Logistics managers don’t have a crystal ball, so there’s no way they can foresee the kind of supply chain disruptions caused by random events such as last year’s earthquake and tsunami in Japan or floods in Thailand. But they are worrying about more predictable threats to their transportation networks this year. They know those threats are real because they have learned their lessons.
The financial health of ocean carriers is at the top of the list of 2012 risks logistics managers cite as threats to their supply chains, especially in view of Drewry Shipping Consultants’ projection that carriers will collectively lose an estimated $5.2 billion when their 2011 results come in.
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“I see the financial health of carriers and potential rate increases as going hand-in-hand, but the health is the big driving factor,” said Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, which negotiates ocean freight contracts for its member importers. “We’ve got the carriers doing the same sort of madness they did in 2009, but because they’ve had such devastating price competition in their attempts to improve market share, a lot of their reserves have been depleted. There are only a few that can withstand another round of this, yet we’ve got more big ships coming in.”
Big U.S. retail importers agree. “On a broad basis, I’m concerned about where the ocean carriers are going,” said the head of international transportation for one of the largest U.S. retail importers who spoke on condition he not be identified. “There’s a lot more capacity than demand, with 8 to 9 percent of additional capacity rolling off the lines in 2012 and a U.S. demand growth of 3 to 5 percent.”
If carriers don’t find a way to absorb the capacity surge and continue to pursue market share, freight rates will never recover, he said. But he said, “If carriers start to idle capacity, we could wind up in a situation like we were in 2010, when there wasn’t enough capacity to meet demand and containers get rolled.”
“The tightening of capacity and skyrocketing rates that accompanied it in 2010 are the No. 1 concern for our retail members,” said Casey Chroust, executive vice president of retail operations for the Retail Industry Leaders Association. “They are watching closely because they don’t want to have a repeat of that situation.”
Because carriers have suspended or consolidated some services following last year’s peak season, capacity already has started to tighten more than it has in the last year, and rates are starting to pick up in the Asia-Europe and trans-Pacific trades.
The big retail importer said containers already were being rolled in Chinese ports in the run-up to today’s Lunar New Year, when Chinese factories shut down for two weeks of celebration. He said none of his company’s shipments have been rolled, but that those that have been were primarily containers booked by non-vessel-operating common carriers.
Shippers shouldn’t worry about this recent, short-lived jump in spot rates, but should instead focus on ways to mitigate the risk of another sudden capacity crunch later this year, said Martin Dixon, research manager of Drewry’s Container Freight Rate Insight.
“The big question on everyone’s minds is how sustained the rate revival will prove and what this means for 2012 trans-Pacific contract rates,” he said. “Once the pre-Chinese New Year rush recedes later this month, spot rates will retreat back to December levels unless carriers take action to remove surplus capacity from the trade. Shippers would be well-advised to wait a few weeks before commencing contract negotiations.”
Another big concern is the possibility of labor disruptions in U.S. ports. Some transportation managers already have developed contingency plans to move their shipments away from East Coast ports if labor disruptions look like they may become a reality.
“The upcoming contract negotiations with the International Longshoremen’s Association have got to be on everybody’s radar screen, given the radical comments that ILA President Harold Daggett has made,” said the logistics director of a large exporter of high-end forest products who requested anonymity.
“The chassis issue is working its way out, but that has been a big risk factor associated with the transition of who is going to be responsible for maintenance and repair,” he said. As ocean carriers turn the provision of chassis over to chassis pools and to private leasing companies, the ILA claims it has jurisdiction over M&R at all East and Gulf Coast ports. It also is protesting the automation of terminal equipment at the new container terminal at Global Terminal in the Port of New York and New Jersey.
“That’s just nuts,” the export director said. “At some point, it’s hard to argue for buggy whips.”
Fears of labor disruption aren’t confined to the East Coast. “On a smaller scale, I continue to be concerned about the Port of Oakland with the unrest caused by the Occupy crowd that has shut down the port a couple of times,” the large retailer’s transportation director said.
Still, his antennae are largely focused on the East Coast. He already has contingency plans to move imports away from East Coast ports if contract negotiations stall. “If we don’t see resolution of contract issues by a set date, we will begin moving some of our key product categories off the East Coast through other gateways because we have to mitigate the risk,” he said. “We can’t wait until the last minute to move cargo to the West Coast and Canada.”
Most transportation managers don’t list political threats among their top concerns, because they know there is little way of predicting whether Iran, for example, will follow through with threats to close the Strait of Hormuz, the chokepoint through which a fifth of the world’s oil supply passes. But they are concerned that escalating oil prices will plunge carriers even further into the red this year, especially considering freight rates in the Asia-Europe trade last year were too low to cover the price of bunker, let alone other vessel-operating costs.
Bunker fuel prices have remained at close to $700 per metric ton for the last few months, even though oil prices have moved down. “Oil goes up and down, but bunker doesn’t come down, which tells me that it’s caused by speculation, which is problematic,” the retail importer said. “The expense for the carriers is huge. They don’t even cover it on Asia-Europe. The consolidation of alliances in the Asia-Europe trade to compete with the MSC-CMA CGM consolidation will take capacity out of the marketplace. Does that model begin to move into other arenas over time? It’s way too early to say.”