Amid projections the shipping industry in 2012 will face another year of weak cargo growth and overcapacity, APL does not foresee carriers having much leverage in service contract negotiations next spring.
Eugene Seroka, APL’s president for the Americas, told footwear importers meeting in Huntington Beach, Calif., in late October that spot rates in the eastbound Pacific will deteriorate from already-low levels as the business enters the slack winter-early spring period.
Because freight rates “are not going in the right direction,” he said, APL expects to make it through another difficult year by controlling its operating costs while working closely with customers to improve the efficiency of their supply chains.
For shippers, that means the main concern for the coming year is likely to be securing the right capacity at the right time as carriers face looming questions over whether to keep vessels operating in a low-price environment.
Michael White, president, North America, at Maersk Line, delivered a similar message at the Footwear Traffic Distribution and Customs conference. By reducing inventory costs and modernizing processes, the world’s largest container line believes it can cut transportation costs from origin to destination by hundreds of dollars a container.
At least some of the cost savings, presumably, are passed along to shippers. But so far, it’s meant tough financial sailing for carriers. Most shipping lines that announced third quarter results last month reported millions of dollars in losses. At the same time, shipyards were delivering a steady stream of large container ships. There is now a 15- to 18-point spread between vessel capacity and cargo demand, Seroka said.
And global vessel capacity will increase next year. Seroka said 13 lines have ordered vessels of 12,500- to 18,000-TEU capacity, and more may be coming. “In our customer visits,” Jim Newsome, president and CEO of the South Carolina State Ports Authority, told a congressional panel last month, “we have learned that lines that have not yet acted are, almost without exception, planning orders for 13,000- to 16,000-TEU ships.”
The vessels are coming into a decidedly cut-rate market. According to Drewry Shipping Consultants, the spot rate for shipping a 40-foot container from Hong Kong to Los Angeles stood at $1,458 in mid-October, down 35 percent from a year earlier. That spot rate is becoming the market rate in the eastbound Pacific for all imports.
“There is no difference between the spot rate and the service contract rate. The market sets the rate,” said David Bennett, director of sales at Geodis Global Solutions. Bennett said one carrier executive told him the prevailing operator view is, “If you’re not operating a vessel of at least 10,000 TEUs, get out of the way.”
Paul Bingham, economics practice leader at Wilbur Smith Associates, said banks that supported carriers’ huge losses in 2009 may be unwilling to do so again, and the result may be consolidation among carriers.
Services already are consolidating. Niche carriers, whose small 3,000-TEU vessels are becoming uncompetitive even in feeder services, are dropping out of the trans-Pacific. And niche carriers and established lines this year have pulled eight vessel strings from the Pacific. Meanwhile, carriers are canceling individual vessel sailings when bookings are soft. That has left footwear importers reporting difficulty in getting goods on intended sailings even amid overall excess capacity in the eastbound Pacific.
Such uncertainty presents problems for carriers and their customers, and this is why more accurate forecasting is needed. White said weekly forecasts from customers would be ideal, although more realistically, rolling four-week forecasts would be effective in matching capacity with demand.
It is also important that shippers adhere to the bookings they make. White noted the failure of shippers to fulfill bookings — known as shortfalls — runs on average about 30 percent, but during busy periods 40 to 45 percent of bookings can result in shortfalls. “We have to remove this waste , these no-shows,” he said.
Despite lean times, APL is investing in vessels, terminals and services to improve operations over the long term, Seroka said. APL’s business plan is to maintain control of the transportation move, which involves carrying the cargo on APL vessels, handling containers at APL terminals and shipping inland on dedicated double-stack intermodal services. As part of that effort, APL has ordered up to 34 large “next-class” vessels and invested in a 43-acre inland port logistics center outside of Chicago served by BNSF and Union Pacific railroads.
The carrier also is trying to make its overall network more efficient by “triangulating” services to reposition empty containers where they are needed. APL unloads inbound containers in the nation’s interior, attempts to match the empties with shipper export requirements and carries the loaded containers to Asia where they are unloaded and refilled with shipments for the U.S.
Operating efficiency, carrier executives suggest, may mean just as much to shippers as the economics of larger ships. White said the average shipment involves 19 touches and seven phone calls. Fixing this system, he said, means “interesting things can be done with your supply chain.”