What's ahead for 2009

After a year of surprises in 2008, what's ahead for 2009? Recent history -- the past 18 months -- tells me that 2009 will be a worse year for carriers, and will give some rate relief to cargo interests, who are otherwise having their own version of a bad year. Ancillary businesses, ports, terminals, trucking companies, railroads and warehousing all will be hurt by economic conditions. What about the 3PL? A mixed bag, in my opinion.

2008 brought significant negative results for ocean carriers, even with one bright spot. While trans-Pacific markets turned downward in a big way, carriers appeared to retain rate levels, primarily because they finally took a tough position on fuel surcharges. It was a matter of timing -- annual contracts were negotiated in the early first quarter of 2008 after carriers were out selling the fuel surcharge requirement during the fourth quarter of 2007. That worked pretty well for them until the last month of 2008 when year-end contracts were being negotiated and significant reductions evidently were available from carriers trying to protect market share while espousing the need for rate increases to maintain long-term viability; a familiar story.

In the Asia-Europe markets, carriers started early to cut rates in anticipation of volume increases that were below the double-digit increase of 2007. When capacity in the trade increased, as expected, carriers dropped rates again, this time significantly, to protect their market positions.

Virtually all of the negatives for the carriers are a direct result of the global economy, and nothing in the foreseeable future indicates that it will change positively during 2009. Much more capacity is coming on stream this year, making the situation that much worse. Look for rates to drop virtually everywhere, and especially in the Asia-to-U.S. trades, where the West Coast rates have allegedly already fallen by $400 a container.

Fuel costs have declined considerably, providing the lone bright spot for carriers. Recall that at about $120 per barrel for oil, fuel represented nearly 50 percent of vessel-operating costs in the trans-Pacific. With oil down to less than $50 a barrel now, fuel costs have had to come down significantly for the carriers, giving them relief in operating cost. But look for some consolidation in the industry during 2009 and 2010, including one of considerable size.

For cargo interests, the economy has hurt them significantly. If less product is moving and being sold, revenue is down. Several familiar names in retail have drastically cut back their operations or are closing. Many friends on the logistics side of retail and manufacturing have told me that they are facing volume movement reductions of between 10 and 20 percent, both internationally and domestically.

That not only affects their companies' revenue profitability, but has a huge impact on their service providers. While shippers' volumes are dropping, this creates capacity issues for service providers, especially the asset-based firms. The norm in these circumstances is carriers reducing rates to try to maintain volume levels that keep them viable. Those with low operating costs will be more able to cope under these conditions, with the higher-cost operators being severely strained, going out of business or being sold.

Capacity in the international and domestic markets is declining, with chartered ships returned to their owners and some owned vessels taken out of service. Domestically, capacity declined by 10 percent through a combination of truckers going out of business, some selling of trucks to buyers in foreign markets, and curtailing capacity by not buying new equipment, even that which is replacement capacity.

On the 3PL side, there are problems and opportunities. The problems relate to shrinkage in the markets -- less volume and revenue -- which affects cash flow and profitability. However, beneficial cargo owners will seek to cut their supply-chain costs, and 3PLs with imagination and creativity can help do that and improve their own revenue and profitability stream.

I see much of that opportunity in international markets, with increases in distribution services at lower-cost origin locations rather than at higher-cost domestic locations. It will take some time and effort to get the ordering processes in line with these opportunities, but they are there, and in times like these, they may be a necessity.

As turbulent economic conditions unfold in 2009, those with vision and foresight should be able to find opportunities to mitigate the negativity. Those stuck in the world of the past will find themselves a footnote in history.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. He can be contacted atferrullig@mindspring.com.

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