Commentary: Ocean Carriers’ Ifs and Buts

While watching the end of a ballgame one recent night, an announcer said, “If we just got the extra base hit in the eighth inning …” That’s not an uncommon thought in the sports — and business — world.

I was reminded of that recently after reading several e-mails and articles about the state of the container shipping industry. In general, the common thread is that things don’t look good, for the short or long term. Dan Gardner’s article, “The Economy’s False Positive” (JOC, July 2-9) hit all of the nails on the head for the longer term, say two to five years.

But I’m seeing signs the short term — that is, the rest of this year — might not be bad, and actually could be good if …

Start with fuel costs, which have declined for three straight months, including a 6.7 percent drop in May and more than that in June, according to a Drewry report. As the single largest piece of operating costs for carriers, fuel’s 20 to 25 percent slide over the past several months represents a huge savings for carriers. I’m already hearing grumblings from some fronts asking, “Why haven’t fuel surcharges come down?”

I’ll let the carriers try to explain that, but let’s just say it’s complicated. I’ve actually seen a few notices from carriers that fuel surcharges are indeed coming down, although by small amounts ($18 to $35 per TEU) and in smaller trades. Someone said fuel surcharge reductions were responsible for the recent drop in spot rates from China to the U.S. West Coast, but I don’t think so. Instead, I think some of the larger NVOs are getting rate reductions of some sort, and it doesn’t matter which charge the carriers choose to reduce.

But the Drewry report also contained interesting information beyond the reductions in fuel costs, including a statement that 16 service loops in the eastbound trans-Pacific are running at 20-plus knots, with the New World Alliance operating one string at 24 knots. This is a temporary phenomenon, Drewry said, caused in part by the lower fuel costs.

Then there’s the big to-do over where East and Gulf Coast labor negotiations will go, a to-do started at the TPM ocean shipping conference in March when ILA President Harold Daggett said in pretty clear terms that the union could and would strike if it didn’t win favorable terms in a new contract. He listed automation, union jurisdiction, chassis maintenance and repair, and container weights as “hurdles” that must be overcome.

Hearing this, several beneficial cargo owners in the room literally rushed out and called their respective offices and said, “Start planning to shift some of the goods in July and August from the East Coast to the West.

Well, here we are in July, and I see signs this is happening and will continue to happen, though to what extent we don’t yet know.

But let’s play what-if again. What if it looks like there really could be a strike and cargo interests of all types start shifting in big numbers from the East to the West later this month and in August. In addition to an increase on the demand side, it’ll take additional capacity to handle it.

If carriers could soak up capacity by slowing ships, they certainly can increase capacity by speeding them up. With lower fuel costs, it’ll be easier to speed the ships up when capacity is required, and slow them down when demand subsides. It’s a math game: keeping the ships slow and adding vessels vs. speeding the ships up, increasing frequency and capacity.

So besides carrying more cargo to the West Coast, how does this help the carriers? If they speed the ships up, they give back what they saved on fuel prices. But has anyone noticed that several carriers have filed general rate increases or increased peak-season surcharges in the eastbound trans-Pacific for Asia? (Ed. note: We certainly have, see page 10.)

If sizable amounts of cargo shift to the West Coast and vessel space becomes tight, these increases, or some form of them, will come into play, and we will see the first quarter of 2010 replay in the trans-Pacific.

Granted, that’s a lot of “ifs,” but they’re certainly not out of the realm of possibility. If it happens, I think this year’s second half will be a very good one for carriers, a real logistical mess for cargo interests who haven’t planned properly, and a great challenge to the U.S. West Coast infrastructure and the required transportation services to cargo destinations.

But those challenges are better than the alternative — a weak peak season — from everyone’s perspective. As a friend of mind reminds me now and then, if a bullfrog had wings …

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.
 

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