Troubled transpacific trade
Overcapacity, lackluster rates, terminal inefficiencies and potential labor disruption could upset liner carriers’ performance into 2015.
At best, shippers and liner carriers in the transpacific trade are faced with several challenging years.
Neil Dekker, head of container research at the London-based consulting firm Drewry, told attendees of the Journal of Commerce’s TPM 2014 conference last month to expect “a couple of years of pain to get through before we reach better times in 2016.”
Orders for new ships have been aggressive (22 percent of the existing world container fleet), particularly in the last nine months, as carriers have sought lower unit costs, he said.
Most orders are for big ships: 53 percent with more than 10,000 TEUs of capacity and another 29 percent with capacities of 8,000-10,000 TEUs.
Last year global container capacity grew about 5.3 percent and Drewry is forecasting growth of 5.7 percent this year and 6.3 percent in 2015.
The Transpacific Stabilization Agreement, a discussion agreement for 15 container shipping carriers that move more than 90 percent of Far East-U.S. trade, believes capacity growth from Asia to the United States will be 4-6 percent this year.
“This is a lot of tonnage for carriers to digest into their global service portfolios,” Dekker said, and particularly difficult for trades where bigger ships may be deployed, such as the transpacific.
While the world fleet of less than 8,000-TEU vessels will increase just 2 percent between 2010 and 2016, Drewry forecasts the overall fleet with capacities of more than 8,000 TEUs will climb 19 percent during the same period.
Ron Widdows, chief executive officer of Rickmers Group, said at TPM 2014 the ordering continues “even though it may not be the healthiest thing,” because “the people ordering ships today, with a couple of exceptions, aren’t ordering ships for growth.
“The industry does not need ships for growth until 2016 or 2017. You are not ordering ships for growth; you are ordering ships because they are so significantly more efficient, so much less costly… You have to get a lower cost base,” he said.
The economy of scale that big ships offer, as well as their more efficient engines, is critical to container carriers as bunker fuel accounts for 60 percent of operating costs, TSA said.
On top of the price of the regular bunker fuel that carriers burn while transiting the open sea, TSA members face additional costs from the need to burn low-sulfur fuel in Emission Control Areas in U.S. coastal areas and for their ships to be equipped with “cold ironing” equipment to receive electric power while they’re docked in Californian ports.
Nevertheless, Dekker said carriers have handled the cascade of big ships into the transpacific well. They seasonally reduced capacity in the first and second quarters of 2013, and he expects them to do the same again this year, but then ramp capacity back up in the second half of 2014. He forecasts the third quarter of 2014 will see an increase in eastbound transpacific capacity of only 1 percent over 2013. “Carriers have to learn that 87 percent load factor is not bad,” he said.
But Brian Conrad, TSA’s executive administrator, said it’s natural for shipping lines to have different ideas about how full their ships should be.
“You've got 15 different carriers in the TSA—different cultures, different corporate structures, different financial structures... What one company considers a good workable load factor is going to be very different than that of another company,” he explained.
“It would be nice if there was a more consistent standard then everyone saying 'well you know, we can live with 85 percent,'” he said. “The problem is you’ve got some carriers who have the patience to live with 85-percent-full ships for several weeks, but you also have carriers who feel that unless they’re constantly above 90 percent they have to react. It’s this lack of consistency I think that’s causing a lot of the reaction from the carriers. And it’s an understandable lack of consistency.”
According to figures from BlueWater Reporting, the average size of ships in the Asia-to-U.S. West Coast trade grew from 6,095 TEUs at the end of 2011 to 6,308 TEUs at the close of 2013. For ships moving from Asia to the U.S. East/Gulf coasts via the Suez Canal they grew in the same period from 6,429 TEUs to 7,177 TEUs, and for ships moving from Asia to the U.S. East/Gulf coasts via the Panama Canal they fell slightly from 4,586 TEUs to 4,467 TEUs.
Many shipping executives expect the average size of containerships will nudge into the 8,000-TEU range on West Coast and trans-Suez services in the coming year.
Already some carriers are putting in much larger ships: China Shipping, for example, has deployed ships such as the CSCL Spring with about 10,000 TEUs of capacity in its AAC string and COSCO has ships at both the 10,050-TEU and 13,092-TEU range in its SEA service.
Container volumes in the transpacific are expected to grow at a faster clip in 2014 when compared to 2013 as the U.S. economy improves.
Conrad said he expects demand, which grew about 3.3 percent last year, will grow around 5 percent, perhaps even 5.5 percent.
TSA noted that private sector jobs, housing, consumer spending, and durable purchases are all up and businesses are “poised for restocking.”
Wolfgang Freese, head of the Americas region at Hapag-Lloyd, said his company believes a forecast by Global Insight of eastbound transpacific seeing 5 percent growth and westbound transpacific growth of 4.5 percent is “on the dot.” He added he was confident there would be growth of between 5 percent and 5.5 percent over a three-year span, starting in 2015.
Howard Finkel, executive vice president of COSCO Container Lines, said he believed trade growth will be about 1 percent higher than it was last year and for 2015. However, his company had hoped for import growth of 6 percent.
These estimates, Finkel noted, are “not the double-digit of years gone, but it is a steady increase, and while you are going to see some capacity increase, you are going to see that slow down a little bit so that supply and demand will gradually come back to a better balance.”
“I think our customers overall are fairly bullish, a lot more than they were in 2013 and definitely more than in 2012,” said Keith Andrey, vice president of ocean services at UPS. “So, I think there’s a confidence with the customers and with some of our services we offer in the supplier management arena, we have visibility into purchase order forecasting and that looks to be robust.”
“We’ve got customers across all the industry segments—whether it’s retail, high tech, manufacturing, automotive parts suppliers… They’re looking forward to a good 2014, which means they’re going to have a lot of transportation needs,” said Eric Souza, director of product marketing at UPS.
Andrey said UPS has also seen a significant increase in interest by healthcare and high-tech product shippers in moving their cargo by ocean instead of air, because it is less costly. Pharmaceuticals and medical devices are attractive export cargo for ocean carriers, he added.
Shippers are “looking at the their whole supply chain, including their inventory management piece, and they’re realizing there is opportunity even with their existing supply chain based on the air freight mode that there’s an opportunity to use ocean just by realigning how much time their product spends on a shelf in a warehouse versus in a container on the ocean,” Andrey said, adding some customers have discovered that despite the longer transit time, it does not impact their end customer.
Rates. TSA acknowledged “every major carrier in the Asia-U.S. trade lane operated at a loss in 2013; globally the top 15 container lines posted combined net operating losses of $1.1 billion for 2007-12, losing $676 million in 2012 alone.”
TSA members announced a half-dozen general rate increases (GRIs) that go into effect between April 2013 and January 2014, but rates were difficult to nudge higher. To the West Coast, those increases ranged from $200 to $400 per FEU (sometimes the GRI was higher to the East Coast), and totaled $2,100 per FEU.
Richard Ward, a container derivatives broker and analyst at Freight Investor Services in London, said transpacific carriers over the past year have generally not been able to achieve the full GRIs they proposed and then watched them erode.
TSA’s own revenue index for cargo moving to West Coast ports or inland points hit its low point for 2013 in December.
“The whole market really has been challenging for the TSA carriers for the last 24 months,” Conrad said. “You only have to look at the fact that we’ve been able to take the rates up, but then they come down a few months later, even a few weeks later.”
The latest $300 rate increase announced by the TSA went into effect March 15, and was reflected in the estimated spot rates used to create the Shanghai Containerized Freight Index (SCFI). On March 14, the SCFI rose $147 to $1,931 per FEU on cargo moving to the West Coast and rose $101 to $3,287 per FEU on cargo to the East Coast.
One of the major changes in the shipping business in recent years has been the increased prominence of the SCFI.
“It’s the bane of our existence, because everybody wants to leverage or benchmark off of the spot rate,” said David Brady, vice president of transpacific eastbound trade for Hyundai Merchant Marine. “The spot rate, in my mind, is really not an accurate depiction of what is going on, because we have a lot of different levels of services that customers are looking for.”
While some customers may just want the lowest possible price, others need space guarantees, especially during peak shipping periods or for specialized services.
TSA has recommended its members seek a GRI on May 1 and further increases in 2014-2015 contracts of $300 per FEU from 2013-2014 levels for West Coast cargo and $400 per FEU for all other cargo. The vast majority of shippers have contracts that run from May 1 to April 30.
Brady believes the 2 percent gap between demand and supply of new ships, “is manageable unless carriers continue to be driven by greed, instead on by conscience and constraint. That’s been the real key for us, trying to have more discipline on the pricing sector to cover our cost of invested capital.”
Lars Jensen, chief executive officer of SeaIntel Consulting, said he believes the transpacific trade could see increased rate volatility in 2014, much as the Asia-Europe trade had during the past two years as increasingly larger ships entered that trade.
Cascading vessels from Asia-Europe routes means “there is a very significant risk that this is going to spill over into the transpacific this year,” Jensen said.
He also said the trade may see increased numbers of skipped or blank voyages, where carriers withhold a weekly sailing. This has become a highly popular tool by carriers to control capacity.
TSA warned low rates will prevent long-term investment in container shipping. “Failure to take action on rates and return carriers to profitability in 2014-15 contracts threatens to freeze in place ‘plain vanilla’ operating models for years to come, with a steady decline in service options,” it said.
There’s a feeling among some smaller shippers that they’re much more vulnerable to volatile markets. In early 2010, in the wake of steep financial losses the prior year, carriers pulled ships out of service, rolled cargoes, and left some shippers chasing non-vessel-operating common carriers for capacity.
Some large shippers have enough leverage that they can dictate service and rate terms to a larger degree, and others are seeing merit in turning to contracts longer than one year, or linked to a rate index that ensures neither carrier nor shipper faces too much volatility.
Alliances. It seems likely the P3 and G6 carrier alliances will begin operating in the transpacific trade during the second quarter of this year, and COSCO’s Finkel said the new discussion alliance between the CYKH carriers and Evergreen, while focused on the Asia-Europe trade, could be expanded to include a string that operates between Asia and the U.S. East Coast.
Bruce Carlton, president of the National Industrial Transportation League, wrote to the U.S. Federal Maritime Commission last year, stating the P3 Network planned by Maersk, Mediterranean Shipping Co., and CMA CGM would have "extraordinary market reach and potentially enormous concentration of market share.”
“The theory that further concentration of liner alliances finally sets up the industry to have rate stability is still an open question,” said Paul Bingham, an economist at CDM Smith. “The regulators in Europe and the U.S. may not approve of some of the behavior in rate-setting that would result in stability, presumably at higher average rates.”
Hyundai is part of the G6 Alliance, and Brady points out that its entry into the Asia-West Coast trade will allow the alliance’s members to ramp up the size of their vessels much quicker than they could have done individually and offer shippers more service choices.
It’s not clear if, for example, a larger alliance like the G6 will help stabilize freight rates. As Grand Alliance carriers, for example, take space on strings formerly operated by the New World Alliance, they may or may not have to discount rates to attract customers to new routes.
Jensen said the major East-West routes will become increasingly commoditized, and predicted there will be considerable consolidation in the industry over the next decade, so that instead of 20 global carriers there will be six to eight.
He also predicted an increase in the number of “schedule independent products,” such as the “Daily Maersk” service, where a carrier gives a guaranteed transit time but may route cargo in different ways or skip sailings. Just as a FedEx shipper moving a package may not know if his shipment is flown through the company’s Memphis, Tenn. hub, or trucked overnight between two cities, ocean shippers may not care how a 40-foot container is routed from China to Germany as long as it gets there by a guaranteed day.
Andrey of UPS said his company was taking a “guarded, but positive view” toward the alliances, hoping they will help the liner carriers improve their profitability.
Big ships, big impact. The use of larger ships will mean “a lot more bottleneck effects and a lot more strain on port infrastructure,” because of the cargo concentration that will be loaded and discharged in a short period of time at ports, Jensen said.
Ed DeNike, president of SSA Containers, said at TPM that when ships increase in size from 8,000 TEUs to 11,000-13,000 TEUs, they will be worked differently.
The smaller ships generally take two and a half days to work with six gangs, and the West Coast terminals do not deploy longshoremen during the so-called “hoot owl” shift from 3-8 a.m., because productivity is low and costs are “horrendous.” But the bigger ships will probably be worked around the clock, with eight gangs and take three days to process.
Because more longshoremen are needed, there may be a dockworker shortgage, DeNike cautioned, and this could affect shippers who may need to wait longer for their cargo.
He also said at many ports there’s not enough trucking capacity to handle the larger ships. Trucking is not an attractive job, he said, and drivers are waiting longer than they should to get in and out of terminals. He even foresees challenges with getting trains switched on and off terminal as volumes increase.
In addition, DeNike said cranes at many West Coast container terminals are not large enough to handle the height of the new ships and will have to be upgraded. That will take cranes out of service, while this work is done. He said his company has terminals with 17-18 cranes which will have to be raised and other terminal operators have similar problems.
Stacks of containers will also be higher and wider, and “as a result we’re going to lose our flexibility handling these containers if they are buried,” he said.
ILWU-PMA talks. Andrey and Souza of UPS said the possibility of a labor stoppage at West Coast ports this year as the International Longshore and Warehouse Union and their employers negotiate a new contract is a concern for shippers.
Shippers can mitigate risk by increasing buffer stock, using alternative routings through ports on the East and Gulf coasts or in Mexico and Canada, and even shifting transport modes and moving product by air freight.
“Ironically the operational problems at the Port of New York and New Jersey and the trucker strike at the Port of Vancouver already this year prove that alternatives are not without risks either,” Bingham said.
Shippers could benefit by having planning and visibility of their orders through supplier management tools, such as those provided by UPS.
Determining the best course of action varies from product to product and company to company.
“It comes down to a risk tolerance decision that the customer has to make—how much of a disruption can they afford, versus the cost of routing differently?” Souza said.
While many shippers—particularly retailers—are doing some contingency planning to prepare for a dock labor disruption, some have said shifting volume from West Coast to East Coast ports is less practical than shifting in the opposite direction, as some did in 2012 when the East and Gulf coast’s International Longshoremen’s Association negotiated its contract.
The amount of capacity on ships calling alternative ports in locations such as Canada and Mexico, or along the U.S. East and Gulf coast, would be limited, and increased transit times and cost of restructuring supply chains may make those routings unattractive.
If there was a strike or lockout, as there was in 2002 when the ILWU and PMA could not come to a contract agreement, it seems unlikely that President Obama would let it last long before using the Taft-Hartley Act to declare a national emergency and send the parties back to the bargaining table.
Of course shippers have to worry not only about the length of a strike, but its aftermath. It took weeks to get the West Coast ports back to normal in 2002 when the lockout closed container terminals for 11 days.