Where's the peak season?

Where's the peak season?

carriers' predictions

It's late August in the eastbound trans-Pacific ocean container trade, but shipments are not being delayed in Asia, vessel capacity in the world's largest trade lane is plentiful, equipment is readily available, and there is no congestion to speak of at U.S. ports.

Why, then, are shippers not delighted?

Earlier this year, major importers signed contracts incorporating freight rate increases of anywhere from 30 to 50 percent. Their intention was to ensure that their shipments found space on vessels in what was supposed to be a busy peak season. The problem is that two months into what is supposed to be the busiest time of the year in the eastbound Pacific, the peak season has yet to materialize.

"The peak has been a little late in coming," said Howard Finkel, senior vice president of trade at China Ocean Shipping Co.

"We have seen less demand this year than last year at this time," said Jim Galligan, vice president of pricing and conference affairs at MOL (America).

The absence of a robust peak season has not escaped notice by those who track trade volumes. Some see evidence of continuing economic sluggishness in ocean container volume figures, notably in the trans-Atlantic and Europe-Asia ocean trades. "The optimistic investor, looking for evidence of an economic recovery in our freight data, will be sorely disappointed," Raymond McGuire, a transportation analyst for UBS AG, wrote in an Aug. 21 report.

Shipping executives attribute the lack of problems associated with importing container cargo not to weak volumes, but to good planning. Some say that for the first time in recent memory, carriers and importers worked together to prepare for the peak season. Carriers added services to the fastest-growing trade lanes, such as Shanghai to the U.S. West and East coasts. Shippers routed more of their cargoes through Oakland, Seattle, Tacoma, Savannah and New York-New Jersey in order to relieve pressure on Los Angeles-Long Beach.

Some retailers say that their import volumes so far this summer have been precisely what they informed carriers the volumes would be. J.C. Penney's freight volumes began to pick up in late July, and imports will continue to grow well into October before tapering off. The retailer wants its summer and fall volumes to increase gradually. "The peaks are not as high and the valleys are not as low," said Mark Maleski, international distribution manager.

Carrier executives applaud the fact that shippers gave them accurate projections on cargo volumes, and that carriers responded by putting sufficient vessel capacity and equipment in those trade lanes. Importers who formerly associated the peak with logistics chaos, with cargo being "rolled" to later voyages in Asia and with severe equipment imbalances in the U.S., should be happy that the busy season is moving along so smoothly, the carriers believe.

Shippers don't see things the same way. Some are miffed because they feel carriers earlier this year spread fear about capacity shortages, goading shippers into accepting large rate increases in return for space guarantees this summer, when in fact there has been no shortage of space.

"The ships are not full," said Bengt Henriksen, general manager of Unaffiliated Shippers of America. Making matters worse for those who committed most of their freight to costly contracts this spring, cargo consolidators that held out are finding that rates on the spot market in Hong Kong are dropping about $50 a week, Henriksen said. Some carriers have deeply discounted the $300 peak-season surcharge, or simply rolled it into the base rate.

In a macro sense, cargo volumes in the eastbound Pacific are about what the carriers predicted. Shipping lines earlier this year projected 8 to 10 percent growth in containerized imports from Asia. According to the Transpacific Stabilization Agreement, a discussion agreement that represents most of the carriers in the trade, imports in the first six months of the year are up 12.9 percent over the corresponding period last year.

The Pacific Maritime Association, which measures revenue tonnage at West Coast ports, pegs the volume increase in the first half of the year at 10 percent.

Carriers say those volume numbers are actually stronger than they appear because the percentage increases are based on unusually strong cargo volumes in May and June of 2002. Importers last year advanced their shipments in anticipation of the July 1 expiration of the International Longshore and Warehouse Union contract on the West Coast.

Furthermore, cargo volumes have been spread around geographically much more this year. According to figures provided by the individual ports, imports through Los Angeles-Long Beach, which handles more than 35 percent of U.S. containerized cargo, are only about 6.5 percent higher through July than during the first seven months of 2002.

By contrast, ports that normally grow more slowly than the Southern California port complex have experienced double-digit cargo increases. Oakland is up 11.3 percent through July. Seattle's imports are running 11 percent ahead of last year. Tacoma's imports have increased 30.6 percent, and imports through Portland, Ore., were up 36 percent through July.

Also, carriers have added three new all-water services from Asia to the U.S. East Coast, and imports through Savannah and New York-New Jersey are up more than 30 percent compared to last year.

Shipping executives say there will be a peak season this year, but that it will be shorter and more intense than in recent years. "Customers are still predicting large volume increases in the coming weeks," Galligan said.

It is difficult to pinpoint a reason for the shorter, later peak this year. The first and second quarters of the year were busier than usual this year as importers fast-forwarded their summer and back-to-school merchandise to stay ahead of the May 1 general rate increase in the eastbound Pacific. The SARS epidemic in Asia could have delayed production of holiday merchandise. And because of SARS, U.S. importers did not send their buyers to Asia early in the year as they normally do.

Some retailers plan to bring in larger-than-usual volumes this fall. Furthermore, when the peak figures come in for September and especially October, they are likely to be quite large when measured as a percentage increase. The ILWU began a series of work slowdowns last September during contract negotiations, and the employers locked them out for 10 days in late September and early October. When the West Coast ports re-opened, more than 200 vessels were backed up and the container yards and terminal gates were congested.

This year, the terminals are operating efficiently as they enter the fall months, and terminal operators are beginning to introduce some of the productivity-enhancing technology that the new ILWU contract allows them to use. Except for some temporary dislocations of intermodal equipment due to the perennial trade imbalance in the trans-Pacific, equipment should generally be available where and when it is needed.

Imports from Asia, and especially from China, will be strong this fall. Economists are still trying to measure the magnitude of the shift of global production to China since the world's most populous nation joined the World Trade Organization in 2002. The old formula, that demand for containerized imports in the trans-Pacific is two-and-a-half to three times the growth in gross domestic product, is no longer valid because the U.S. imports so much from China.

According to the report by UBS, China is the largest single supplier to the U.S. of many products that move by sea, such as furniture, consumer electronics, toys, sports equipment, footwear, apparel and vehicle parts. China has moved aggressively into the furniture market, accounting for 68.4 percent of U.S. imports. And it is by far the dominant supplier of toys, sporting equipment and footwear, accounting for more than 80 percent of U.S. imports, according to UBS.

Since China's consumer merchandise exports are growing so rapidly, and production schedules may be somewhat late this year, carriers remain convinced that a true spike in imports will occur in late September through October.

Nevertheless, importers still believe they were misled into believing that the only way they could guarantee sufficient vessel space and equipment for their shipments was to sign contracts calling for a $700 general rate increase plus a $300 peak season surcharge.

"Steamship economics is right up there with voodoo economics as far as predicting what supply and demand will be," said Tom Craig, general manager of LTD Shippers Association.

Those shippers who were able to negotiate discounts during the relatively slow months of June and July should be proud of themselves. With carriers convinced the peak season is just around the corner, they are slamming the door shut on further discounts.

However, if service levels remain high during the fall months, shippers will at least feel they got something back for the large rate increases. Raymond McGuire, director of international services at Saks Fifth Avenue, said he has yet to experience a late shipment at his distribution center this year, and on only one occasion was he shorted a chassis. "I need my cargo in Ontario, Calif., in 18 to 19 days, and I'm getting it," he said.

It appears that carriers will also seek rate increases, although not of the magnitude of this year, when they negotiate service contracts for the 2004-05 shipping season. Carriers say they lost so much money in 2001 and 2002 that this year they were not able to make back all of what they lost even with 40 percent rate hikes. Also, it appears that supply and demand will be in balance next year, which means that carriers will tell shippers capacity will be tight. "They'll play the capacity card again," Craig said.

Preliminary figures on new capacity coming into the global container fleet and demand for container slots indicate there will likely be a balance in supply and demand, and possibly some tightness during the 2004 season.

According to the London shipbroker Clarkson, the global container fleet will increase 6.5 percent in 2004, while the growth in cargo volume will be 8.1 percent.

However, since many of the new vessels coming out of shipyards will be large ships of up to 8,000-TEU capacity, the major east-west trade lanes will experience more of the growth in capacity than the smaller north-south trade lanes. The cascading of vessels will probably begin with the 8,000-TEU ships entering the Asia-Europe trade, where they will bump vessels of about 6,000-TEU capacity to the trans-Pacific. Those ships will bump some 4,000-TEU vessels, which are the largest that can fit through the Panama Canal, to the all-water services from Asia to Europe.

The carriers' negotiating posture on rates for 2004 will become clearer early next year. If Christmas sales volumes at the major retailers are strong, inventory levels are low and the U.S. employment picture brightens, carriers will boldly proclaim that demand will exceed supply in the eastbound Pacific. If the opposite scenario develops, proposed rate increases will be more modest.