Considering that the eastbound trans-Pacific trade is struggling through its worst performance since 2001 in terms of cargo volume growth, ocean carriers have much to be thankful for.
Freight rates in the U.S. import trade from Asia have held up despite declining container volumes. A concerted effort by carriers to manage capacity in the trans-Pacific has kept vessels relatively full. And with U.S. exports to Asia booming, carriers are able to make a little money in the normally weak westbound trade.
Carrier executives are nervous, though, and rightfully so. Steady erosion in the important Asia-to-Europe trade could produce a surplus of vessel capacity in the global container fleet in the coming year, a development that will affect freight rates in the Pacific.
More than 100 vessels with capacities of 7,500 to 12,000 TEUs are scheduled for delivery by the end of 2009. These massive ships can operate profitably only in the Asia-Europe and trans-Pacific trade to the U.S. West Coast. If growth slows considerably in the Asia-Europe trade, a capacity glut will emerge in the two largest east-west trade lanes and freight rates will fall.
Shippers are well aware of these developments and already are negotiating rate discounts in the Asia-Europe trade. Rates in the eastbound Pacific have held up reasonably well because of carriers' ability to enforce bunker fuel surcharges. However, a surplus of big ships could result in declining freight rates in the eastbound Pacific when the trade enters the slack season next winter.
Several economic developments indicate that trade conditions could get worse before cargo volumes stabilize and the trans-Pacific trade returns to growth, possibly later in 2009.
Underpinning the economic decline in the U.S. is the stubborn housing crisis. The U.S. housing bubble burst in 2007. The decline in sales of existing and new houses has accelerated since late last year. Home prices have declined by about 25 percent since mid-2007, and another 15 percent decline is possible. Former Federal Reserve Chairman Alan Greenspan predicts that the housing market will decline into 2009 before stabilizing about midyear.
Banks and mortgage companies continue to struggle with foreclosures, adding more fuel to the decline in housing prices. Banks also are tightening their lending policies, making less money available for new home purchases.
The housing and financial crises have a direct impact on the trade between Asia and the United States. Carriers estimate that 25 to 35 percent of their container volume in the eastbound Pacific is related to the housing industry. Sales of furniture, televisions, tools and building materials depend upon a buoyant housing market.
In addition, when housing sales were strong and home prices were increasing, consumers tapped into the equity in their homes to buy clothes, footwear, electronics and other consumer items that are carried in containers. With home values decreasing in many parts of the country, consumers no longer have access to this easy source of money.
Furthermore, the persistently weak dollar makes imports more costly. Food prices have soared this past year, and consumers are paying near-record prices for gasoline and heating oil. As a result, American consumers have cut back significantly on purchases of all but the necessities of daily living.
The eastbound trans-Pacific trade is driven primarily by the retail industry, and major retailers are in no mood to gamble on a quick turnaround in consumer expectations. Therefore, retailers are managing inventory closely, said Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation. Imports as a result have declined every month this year compared to the same month in 2007.
The NRF, which publishes a monthly Port Tracker along with consulting firm Global Insight, noted that imports in June were down 10.3 percent compared to June 2007. Port Tracker predicted that imports would continue to decline for the rest of the year except for slight increases in October and December.
The August Port Tracker projected that for the year, containerized imports would decline 4 percent compared to 2007.
Carrier projections are equally gloomy. The Transpacific Stabilization Agreement, which represents 15 lines in the eastbound Pacific, reported that containerized imports from Asia declined about 5 percent in the first half of the year. Volumes began to pick up in August, and the TSA expects a "modest" peak-shipping season this fall.
Such projections are bad news for ocean carriers because they entered 2008 anticipating another strong year of growth in the Asia-Europe trade. The westbound trade from Asia to Europe grew 16.6 percent in 2007, allowing carriers to absorb all of the new vessel capacity that they added to the global fleet.
The largest economies of western Europe, however, have slowed noticeably this year. Container volume from Asia to Europe increased only 5.2 percent in the second quarter. Gross domestic product in the euro zone is now projected to grow by less than 2 percent in 2008.
Meanwhile, shipyards continue to deliver huge ships with capacities of 10,000 TEUs or more. Unlike vessels of 7,000- to 8,000-TEU capacity, which can be profitably deployed in the U.S. West Coast trade, the biggest ships are used only in the Asia-Europe trade.
When capacity in a trade lane increases and cargo volume slows, declining freight rates are inevitable, and that is what is happening in the Asia-Europe trade. Norwegian investment bank DnB NOR projects that freight rates in the Asia-Europe trade will drop 6.4 percent by 2009.
Carriers are attempting to cope with the steady growth in capacity by increasing the number of vessels they deploy in their Asia-Europe strings. A number of those strings now utilize nine large container ships, compared to the normal eight vessels.
When carriers increase the size of their vessel strings, they reduce the steaming speed, which produces an immediate savings in fuel costs. With bunker fuel selling at more than $600 a ton, a big ship operating at a 10 percent reduction in speed will save hundreds of thousands of dollars in fuel costs on the journey from Asia to Europe or the U.S.
Carriers in the trans-Pacific trade to the West Coast are addressing the capacity issue through vessel-sharing arrangements. For example, Maersk Line, CMA CGM and Mediterranean Shipping Co. had been operating three separate services from South China to Los Angeles-Long Beach. The carriers combined their services to operate two strings of 8,000-TEU capacity. This move reduced vessel-operating costs and took advantage of the lower per-unit carrying costs inherent in big ships.
Carriers removed some capacity from their trans-Pacific services in late 2007 as the trade entered the traditional slack season. Unlike past years, however, carriers did not return all of the capacity to the trade for the 2008 peak season.
By managing capacity this year, carriers have been able to prevent erosion in freight rates. According to statistics provided by Drewry Shipping Consultants and published in The Journal of Commerce, the spot freight rate for a shipment from Hong Kong to Los Angeles in mid-August was $2,091 per-FEU, up 19.9 percent compared to the same week last year.
Carriers in the 2008-09 contracting season have been successful in collecting bunker fuel surcharges to cover some of the cost of rapidly increasing fuel costs. As a result, even though the base freight rate in the new contracts was no higher than, and in some cases was less than, the rates last year, carriers are now collecting bunker fuel surcharges that can range from $200 to $600 per FEU.
According to the TSA, about 90 percent of the service contracts signed by late May contained floating bunker fuel surcharges.
In addition to charging for bunker fuel, ocean carriers are attempting to pass along some of the increased costs they incur for the inland movement of containers. Trucking companies and railroads include diesel fuel surcharges in their contracts with shipping lines, and carriers have passed along some of those cost increases to shippers.
U.S. importers are attempting to keep their transportation costs in line by filling containers to the maximum weight and volume allowable. They are adjusting their distribution networks by locating warehouses closer to consumer markets, thereby reducing their reliance on costly truck haulage.
When possible, some importers are shipping their intermodal containers through Vancouver and Prince Rupert on Canada's west coast. Intermodal rail rates charged by Canadian railroads are hundreds of dollars lower than those charged by U.S. railroads.
Importers who ship through Los Angeles-Long Beach could see their costs increase this fall under the ports' clean-trucks program designed to replace old, polluting trucks with cleaner-burning modern vehicles. To fund the clean-trucks program and related infrastructure projects, the ports and the California Legislature intend to implement several user fees that could add more than $100 to the cost of shipping a container through Southern California.
On a positive note, the declining container volumes have helped ports, railroads and trucking companies handle the current cargo loads without experiencing any congestion.
This interim period before growth resumes also gives ports on the West, East and Gulf coasts time to complete much-needed expansion projects. Ports such as Tacoma; Los Angeles; Long Beach; Houston; Charleston; Mobile, Ala., and Jacksonville, Fla., are building new terminals or expanding existing facilities.
Those expansion projects, along with recently opened terminals in Portsmouth, Va., and Prince Rupert, should provide sufficient terminal capacity in North America for at least the next several years.
West Coast ports also are looking forward to six more years of labor stability. Negotiators for the International Longshore and Warehouse Union and the Pacific Maritime Association in July agreed on a tentative contract. If the members of those organizations vote this month to approve the agreement, as anticipated, the contract should provide a strike and lockout-free environment into 2014.