New factors in the trans-Pacific

New factors in the trans-Pacific

I covered the trans-Pacific trade in the mid-1990s, and there was always an element of mystery surrounding how the peak season in the trans-Pacific would turn out. There was mystery in the annual stare-down between shippers and carriers that resulted in rate levels. There was mystery as to whether the railroads would turn out enough equipment and maintain a steady flow of containers moving through the West Coast. There was mystery in whether harbor truckers would become restive and stage rallies. There was anticipation and interest that reflected lack of certainty in the outcome. How times have changed.

There is today - or at least this year - no real mystery to the major moving parts that constitute the trans-Pacific. Rates don't look likely to be a major driver in 2005, because of tight capacity and shippers' primary interest in avoiding bottlenecks. Smooth-flowing cargo through major port gateways used to be a foregone conclusion; now it's taken for granted that there will be problems and those providing the service are the first to point that out. "The carriers don't see the congestion situation improving. They don't see upside on the trucking side. The carriers see the summer of 2005 being pretty much as bad as 2004," said Brian Conrad, deputy executive director of the Transpacific Stabilization Agreement.

Conrad expressed those views in a February speech (available on the TSA's Web site at www.tsacarriers.org, under "news") to Women In Transportation. The speech was noteworthy for the relatively new proposition he was advancing: that congestion and the freight rate market are now intrinsically linked. On the water, capacity has been tight because of the high rates of growth in trade - third-quarter volumes were up an average of 25 percent from 2001 through 2004, according to the TSA, and that helps explain why rates have been rising in recent years. But Conrad said there is now another factor at work: landside congestion that forces ships to wait at anchor and skip port calls effectively reduces available vessel capacity. It will serve to mitigate the effect on the market of the predicted glut of new capacity that will start hitting the market later this year.

"The congestion and difficulty on the West Coast is going to cause the carriers to have to skip port calls," Conrad said in an interview. "There are probably going to be missed sailings because of delays in unloading, and what that is going to do is reduce the effective amount of capacity that is going to hit the ports in any given week. We feel it is a fairly significant new factor."

How significant? That's open to question, but the fact that Conrad would even raise the point indicates how serious congestion has become, or at least how bad it was last year. Conrad said that a bad week of missed port calls could reduce on-the-water capacity by 2 percent, a figure that offsets a lot of new capacity. "If there is no change in the West Coast situation, it will be a factor in how we look at capacity in years to come," Conrad said. "It won't be the raw numbers - X number of ships means X number new slots - because you have to look at how these factors will be affected by problems on the West Coast."

Conrad is in some ways preparing the market for the arguments that carriers will be making in upcoming negotiations. There is no denying that a significant quantity of new capacity is on order at shipyards and set to hit the market over the next two years. And the pace of new ordering is only intensifying. Orders for more than 100 ships were placed in the first six weeks of 2005, with 31 ordered last week alone, a pace that is 60 percent ahead of the same period in 2004, according to London-based ship broker H. Clarkson.

But there are other factors that must be considered. The primary reason for ship backups in Southern California last year was an unexpected shortage in longshore labor, and the Pacific Maritime Association and International Longshore and Ware-house Union are likely to be better prepared this year. Also, trucking rates are rising, which will bring more drivers and rigs into the market. Programs such as PierPass will begin to make Southern California a 24-hour-a-day operation, which it is not today.

But the larger point Conrad makes is valid. Vessel capacity might be increasing, but system capacity isn't. New terminal capacity on the West Coast, where 70 percent of Asian containers land, is nowhere to be seen, and new roads are years in planning. As Conrad said, "There is no development on the shoreside that is going to make a significant amount of difference."

Peter Tirschwell is vice president and editorial director of Commonwealth Business Media's Magazine Division. He can be contacted at (973) 848-7158, or via e-mail at ptirschwell@joc.com.