Trans-Pacific Turmoil

Because I write only once a month, I have the benefit of time to prepare and review my writing, and I can contemplate issues as opposed to having a deadline a day or less away. I’m rarely the first out with information, although several years ago I was first in print to say Maersk would be building 12,000-plus-TEU ships.

Over the past month, I’ve reflected on what I heard and saw at the Trans-Pacific Maritime Conference. Initially, I was both delighted and frustrated with the crowd — delighted that so many were able to attend and get the benefit of the variety of views on the subjects impacting their everyday working lives, but frustrated in not being able to move about easily and meet more with old friends and acquaintances.

But on to the real issues: In a sense, it was déjà vu, starting with the carriers trying to convince the audience — including themselves — that supply-demand ratios aren’t out of balance and that there will be “tight spots” during the year for space and equipment. The concern is that rates will come under pressure if it is widely accepted that supply greatly exceeds demand.

But the carriers may be too late, because they’re already lowering rates in major east-west trades, despite volume that is rising year-over-year. With less than 100 ships at anchor this year and with new capacity entering service, it appears supply is exceeding even the increased demand.

And it appears some carriers are chasing market share again. Last year’s results underscore the fact that, although carriers benefited greatly from increasing volumes, they also benefited from increasing rates. Dropping average rates by a mere $100 per 40-foot container, as they are doing now, will cost the industry about $6.8 billion over the course of the year. How much did they make in 2010? How much did they lose the year before that?

Then there is the thorny issue of shipper-carrier relationships. Four large beneficial cargo owners on a TPM panel I moderated in essence were aligned with the thought that they needed “certainty” from carriers: certainty on schedules, equipment and space availability, rates and charges. They also expressed a desire to have some simplification in the administrative processes, such as a boilerplate service contract modified by the two parties as required, and common definitions of technical terms — is there a reason to call a fuel surcharge by the eight to 10 acronyms that exist?

As for their own responsibilities, these BCOs said shippers needed to provide forecasts that more accurately reflect their cargo movements, to include specific service requirements in service contracts, and provide mutually applicable penalties for not conforming to the contract.

That ran counter to a speaker on another panel, a consultant for the Retail Industry Leaders Association who said retailers are looking for “agile carriers, those who can adjust to quickly changing markets.”

And there’s the conundrum: Some shippers want “certainty,” and some want “agility.” Some want to play the spot markets, and some want to commit 50 percent of their volume. There is no such thing as a “typical shipper.” There is no model to follow. It comes down to carriers and shippers spending more time defining the needs in the relationship and determining if they can commit mutually to serving those needs.

A couple more issues make my list of takeaways: One is the apparent open question on chassis. Some carriers have been in the forefront of telling shippers, “We won’t supply those anymore. We don’t do it anywhere else in the world, and we are stopping it here.” Others have sent e-mails saying that “as of (such-and-such a date), we will no longer provide chassis” with no follow-up or discussion. Some carriers are including chassis in their service contract negotiations. Some have said nothing. This is a messy item that needs attention by all to ensure chaos doesn’t prevail.

The other issue I see facing the industry is labor, specifically productivity on the U.S. West Coast. While the discussions with Robert McEllrath, president of the International Longshore and Warehouse Union, and Jim McKenna, president and CEO of the Pacific Maritime Association, were interesting and at times either humorous or blunt, the fact is this: Productivity isn’t improving much on the West Coast. As someone suggested, when and if a 12,000-TEU ship calls, it will take a week to unload and then load it. Work rules and attitudes must change to get the numbers well north of 35 moves per hour and allow costs to become more realistic.

Maybe it’s a game of waiting until the Panama Canal expansion is completed before worrying about the potential loss of business to the East Coast because of costs. Between the productivity and compensation issues, the East-West differential for getting containers on and off a vessel is approaching double in some locations.

And more than 60 percent of the nation resides east of the Mississippi, buying more than 60 percent of all consumables — that is, Asia imports. The larger vessels going through the canal won’t transit there empty, and costs and carrier pricing will impact the volumes.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at ferrullig@mindspring.com.

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