advance of scheduled tariff increases. And so what that creates in the marketplace, it creates abnormal patterns, where instead of having a normal demand spike in certain times of the year. And we'll show you, you can see the spikes. You have these abnormalities where all of a sudden demand spikes, then demand crashes, capacity goes up, capacity goes down. It's just been a roller coaster. Then we get into 2020 and what happens, a global pandemic hits. In the first half of 2020, demand absolutely fell off the table, completely -- almost completely down to nothing. But no one foresaw that in the second half, okay, American consumers, the pattern of change, the demand surges, okay? Absolutely just surprised everyone, right? And so demand skyrocketed again, an abnormal pattern. You get into 2021, and it continues to show -- I mean, you have this e-commerce boom record-setting volumes of cargo going in. And then as we get into the first 3 quarters of this year in 2022, what happens, tremendous amount of infrastructure issues. And we'll talk a lot about that. There are in the beginning of the year towards the end of last year, there were ship backlogs. Some of that has abated, but the terminal infrastructure, the rail backlogs, the rail congestion, the lack of chassis, trucks, equipment in the wrong place is creating, again, more impact in the marketplace, more effects in the marketplace. So if you take them one by one, if you take capacity first, and capacity is a constantly moving target, it moves up and down. This is just a snapshot in time of capacity. This is as of July 1, this is the most recent numbers we have. The year-over-year increase of cellular capacity, meaning what we're interested in, containerized capacity, 3.95%, the global fleet is about 25.5 million TEUs, okay? That capacity didn't grow very much over the course of the year. So we get a lot of questions like, well, demand spike, why don't they just move more capacity and there's no capacity to move it, okay? The roller coaster of supply demand, this is a good slide because it shows all the way back to 2009, okay, where you remember, we had for lack of a better description, a global recession and you saw a global throughput crash, okay? And then you got on this roller coaster of ups and downs of capacity and supply being out of balance, okay? They're in balance and they're out of balance, in balance and they're out of balance. In 2022, they're close, okay, look at 2022 and you begin to see, okay, the global throughput is cooling. And meantime, capacity upticked a little bit, it's close to being even 4.3% compared to 4.5%. So it's interesting to watch it. The charter rates and you look at capacity because a high percentage of the global fleet is chartered, look at it as a percentage of the chartered fleet, okay, represents close to 50%. So lots of questions we get about what the carriers own on the ships, they don't, okay? A lot of these ships are chartered vessels. They're owned by charter companies and the carriers that charter the vessels. And the charter rates continue to remain very, very high, which says to us there's nothing available in the charter market. So you go -- you keep with supply, you keep with capacity and you say, all right, well, what's -- Mike, what's going to come in, Adam, what's going to come in. If you look in -- by 2022, okay, the number of ships, the adjusted total, the number of ships, the total number ships, the fleet is not going to grow. It's a small amount, okay? And they're scrapping that happens every year, not much scrapping in 2022, big target scrapping in 2023 and 2024, speculation [indiscernible] no one can really predict the future on this. And I don't think the carriers publicly announce far in advance they're scrapping. The point with capacity is if you look at -- and we get asked this question all the time, they're making a lot of money -- are they buying ships, they are, they are buying ships, but they're not buying them, okay? And they're not coming into the market in 2022. By the end of this year, the projection, the forecast again is about a 4.3% increase in its capacity or supply. The increases in capacity don't begin to build towards probably the fourth quarter of 2023. And then as you get into 2024, that's where you get the big increase. Your global fleet grows from where it's today, $25.5 million. By the end of this year, it will be about $26 million, so a percentage of growth, a 500,000 TEU growth. It jumps by about 2 million TEUs in 2023, and it jumps by about 4 million TEUs in 2024. So that's where the big capacity will wind up coming in. Inactive capacity. So again, I talked a little bit about what -- if you -- even if we wanted to, what could you bring back in the market to try to take on this excess demand. There's not much left. If you look at the total number of units, the NOL is non-owner-operated, okay? So that's the charter market, right? If you look at the charter market, look at the number of units, total units that are 12,500 TEUs and above, okay, right there, 0, okay? What's fascinating on this is of the amount of units that are inactive, 77% of them are in repair yard. And I think people, we tend to lose sight of that sometimes, these vessels require a tremendous amount of maintenance. And they are -- there's quite a few vessels that are always -- even though they show that they're inactive, okay, they're inactive because they're in repair yard. They're getting worked on. They could be getting fit with new engines, they could be getting fit with scrubbers. They could be getting painted. So capacity, my point here is capacity is not growing at a very rapid rate. So now you go to the next level, you go to demand. If you look at demand, we go to sources, we try to source from different -- depending upon we have a subscription-based services, and I'll show you some of those. This is information that actually came out of an American shipper. The source was Descartes Datamyne. And what it shows is, okay, every month in 2022, even though it's cooling, every month continues to be a record. So demand, remember, capacity is kind of flat. Demand continues to grow. And it's interesting to watch it because it's following the same pattern, okay? It's following the predictive pattern that we thought it was going to follow. It typically begins to spike a little bit here in January pre-Chinese New Year, comes down right after Chinese New Year, you come back out of Chinese New Year, you go up. It softens a little bit here in April and May, while what happens? The rates are being renegotiated, okay? As you come into June, the question becomes, will you get into your typical peak season. Historically, the pattern says, yes, the only time that pattern really kind of deviated was look at 2020, okay? And for that matter, 2021, it went back to a regular pattern, but it was significantly higher in volume, tremendous amount of volume going through the system. So what do we do? We go to another source, we try to verify our data. This is a subscription-based service. This is Seabury. This measures global containerized cargo growth and it measures it, if you look at it, it measures it, this is a measure of full year 2021. So you took the snapshot of 2021 and you compare it to 2020, 10.9% growth and 2020 was a record year. So there was significant growth in most of the trade links with the exception of the outbound trade link back to Asia, the export trade link from the Americas back to Asia, almost everything was green. You go and look at the first 5 months now 2022. So we have it up to the end of May. It's cooling. It's not cooling, okay, significantly enough in the lanes -- a lot of the lanes that we're most interested in. So it's not cooling in Asia or the Americas. It's not cooling in and out of LATAM. It's not cooling, okay, inbound from Europe. And it's not cooling in the other [indiscernible] Asia and Europe. So there's a cooling, it's 1.2% year-over-year January through May, but it's not crashing, not yet, okay? If you look at 12-month window, so you just take June of last year and go all the way through the end of May this year. You can see again very quickly, right, it's a 3.8% growth. So demand continues to grow. And finally, what we looked at -- and I found this interesting, Adam and I talked about this a lot. We talked about what was the last normal year? I know that sounds a little corny, I guess. But -- the last normal year really was 2019. When we were -- we weren't in a global pandemic, we weren't in this infrastructure meltdown, right? And you look at where we are today compared to 2019, okay? And that's significant growth. That's 9.3%. And again, I think back to what's going on in capacity, it's not growing at that rate. So what are the -- what's the impact what's the -- because we get asked this tremendous amount of time, what's the impact on rates? Well, you can see beginning in January, this measures every January from 2017 through 2022, okay? The last -- the normal year '19, okay, January 2020, global pandemic, right, doesn't look good, but all of a sudden, it comes [indiscernible] and 2021 and 2022, what's happening right now, it's cooling, okay? And so this is Freightos. This is a rate index. This is not the exact rate, but it measures data and creates an index. The point here on this slide is the trending. And you look at the last year from August through July, right, through [indiscernible] August of last year, all the way through July of that year, okay? The trend was up, okay? It's definitely different. The trending on the rate side is coming down. This is the global index. And this is the index for -- on the left is North America to the West Coast -- I'm sorry, the Far East, China, East Asia to North America and West Coast and then to North American East Coast. And so you can see, I mean, this measures, again, this is looking at the rate and what it's done since the 30th of May. It's cooling, where it was at a high over about $12,000 to the West Coast and probably at a high on the East Coast of it was probably over $15,000, okay, the index. It's now cool. It's now below 10. And again, if you look at just the point here again, look at the trend. The trend last year was upward as rates were accelerating as we came into the second half of last year. As we're coming into the second half of this year, rates are cooling. Will they continue to cooling, I don't know the answer to that question. I think there's more of -- I don't know if I'd describe it as cooling maybe more stabilization, a little bit more stabilization on the rate side. So there is a downward trend on the rates. We talked about operating costs and we're not going to spend a lot of time on this, but I will tell you that fuel, the #1 operating cost of the carrier fuels up, and it's up pretty significantly. I mean you look at it going back to 2020 and VLSFO, which is a very low sulphur fuel oil and HSFO, which is the old bunker, the IFO 380. The gap was insignificant between the cost of the 2. And the price was -- I'm just going to say, it was under $400 or $500 a ton. Your price per ton now, okay, is well about $800, $900 a ton for the VLSFO. What's interesting is that the old bunker fuel, the HSFO, the IFO 380 is not. It's not accelerating, and the gap is widening. What will that do, it depends on the carrier because there are some carriers that chose to burn the old fuel by putting scrubbers on their vessels. Right now, they're in a pretty -- they're in a good position. And fuel, again, the largest operating expense on the carrier. The point here being their operating expenses is and will probably continue to go up. So I'm going to turn it over to Adam, okay? And just he's going to talk a little bit about -- this is sometimes our favorite part of the presentation, but we get asked this all the time, what does the future hold? I wish I could tell the future, but I can't, maybe Adam can. I don't know. I'll do my best, but we -- Mike and I engage with customers, both internally and externally all day long and everybody kind of wants to know what's going to happen. If I look at the last -- Mike and I have been doing this for quite some time, maybe Mike, a little bit longer than I have, but we joked that over the last 2 years, us and everyone would support, we've really been [indiscernible], dealing with all types of things, things that we've never had to deal with before. So when we kind of look into the future, we highlighted a couple of disruptors, what's out there. So these are things, when we talk about that we should be planning for, what we should be talking about, things that can impact our business, disrupt our supply chains, things we talk about. So rather than going through all of these today, we're going to focus on 3. We're going to focus on congestion. We're going to focus on the ILWU contract and then new legislation. If you have questions regarding these others, don't hesitate to reach out to your local Expeditors' representative. But we're going to start there on that congestion and land slide operations. So we get a bunch of questions and we say, hey, we see that rates are falling. And we always say that rates are [indiscernible] supply/demand. Hey, rates are falling, so that means that demand must be easy. Well, if demand is easy and it's easier for me to get on a ship in certain markets, Asia into Europe, Asia into the U.S.A., then why are my transit times still so bad, right? Why am I having so much congestion at the terminals and the relocations. And we're seeing it. So although we're starting to see some congestion dissipate on the U.S. West Coast and we will talk about the U.S. West Coast in a minute, where we're starting to see all types of problems are on the rail. And we're starting to see it with service reliability. It is at a low and it continues to fall. Also, what we're doing to see train speeds, and this is very interesting, not only our service levels at historic lows on the rail with regards to on-time performance and speed -- what's interesting is it's the lowest amount of volume that the rails have handled since 2017. So then I want to ask the question of, well, what's causing this? And what's interesting is supply chains are extremely functional. And what we're seeing is record amounts of congestion all the way downstream. And what this is pointing back to is a glut of inventory and the inability of folks to take on those containers that are arriving on the import side to unload them to have space and why Mike talked a lot about record demand and when we talk about record demand in terms of containers, we talk about value. Now that doesn't mean that consumer spending has maintained with that record demand. It doesn't mean that manufacturing output. It also doesn't take in consideration other economic factors such as we're going to talk about ILWU in a minute. There was a lot of folks that thought that there might have been a disruption come July 1 when that contract expires. So they pulled orders earlier. And now there's difficulty having places to put those, which is causing a stack up. There are our inland rail yards that were at one time [indiscernible] operations, meaning that the containers come off of the rail and they get put on chassis that have now become stacked operations, which causes containers to get buried which just causes the rail yards to wait on chassis to pull out, and that causes a backlog. So what happened -- and it's been building, it's been building over time. And there's been a lot of talk about what's going on -- these are just the progression of articles we pulled from the Journal of Commerce, which I just highlighted out in July, things are getting bad. It's diminishing. The White House Port Envoy stepped in and said, hey, what can we do, what can we do to improve the infrastructure, what can we do to improve rail flow, the Burlington Northern Santa Fe and UP starting getting drastic in July, and they started metering traffic. What we mean by metering traffic -- just as an example, let's just say that the Burlington Northern Santa Fe has 4 direct trains a week from Los Angeles into Dallas or 5 direct trains a week from Los Angeles into Chicago. What they're doing is they're metering because the downstream locations in Dallas, Memphis, Kansas City, Chicago, they're saying my yards are full. I can't take any more. So by metering, they're stopping the train flow. Well, what happens when you stop that train flow, it builds congestions at the terminal, and it's compounding. And you know there's multiple different reasons of what's going on. But one thing that we're seeing as a common element is just the inability for cargo to be hold and return from those [indiscernible], so this is an ongoing issue. What also is interesting is as we see congestion at the rails continue to deteriorate, we have seen some of the congestion at the coast open up. What's interesting is on the U.S. West Coast, where Los Angeles was at one time the epicenter of congestion. If you sat on Mike and I, seminars in the past, you would see that at one point, right, there were more than 100 vessels waiting to get in. As of this morning, there were less than 10, but what's really interesting is, although there's less than 10 vessels in L.A. waiting to be unloaded, we're seeing the dwell time to get on the rail approaching record levels, meaning it's [indiscernible] for us, as we manage our supply chain, you'll have containers that get unloaded, and they'll be on the rail in 2 days, and there are other ones that will be sitting there for upwards of more than 2 months as they're getting buried over and over again by the labor waiting to get on reposition. What also is interesting is to see the shift of congestion. No surprise that L.A., Seattle, Vancouver was highly congested for much of Q3, Q4 of last year or Q1 of this year. And what did the carriers do, one, they gradually moved the capacity route as new capacity was brought in, they moved it into ancillary area markets, like the Gulf and the East Coast. And in addition, the importing consumers out of fear for a good reason of potential strikes or labor disruptions with the ILWU contract, they moved more cargo to the East Coast and the Gulf. And what we're seeing today is this morning, there were more than 14 vessels waiting to be unloaded [indiscernible], 16 in New York and unlocking 38 vessels trying to get unloaded in Savannah. This just goes to show that although rates are coming down because demand is starting to ease, there is a heck of a lot of congestion that we're managing through on a day in and day out basis. And there's still very little elasticity in the market. So these different disruptions exacerbate the situation. And we also see that on schedule or liability. On Global schedule liability, although it came up a little bit, still at historically low levels. So throughout the globe, and this is just through June, on-time performance was sitting right at 40%. Going to the next one, we break it down a little bit more, looking by individual trade lanes. And if you can see Asia to North America West Coast, just above 20. And I talked about the congestion in the multiple vessels that are waiting off the U.S. East Coast to try to be unloaded or load to bring extra loads back out. On-time performance is still under 20%. It's still bad. And with delays, you can also see that this is information we pulled from Sea-Intelligence. The delays to the West Coast still above 10 days. And this is just to be further that arrival that vessel, arrivals on to the East Coast, a 9-day delays. And this isn't taking into consideration that additional time for those of us that are moving part [indiscernible] that additional dwell delays, both moving on to the rail and then ultimately the destination. So what this shows is we are still dealing with a lot of congestion and stability in our supply chains. Next thing I want to talk about is the ILWU contract negotiations. So we've highlighted this on a lot of our past seminars. So the ILWU, The International Longshore and Warehouse Union, so it's essentially the labor that's working the vessels. From Mike and I's backyard here [indiscernible] all the way down through San Pedro. Their contract between themselves and the PMA, the Pacific Maritime Association, which represents the carriers and the terminals expires on -- expired excuse me, on July 1. And there's been very, very -- there's been a lot of speculation of what's going on. The contract expired on July 1, and both sides continue to work, of course, remain completely operational, but there's been a little feedback. Why? Essentially, it's a blackout. And these contracts take time. There was, I think, a lot of fear moving through the market, hey, was there going to be a strike? Was there going to be a shutdown on July 1? And if we look at the past as predictors of the future, looking at contracts from 2002 and 2014, these negotiations took anywhere from 7 to 9 months. In 2014, extended all the way to 2015, and [indiscernible] a deal until February. There was some news and some looked at it as a glimmer of hope with the press release by the ILWU and the PMA on July 26. I talked that they had reached a tentative agreement on health benefits and many folks got excited, but those of us who have been watching this really close know that the main 2 factors that they're pushing for as one, on the PMA side, they're looking for automation and operational efficiencies and on the ILWU side, they're looking for more pay. Those are 2 items which there's been no feedback from either side that they've made progress. So we'll continue to watch this really close. But as of right now, just not a lot of news. Last thing we want to talk about, and this has been dominating a lot of the headlines in a lot of our conversations, which is some new legislation that was passed. So I'm going to spend a few minutes talking about the Ocean Shipping Reform Act of 2022. So this is actually new law, and this is a bill that Biden signed on June 16. This is actually an extension of the shipping act of 1984. And why it's pretty significant is the shipping Act hadn't been amended since 1998, early in my career. So I think, first and foremost, why was this getting so much attention? I think it's because the supply chain has been dominating the headlines with the congestion and disruptions, the imbalance of supply and demand. And a lot of folks have been upset and they've been reaching out to their executive branch into their Congresswomen, Congressmen, their Senators pushing for some type of action. So this was introduced past February. We have ultimately made it through the House of Senate and then President Biden signed it on July 16. So -- this has 26 different sections and a lot of the questions is, hey, there's a lot of dense reading to go through it. So really, what it does is it broadens the regulatory powers of the [indiscernible], and one thing they want to do is they want to increase monitoring and make sure that there's spare export practices. So a couple of high points enforcing the carriers obligation to support and promote the growth of U.S. exports. And I know this is interesting. But if you look at the certain sectors that were contacting and pushing for the most reform, it was really coming out of the export sector. And why -- there was a large segment in the U.S. export market that was having a very, very difficult time getting equipment. So no surprises that the trade balance, especially when it comes to containers in the United States, traditionally, it's been about 3 import containers for every one export container. And what gets exported out of this country in terms of volume or bulk tends to be a lot of agriculture and [indiscernible]. So what happens when supply and demand were completely out of balance and demand was far exceeding available capacity in late 2021. The carriers were prioritizing high revenue-producing import loads for those export loads where the rates were much lower. I mean we saw rates well over $15,000 to the U.S. West Coast from an Asia-based port to the U.S. West Coast, where a return trip listed in many cases, under $1,000. So what were the carriers doing -- Well, in many cases, rather than taking that empty container and moving to inland to be reloaded with corn or soybeans and get back in order to get to China and then have to move inland. They were just kind of denying moving export loads. So there's some -- they're enforcing some obligations on that. I'm going to talk about detention and demurrage in a second. There's been some new rules to govern that. They have -- the FMC is adding a few divisions and increasing enforcement so that they can react to not only concerns by the field, but then also can be proactive. And then also, there's going to be some additional tools and resources to analyze. What's interesting is throughout these 26 sections, they don't directly address ocean freight rates. And that was interesting because there was a lot of talk that through this new law that it was directly going to affect ocean container rates. It didn't happen, quite the opposite, there was a large stunning done by the Federal Maritime Commission that was in tandem when they rolled out the new law. And what they found out that the high rates were a product of supply and demand. And not only were the carriers not colluding or manipulating the market. In the largest headhaul lanes, they had added 24% more capacity. So that was interesting. So I highlighted out a few of these sections here. For one, this is interesting. The FMC rather than waiting on complaints or concerns that come in from themselves or other agencies, they can self-initiate investigations based on their field inspectors if they see something that's out there. I talked about how there's going to be more rulemaking for declining opportunities for U.S. exports. It's going to be a lot more transparency. This is going to be by reporting. So now carriers, a lot of the reporting that happens throughout the industry is done through AMS and Manifest Data. Now the FMC is going to be collecting and publishing data from all the carriers, which would be interesting. I'll come back to detention and demurrage in a minute. The FMC through a lot of new funding is establishing the Office of Consumer Affairs and dispute resolution services so that they can quickly address complaints and concerns. They're going to authorize the FMC emergency authority to collect data. So if there is a -- we see a spike of something that happens in the Gulf, they're going to quickly have the ability to go in and request records and information they can find out what's going on. We talked about the rail piece and one of the large pieces of congestion and destination is just the lack of available chassis for a host of reasons. As part of this, they're going to be doing a study in tandem with the Bureau of Transportation to collect data and start looking at chassis to see if they can pinpoint that -- we know a lot of the issues that we've seen over the past 2 years and not only the rails, but also the terminal locations is just due to not enough chassis where chassis being in places where not having that free flow, and then this last one, this is interesting is they're going to -- there's going to be a lot of talks. And they're going to look at the possibility of federal and nonfederal land in times of space prices in the terminals in order to place containers in order to ease some of that congestion. So quite a bit there. The one piece that I think this affects us the most, and Expeditors, it's a legislation that we're happy about is a lot of it with congestion, we're seeing great increases in the amount of demurrage that's out there. The amount of the charges for cargo that's waiting in the terminals, the amount of charges that are out there for the use of the carrier's equipment. And Section 7 of the law, one of the things that they're doing is they're shifting the burden of proof, so rather than the carrier, there's demurrage or terminal, there's carriers rather than just submitting an invoice to Expeditors and saying, hey, they're submitting an invoice to the importing or exporting community. What happens now is the entity, the terminal of the carrier trading the invoice, they have to -- the burden is on them to prove why demurrage is being invoiced and that comes out with 13 elements. This is being transitioned right now throughout the marketplace. So rather than just sending an invoice, they're going to have to provide certain data elements, this is in the coming months of when the containers are available, when free time started and then also to add context if there's any questions with regards to those charges being assessed. So how will the FMC manage all of this? Well, one, they got a heck of a lot of new funding. So through 2025, an additional $164 million. So they're increasing their budget by 50% and they're going to spend a lot of that money. We've been actively talking to the FMC, we're engaged with them. And a lot of that money is going to be spent on new hires to deep up that agency in terms of enforcement investigation and of course, customer service. And this isn't really the end. I mean, although the 26 sections are out there, there's still a lot more hanging around. There's talks of the next thing [indiscernible] closely is the antitrust immunity that the carriers have and we'll watch that close. That antitrust immunity enables them. Of course, they can't talk -- carriers can't talk about rates, but that enables them to share equipment, share vessels and operate within their VSAs and their licenses. It will be interesting to watch how that develops because there's a school of thought out there that says, if they remove that ability to talk for vessel-sharing alliances, it could have some real large downstream effects on the industry in terms of service capabilities because you'll go back to each line, having them to operate only their own ships in service loops. It could be far reaching consequences. So it's really hard to tell. But so that was most of what we really wanted to talk to today in terms of the market disruptors, and we thought focus on 2 or 3 of them because we only have 45 minutes or so. And I'll be darned, but we kept it pretty close to what we were supposed to.

So what we're going to do now is many of you have been putting questions into the Q&A box. So if you do have a question, don't hesitate to type it in and Mike and I will read some of these and see what we can do. Yes. There are certainly a few questions in the chatbox, but I know there's a question in there and I won't name any names, I promise, but it's a great question. It's the port authority in New York, New Jersey just published the tariff, which will take effect on September 1. The tariff creates a container in balance fee of $100 per container for ocean carriers who have an imbalance between the number of empty boxes going at the port versus the number of imports they discharge. Is it a charge we'd expect to fall back on us? I don't think so. It's hard to say right now, but I will tell you that about 2.5 weeks ago, I was in New York and met with [indiscernible] and her staff. And they are trying to get in front of the problem by forcing the carrier to get their equipment back in balance. And so what they're saying is, hey, if you are so out of balance between the number of empty boxes that are sitting dwelled in the report, you're not taking and evacuating your empties out, I'm not going to penalize the public. I'm going to penalize you. I'm going to charge $100 per container. So what they're trying to do is they're trying to attack this issue of port congestion, particularly in New York and New Jersey, I think it's a good angle. I'll be honest now. Will it eventually bleed back on us? I don't know the answer to that question. Our hope is it will not. Okay. Next question came in, a question from Ivan. I know Mike talked about how really through the end of '22, the new fleet isn't growing substantially. We're going to see a lot of that growth in the markets in 2023 and 2024. So the question was, do we expect to have rates increase at the close of Q4. So this -- and this is a tough one. So I think when I talk about rates, I always flip it back to microeconomics. -- in the theories of supply and demand. And why Mike showed some raps and things of why rates are coming down right now, why rates coming down because demand is coming down. And we know just based off of a lot of things outside of the supply chain, but we know the inventory levels right now are pretty bloated. So with a lot of the customers that we engage with, they're talking about how they're slowing ordering for much of Q3 as they're trying to bleed out some inventory that they had accelerated in Q2 remains to be seen how that happens across the entire network. And then Q4, they're going to begin ordering again. If they order again and we start to see a blip, and there's potential for rates to go up. But as Mike said, right now, rates are kind of on the slow decline. And unfortunately, what I'm seeing with the economy and consumer behavior, I think it could come down, but Mike and I could predict where the rates are going to go from quarter-to-quarter, we'd probably be sitting here in a bigger office. And that's for sure. I think what you're going to have to do is really watch. Right now, you've probably heard Adam and I said this in many of our webinars. It's still about the space. Okay. And I think with the infrastructure woes and the supply chain issues, there was a question in the chatbox actually about door-to-door time frames. Have they changed? Yes, they have. You're building much more time into your supply chain, particularly if you're going to inland destinations or IPI points and it has everything to do with the fact that the infrastructure can't support at the moment, currently, okay, the amount of cargo that's already in the ports and the cargo that continues to come in the ports. And unfortunately, to Mike's point, we have seen the transits actually grow to inland locations just because of the time taken to get on the rail. And then once it arrives at those locations of the [indiscernible] the additional time to get the containers out of those inland depots. There were a couple of questions on some labor issues in the European ports, particularly in [indiscernible] Germany. And yes, they are continuing. Frankly, they are continuing to be issues. Labor is in a very formidable position right now across the globe, not just in the United States. You've probably read the ILA wants to start talking about their contract early. Well, yes, no kidding. They're kind of in the driver's seat right now. Carriers are making record profits, right? And you have a very pro-labor administration in place. So I would suspect that labor will continue to be at the forefront. I don't -- to be honest, frankly we can follow up with you. I don't know what the latest is on the labor strike, there was a walk off on the German [indiscernible], but we'll follow up with you on that. Another question about the ILWU on ports outside of L.A. and Long Beach. I think this kind of goes in when I was talking a little bit about congestion. When I talked this morning, there are 38 vessels trying to get into Savannah. New York 16, [indiscernible] l4. This just shows how there's been a swing and people are trying to go over those. One thing Mike discussed the ILA and for those of you who might not be as familiar with labor, 2 primary labor unions servicing maritime vessels. So that's the ILWU on the U.S. West Coast and the ILA, which services the U.S. East Coast and Gulf, they're actually under contract, the ILA through September 30, 2024. But as Mike said, there has been talks about them potentially opening that up and negotiating sooner. We'll see and we'll watch that close. I know there were a few questions in the chatbox, and I think we did address most of them on OSRA and the detention and demurrage. We do have some forward facing material on that and we'll get that out to you that helps explain a lot of the details that are now going to be required. The onus of burden most definitely has shifted from the importer or the customer, us, you. It is now -- the proof needs to fall to the carrier side to the rail side terminal side -- so we'll get some of that information out to you that I know you put some stuff in the chatbox on that. I know there was question in there. And again, I think we talked a little bit, I think we covered it about the current congestion on the West Coast recommending East Coast and Gulf ports. It's already happening, Kevin. And I think that what you're seeing is that if you look at market share, we -- there are some statistics out there that show that actually the market share on the West Coast in the first -- I'm going to say, in the second quarter of 2022. The market share shifted, okay? And it shifted towards East Coast, all water and Gulf Coasts. But is that going to create even more backlog, it's already creating backlog problems. So our hope is that the contract comes to fruition and that we do not have a labor disruption on the West Coast. So a question came through with regards to -- with all the congestion in the terminals and on the rail, is there capacity to terminate, divert cargo and transload [indiscernible]. So this is a tough one. The carriers have been reaching out and based on saying that, hey, they would like to have more -- we're talking about Los Angeles and Long Beach and even in some cases [indiscernible], they would like to have more cargo terminate at the Ocean Terminal. Why? Just because the rail's congested. So the carriers have been much more willing to take diversions or termination requests as long as they're filed prior to them filing their bonds which is at least 48 to 72 hours prior to arrival. The challenging piece is once that diversion happens, the infrastructures within the terminal locations are still [indiscernible], there's very little warehouse space to perform transloads, warehouse space in Los Angeles, [indiscernible] at an absolute premium. The amount of drivers that are willing to do long-haul, it's been challenging. So in these particular instances, our recommendation is to engage your local Expeditors' representatives to talk about those market conditions and what's feasible at that particular instance. A good question in the box. The disruptions and exceptions, are they going to be the norm? According to the data, how much longer do we expect the conditions to remain. A lot speculation is out there. I can tell you there were some trade publications, some quotes from the Executive Director of the Port of Los Angeles, who basically said the backlogs to clear the amount of backlogs and the rail congestion and what's happening could take anywhere from 6 to 12 months. So we hope it's not the norm. We hope that the backlogs eventually, I mean, there's a tremendous effort afoot right now to get cargo out of containers, get empties back to the carriers and get the carriers evacuated out of the terminals and clear the [indiscernible]. And what becomes difficult is there's just still no because things are congested all over. There's no elasticity. And that's -- we're talking about planning and things we just don't know, right? If everything remains without disruptions, meaning that there's not a bad wildfire season or if there are no labor disruptions, right? If demand continues to drop as folks bleed out inventory, yes, things should return to normal faster than it has over the past 1.5 years. The challenging thing is, well, what happens if there is a labor disruption, what if there is inclement weather, right? And that [indiscernible]. There was a question about OSRA, does it apply to Canada? And the answer is no. It does not. The FMC is governing cargo into and out of the United States only. And it was a follow-up question as well as was the objective to regulate excessive freight charges. And no it wasn't addressed at all in any of those 26 sections, there was no language to regulate the excess of freight charges. In fact, there was a statement put out by the Federal Maritime Commission that said after investigating the freight rates that will be in charge in the market, those rates were driven totally by supply and demand, so it's great question. So I think again, we're just about out of time here, and I wanted to, again, ensure that we will absolutely make sure that we have -- we will make sure that any of the questions we did not get to in the Q&A, we will have someone follow up with you directly on that. And I know there was some questions as well from several of you about we have a forward-facing document on OSRA. It's a 2-page PDF flyer. It does a real nice job of explaining in a condensed version, what OSRA is and what it did and the major impacts of it. So if you are interested in that, then you just contact your local sales representative or the sales contact that Expeditors, we can provide that to you. And that being said, thanks to everyone for joining today, and I'll turn it over to Nicole to close this out. Thank you, everyone, for joining today, and thank you to Mike and Adam for the great information. As a follow-up, I will be sending a short feedback survey out via e-mail. Upon completion, you'll receive a copy of the slides via PDF that were shown today. We will also make sure if you do request that flyer that Mike and Adam just mentioned, we will get that over to you as well. So without further ado, I will let you get back to your day today. But just again, I wanted to thank everyone for joining, and thank you to Mike and Adam for the information. So take care, everyone, and we will see you at the next webinar.