Win, lose or draw?

Win, lose or draw?

In one of my previous lives, the second half of April was one of the most interesting two-week periods of the year. With the shipping contracts' expiration date of April 30 looming, final negotiations with shipping lines were under way and most of a transportation-responsible manager's time was spent desperately trying to complete the various deals before the deadline. It was exciting and frustrating and exasperating, but the work was exhilarating and often more creative than any other part of the job.

Although I haven't directly negotiated a service contract in more than a decade, the process still fascinates me, and the results continue to have a major impact on my work, albeit an indirect one. Each year, I watch with great interest as the tale unfolds. The coming contract year of 2008-09 has the look of being an almost perfect storm of conflicting issues for the carriers and shippers in the U.S. trades, especially on the all-important trans-Pacific routes. How does this year's storm look from these opposite sides of the negotiating table?

The scenario in mid-April looks something like this: As a result of a slowing U.S. economy resulting from the real estate mess and subsequent drop in consumer confidence, imports through all three of the main U.S. entry ports in California plunged during March, by 7.1 percent at Los Angeles, 9.8 percent at Long Beach, and 12.2 percent at Oakland. The situation is exacerbated by the continued decline in the value of the dollar. Lower volume often means fewer (or at least smaller) orders, which tend to raise factory unit prices, which are increased further by the lower value of the dollar. Merchandisers and salespeople are under pressure to reduce prices (or keep them stable) so not to scare already frightened customers away. The last thing any importer wants to discuss in times like this is higher shipping rates.

The ocean carriers' situation is certainly no better. They have invested billions in new vessels, and while carrier economics may be opaque and mysterious, the lines still must pay for the ships. One way to do this is to implement a general rate increase. In the days of conferences, carriers could approach a market in a unified fashion, with all lines announcing the same increase at the same time. This is no longer possible, and while the term GRI lives on, the concept has little real meaning and no power to influence behavior.

As the price of oil has risen (it passed $119 early last week), so has the cost of bunker fuel, which has risen to more than $500 per ton. Please try to remember that during last April's contract negotiation season, oil prices were in the range of $60 to $65 a barrel. Fuel prices now make up around 50 percent of shipping lines' costs, and the lines must find some way to recover at least part of the increase.

Carriers are also impacted by currency fluctuations, to say nothing of other expenses. One reason for building bigger ships is that they are more efficient than smaller ones, and provide lower per-container costs. However, this only works when the ships are full or mostly (say 75 to 80 percent) full. If they're not full, the cost per slot is greater because of the higher cost of the bigger ship. Did you follow that? Well, the ships apparently are not full, at least based on the March statistics noted at the start of this column.

One bright light may be exports. With a weak dollar, U.S. products are relatively less expensive, and exports are up. The problem is that export rates are lower than import rates and because of lower cargo value, exports cannot pay rates that are too high or the currency advantage quickly goes away. Also, the slowing import volume reduces the availability of empty containers, which combined with the heavier weight of each export container, places limits on overall export volume. So the export light is on, but it may be dim rather than bright.

Where does all of this leave us? At the very least, we're in a perfect storm of doubt or panic or great uncertainty and little or no joy. It is hard to say which side of the table faces the greater set of problems - carriers or shippers. The ships will continue to sail, the cargo will continue to be moved, and each shipper-carrier agreement will eventually be completed. Most will be less than fully satisfied with the result, not exactly a tie, but no clear winner either.

Could it be that this is ultimately the best outcome of any negotiation? You be the judge.