Shippers Rocked and Rolled

Shippers Rocked and Rolled

It’s not every day that I’m minding my own business and my phone rings, and on the other end of the line is the logistics director for one of the world’s largest retailers. He is in a bad mood. He has called to inform me that there is a crisis in the trans-Pacific market and we need to report it.

His cargo is being rolled throughout Asia, jargon for missing its intended sailing because of a lack of space. His carriers are demanding an “emergency” rate increase as if the clause in his service contract barring such actions didn’t exist. And when his cargo is eventually loaded, the ship proceeds at slow speed as carriers try to save fuel and absorb capacity.

For the shipper, that means more inventory must be in the pipeline, and thus more cost, at a time when retailers are managing inventory conservatively because of the uncertainty of the recovery.

This was not an isolated call. It was one of several nearly identical conversations since the beginning of the year, all initiated by large shippers, that in the aggregate drew back the veil on one of those rare, but combustible, scenarios in freight transportation: a nasty bottleneck that appeared seemingly out of nowhere and, though it may be brief in duration, will likely be remembered for years to come, like the infamous rail and port bottlenecks seen over the last decade.

There is probably not a single major shipper moving goods from Asia to North America that has been unaffected and is not wondering how something like this can be avoided in the future.

How this happened is explained easily enough. If the circumstances are rare, so are the causes. Shippers sourcing in China always push through a stockpile of spring merchandise early in the year in advance of the Chinese New Year, when the country all but closes down for more than a week, similarly to the Christmas-New Year stretch in the West.

This year, the holiday falls in mid-February, later than usual, making January an unusually busy month for cargo movements. “The demand right now is a little more than we had planned for. We have a bit of an artificial peak created by the Chinese New Year,” Peter Keller, executive vice president of NYK Line (Americas), told a panel at a National Retail Federation event in New York on Jan. 11.

Set the pre-Chinese New Year surge against a carrier industry that is reeling from an estimated $20 billion in losses last year as rates and volume collapsed under the weight of a surge in ship ordering ill-timed to the Great Recession.

Funds from multiple carrier refinancings last year will quickly dry up unless a meaningful rate recovery occurs this year, with forced asset sales or bankruptcies the next step if a recovery doesn’t come quickly.

For carriers, 2010 is a year to survive. Given continuing high unemployment and the drying up of consumer spending, shippers don’t see their own business much differently. The stakes are high, and tempers are short.

As painful as it is, this capacity squeeze will pass. But what will be left in its wake? How will shippers and carriers do business with each other when rates are volatile and unpredictable in the extreme and trust is a thing of the past? More than one shipper remarked how the emergency rate increase seemed conveniently timed to the so-called winter deployment in which carriers withdrew capacity from the trade during the normally light winter months.

Carriers deny this, but are open in saying a major push is under way to generate $400 per 40-foot container in non-contracted revenue from shippers beginning on Jan. 15.

“If the contract allows for some kind of automatic adjustment, it is being applied,” said Brian Conrad, administrator of the Transpacific Stabilization Agreement, the carrier discussion group in the eastbound trans-Pacific. “If the contract says no additional surcharge and increase, then what the carriers are doing is approaching shippers on a one-on-one basis, and saying, ‘We know what your contract says; per the terms, we are not able to apply anything, but you know what the situation is. Is there any way to work with you to reopen the contract and put in some kind of adjustment?’ ”

Is there a way to remake the shipper-carrier business environment such that rates are stable, capacity is available and everyone more or less is happy for the long term? The only solution is to acknowledge that container rates are largely set by the market, and to create some form of hedging that would allow shippers and carriers to protect themselves from adverse movements in rates.

Unfortunately, though the industry may be headed in that direction, it’s not there yet.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. He can be contacted at ptirschwell@joc.com.