Tied in knots

Virtually everyone with a stake in container shipping is focusing on two main issues these days: the West Coast longshore contract negotiations and what’s next now that the P3 mega-alliance is dead.

Regarding the first issue, shippers are breathing a sigh of relief because there haven’t been any major disruptions at U.S. West Coast ports, nearly a month after a brief extension of the contract between the International Longshore and Warehouse Union and employers represented by the Pacific Maritime Association expired. Both sides seem to understand that a shutdown of any kind wouldn’t be in their best interest.

Chatter around the negotiations indicates there’s been no resolution concerning who will pick up the projected $150 million tab for the “Cadillac tax” the Affordable Care Act will impose on the ILWU’s health care package in 2018.

Until now, union members have paid nothing into their health care plan, and they want to keep it that way. Employers — specifically, the ocean carriers — say they can’t absorb another $150 million of costs plus whatever ongoing additional premiums. Only three carriers are making money today, and carriers collectively have lost billions of dollars over the past five years.

So where do they go from there? Compromise? Makes sense, so that won’t happen. Sign a shorter-term agreement and kick the can down the road? Sounds like something Congress would do.

And this isn’t even getting into some of the really meatier issues, such as productivity. That issue, of course, is tied directly to protecting headcount in the ILWU. That’s all tied to automation, requiring enhanced equipment at terminals as well as some infrastructure improvements and another look at terminals’ operating hours. These are difficult issues exacerbated by the virtual “non-compete” conditions on the West Coast.

No simple answers are available, but conditions already are having an impact on how cargo moves. And, if the union’s objective is to maintain or increase opportunities, it will accomplish neither by maintaining the status quo. There are answers, none easy, but talking to each other a few weeks every two or four years won’t get it done. Do we have serious people who will have serious dialogue, or will they just continue to kick the can down the road?

As for the sudden, China-led demise of the P3, Maersk Line and Mediterranean Shipping Co. — two of the three P3 participants — wasted no time in responding by creating the 2M. Designed to remove the major concerns China raised in rejecting the P3, the Maersk-MSC alliance would have less market share and no centralized operations center with complete control of the vessels assigned to the alliance.

Will that satisfy China? Who knows, considering many are skeptical about the real rationale behind the P3 rejection.

But following the 2M announcement, a rumor emerged that there are serious talks about a “CCU” (China Shipping-CMA CGM-United Arab Shipping Co.) alliance. That would make sense because those three companies are the only ones outside of the 2M to have ordered vessels large enough to be competitive in the Asia-Europe markets.

I see reports about who is building what ships, with emphasis on vessels capable of carrying more than 14,500 TEUs, but the reality is that 14,500-TEU ships aren’t competitive in the Asia-Europe market. They may be great in other markets, but not Asia-Europe.

Many carriers still haven’t crossed that 14,500-TEU line, and for those with 20:20 hindsight, they are far too late in making the decision. Looking at the financial reports from carriers in the past two years, it’s clear that Maersk’s decision to build 15,500-TEU vessels and put them into service was the first big step toward cost control that, eight years later, allows it to generate returns that make business sense.

Looked at another way, more than 75 percent of the rest of the industry has yet to pull that trigger. When those carriers do, they will have given Maersk a 10-year head start on cost control and profitability. Has anyone ever heard of a 10-year advantage over your 20 or so largest competitors in a mature industry? One can only guess at the reasons for this apparent lack of reaction over such a long period of time. Could so many have not believed the real impact these larger, more efficient vessels would have?

They’re now stuck between the proverbial rock and a hard place, facing a costly decision that will exacerbate an already negative supply-demand market. What are the alternatives? If you want to be a global player, you must make that tough decision and build the ships. If you don’t like that idea, then you have to plan to be a regional or niche player.

The big losers in this won’t just be the carriers that waited, but also the non-operating owners that have chartered vessels to them. Those charters are coming back and will have few places to go.

This isn’t your father’s market place of 10 or 15 years ago where you could go charter a few ships, lease some containers, get a few agents in the markets you wanted to get into and you were in business. This is a high-stakes game, and I think we’ll not only see some carriers leave the scene, but many relatively young ships scrapped — and that could change the way non-operating owners approach the market.

Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him atmrgtf4811@mindspring.com.

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