Ocean Shipping: Feeling the pinch
Asia's economic problems and U.S. regulatory changes pose new problems for ocean carriers and ports.
By Toby B Gooley -- Logistics Management, 7/1/1998
Container carriers are caught in a vise, pinched between shippers that demand more service at lower prices on one side and the vagaries of global economics on the other. A tough spot to be in--and the carriers have made it tougher for themselves by increasing capacity and cutting rates. It's no wonder, says Stuart Rattray, vice president, North America, for Australia New Zealand Direct Line,"[that] the profitability of the industry is still appalling from the point of view of shareholders that might want to invest in ocean shipping."Thanks to Asia's ongoing financial crisis, the situation is more critical than ever. The collapse of some Asian currencies has created a severe imbalance in the trans-Pacific trade, with imports to North America growing by 19.0 percent this year and exports plunging by about the same amount. As demand for Asian products has soared, so has the demand for containers. But the drop in U.S. exports to Asia means that few boxes are returning there, causing an equipment shortage and forcing carriers to carry thousands of empty containers across the Pacific, explains C.L. Ting, president of Orient Overseas Container Line USA.
Though shippers have accepted a rate increase of $300 per 40-foot container on the eastbound side, Ting says, "that's not at all sufficient to cover the costs of repositioning containers from U.S. inland points." Carriers, therefore, are dropping westbound rates to attract cargo to defray the cost of repositioning empties. How long will this continue? Ting says there are signs that Asia's economies are stabilizing, but he doesn't foresee significant change over the next 12 months.
While Asia has dominated the news lately, carriers in all trade lanes say they need to "restore" rates that are far below levels of five years ago. They generally are trying to do that through ocean carrier conferences and "discussion agreements." Conferences are carrier organizations that negotiate and set rates under antitrust protection. Discussion agreements include conference and non-conference carriers. They may address general industry issues like overcapacity but are not allowed to set specific rates.
Cooperation among carriers is crucial to maintaining rate levels, but several factors work against such unity. For one thing, the practice of taking "independent action," which lets conference carriers cut rates with the permission of other members, continues to push rates downward. Service contracts, in which carriers agree to certain rates and services in exchange for a shipper's volume commitment, also have led to non-compensatory rates.
The future of rate negotiations may well rest on the success or failure of the Ocean Shipping Reform Act. That law, which at press time had not yet passed, would deregulate the relationship between shipper and carrier by allowing confidential rates. Some observers expect that confidential contracting will hasten the end of the conference system. "If you can't police freight rates because carriers have confidential contracts, what's your reason for being?" asks consultant John Reeve of A.T. Kearney. "I think we'll still have talking agreements, but the formal, common tariff will become a dinosaur."
Another factor affecting carriers' cost structure is overcapacity. Many super-sized ships have been launched in the last three years, and carriers must find a way to fill those additional slots. Add to that the entrance of new players in the North Atlantic and Latin American trades, and rate cuts are virtually guaranteed.
Increasing cost pressures, meanwhile, are driving carriers to join multinational alliances, which let carriers share operating costs while increasing their services. The alliances, which were envisioned as long-term relationships, are turning out to be rather fluid: The need to respond quickly to unstable market conditions led most participants to change partners early this year.
Although the alliances save carriers money, that may not go far enough for some. The industry has been rocked recently by a series of multinational mergers. APL and Neptune Orient Lines, and P&O Containers and Nedlloyd Lines are two prominent examples. These mergers cut costs while allowing carriers to expand their market coverage and increase their economies of scale. And we haven't seen the last of them, predicts Tim Rhein, president and CEO of APL Ltd. "The liner market will consolidate further, and carriers will be bigger, stronger, and fewer," he says.
Reeve of A.T. Kearney believes that information technology will accelerate the merger trend. Within five to 10 years, he predicts, global supply-chain managers will be able to buy transportation services worldwide via the Internet. "That makes shipping even more of a commodity industry than it is today," he says. If that happens, carriers will need to add more value for their customers and invest in more sophisticated technology.
Ports Under Pressure
Seaports are under similar economic pressure. The Asian crisis, for example, has changed freight flows and added to congestion created by rail service problems in the Southwest. These factors last summer created a backlog of inbound cargoes in the ports of Los Angeles and Long Beach in California. Will it happen again when the annual flood of holiday merchandise arrives? Kurt Nagle, president of the American Association of Port Authorities, says when he visited those ports in late spring, they were handling the equivalent of last year's peak loads without any significant congestion. Still, he expects some shippers will seek to avoid problems by using all-water routes to East Coast and Gulf Coast ports via the Suez or Panama Canals.
Funding for infrastructure improvements is a long-term issue for ports. In March, the U.S. Supreme Court struck down as unconstitutional the Harbor Maintenance Tax on exports. The HMT, which since 1986 has been assessed against the value of goods moving by water in the United States, is supposed to fund the federal government's share of the cost of maintaining navigation channels.
The tax on imports, which still stands, is sufficient to pay for current maintenance needs, says Nagle. But the European Commission is expected to challenge it through the World Trade Organization. If that challenge is successful, it will affect the United States' ability to keep its waterways open for trade.
It's not all bad news on the waterfront, though. Ports got what they wanted in two pieces of legislation. The pending version of the Maritime Reform Act retains the Federal Maritime Commission's oversight of anti-competitive practices. It also requires ocean carriers to make public the essential terms of service contracts while keeping rates confidential, and it continues to treat port tariffs as enforceable contracts.
Ports also claimed a victory with the passage of the Transportation Equity Act for the 21st Century, or TEA-21. Under previous legislation, power to distribute funding was in the hands of local Metropolitan Planning Organizations, or MPOs. Freight interests charged that most MPOs were ignorant of the economic value of freight transportation. The result was that freight-related projects received only a fraction of the funds for which they were eligible. The new law, says Nagle, ensures that freight interests will be heard and that freight projects have a fair shot at obtaining the funding to which they are entitled.
Ports won't be resting on their laurels, though. Between the WTO challenge to the Harbor Maintenance Tax and the Clinton administration's plan to fund just 12.0 percent of the Army Corps of Engineers' waterways projects, ports still have a lot to worry about.
Top North American Container Ports - 1997
[Ranking by 20-Foot Equivalent Units (TEUs)]
Rank Port TEUs
1 Long Beach, Calif. 3,604,656
2 Los Angeles 2,959,715
3 New York/New Jersey 2,456,886
4 San Juan, P.R. (FY) 1,833,018
5 Seattle 1,475,813
6 Oakland, Calif. 1,465,260
7 Hampton Roads, Va. 1,232,725
8 Charleston, S.C. 1,217,544
9 Tacoma, Wash. 1,158,685
10 Houston 935,600
11 Montreal 870,368
12 Miami (FY) 761,183
13 Savannah, Ga. 734,767
14 Vancouver, B.C. 724,154
15 Port Everglades, Fla. (FY) 719,685
16 Jacksonville, Fla. (FY) 675,196
17 Honolulu (FY) 477,776
18 Baltimore 476,012
19 Halifax, N.S. 459,176
20 Veracruz, Mexico 364,259
21 Anchorage, Alaska 341,509
22 Portland, Ore. 294,930
23 New Orleans 263,861
24 Manzanillo, Mexico 256,425
25 Palm Beach, Fla. (FY) 170,080
FY = Fiscal Year
Source: American Association of Port Authorities
Top 25 Ocean Carriers -- 1997
[Ranking by 20-Foot Equivalent Units (TEUs)]
Rank Carrier Total Imports Exports
1 Sea-Land Service 1,355,126 729,046 26,080
2 Evergreen Line 1,244,734 638,167 06,567
3 Maersk Line 1,081,450 617,802 463,648
4 Hanjin Shipping Co. 827,591 461,361 366,230
5 Hyundai Merchant Marine 676,772 375,930 300,843
6 American President Line (APL) 656,185 439,825 216,359
7 Orient Overseas Container Line (OOCL) 518,773 282,362 236,411
8 China Ocean Shipping Co. (COSCO) 513,599 266,489 247,109
9 YangMing Marine Line (YML) 491,356 286,580 204,776
10 Nippon Yusen Kaisha (NYK) 470,394 281,609 188,785
11 Kawasaki Kisen Kaisha ("K" Line) 466,616 261,869 204,747
12 Mitsui O.S.K. Line (MOL) 429,866 242,074 187,792
13 Crowley American Transport 342,567 134,047 208,520
14 Hapag Lloyd 313,649 174,003 139,646
15 P&O Nedlloyd 313,480 165,024 148,456
16 Zim Container Line 311,026 170,033 140,993
17 DSR Senator Line 308,001 152,849 155,153
18 Mediterranean Shipping Co. 285,391 143,165 142,226
19 Neptune Orient Lines (NOL) 268,923 175,170 93,754
20 Cho Yang Line 214,964 119,203 95,760
21 Dole Fresh Fruit Co. 213,166 152,097 61,069
22 Lykes Lines 208,855 105,806 103,049
23 Seaboard Marine Ltd. 172,515 49,317 123,198
24 Sud Americana de Vapores (Chilean Line) 135,432 59,645 75,787
25 Great White Fleet Ltd. 125,507 85,385 40,122
Source: U.S. Global Container Report, PIERS, New York
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