The Big TPM Question

One question above all will be in the minds of shippers and carriers attending the Journal of Commerce’s annual Trans-Pacific Maritime conference in Long Beach next week: Can the industry end three years of volatility and attain a measure of stability in the Asia-U.S. trade lane?

David Arsenault, vice president of Hyundai Merchant Marine, said the next two months will show whether shippers and carriers learned from their mistakes of the past few years. Arsenault recounted how the Great Recession of 2009 hammered carriers in their global operations and especially in the Pacific trades.

Carriers in 2009 lost $15 billion total as cargo volume plummeted by about 20 percent and freight rates dropped even faster. The trade bounced back nicely in 2010, with imports from Asia increasing 15 percent. Carriers, for the first time in awhile, matched capacity with demand, and they turned a nice profit of about $13 billion.

Alas, everyone went back to their old ways last year, Arsenault told the Propeller Club of Los Angeles and Long Beach on Tuesday.

Cargo volumes flattened out, capacity exceeded demand and carriers lost an estimated $2 billion total. The bottom line for the past three years is that carriers registered a net loss of about $8 billion. Arsenault said this performance is unsustainable and must be addressed in the service contract negotiations that are beginning now in the eastbound Pacific.

Each party appears to be entering contracting season with the mindset of yesterday. Carriers are pushing for rate increases — that’s right — more than one increase. They are seeking an interim general rate increase on March 15, followed by another GRI on May 1, and possibly a peak-season surcharge in the summer. Retailers and direct importers face cost-cutting pressures from the highest levels of their companies. They want to keep rates right where they are.

Arsenault noted a couple of differences in the trade this year. The small, niche carriers that operated 3,000-TEU ships the past two years in the trans-Pacific and led the charge for lower rates are mostly gone now. These “spoilers,” as Arsenault called them, either left the trade or went out of business.

Also, carriers the past month have been routinely canceling individual vessel calls as exports from Asia dropped during the Chinese New year celebrations That contrasts with 2011 when the carriers virtually had no winter deployment program and overcapacity was rampant, Arsenault said. He indicated that if volumes don’t pick up soon, entire strings of vessels could be laid up.

The current spike in oil prices is an added reason why vessel layups are possible. Bunker fuel is selling for about $740 a ton, up 25 to 30 percent from last year. It costs carriers a lot of money to idle vessels, but it costs them even more to operate the vessels at low utilization rates in this environment, he said.

As Arsenault sees it, one of two scenarios will develop this spring in the trans-Pacific lane. Carriers can idle more capacity to bring supply down closer to demand and they can expand their program of slow-steaming and dropping calls at low-volume ports. Cargo interests will suffer in their environment of uncertainty.

The other alternative is that shippers and carriers will honestly share their cargo projections with each other and agree upon freight rates that are fair for customers and compensatory for carriers. The lines will match capacity with demand. In this scenario, Arsenault said, an importer doesn’t want to have the highest rate on the vessel, but neither does the customer want to have the lowest rate. Carriers will follow the low contract rate on May 1 with a peak-season surcharge within weeks, he said.

For shippers and carriers who are interested in learning where that sweet spot will be this year, some answers should be forthcoming at the TPM conference in Long Beach next week.

-- Contact Bill Mongelluzzo at bmongelluzzo@joc.com. Follow him on Twitter @billmongelluzzo.

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