Deregulation buoys hope for turnaround
Both the shipping and port sectors hope that maritime reform legislation can bring an industry weakened by a global trade slump back to health.
By Staff -- Logistics Management, 7/1/1999
The maritime industry has been awash in red ink for several years because of slack international trade and brutal rate competition.To put the situation in perspective, consider that in 1998, only two trade lanes in the world showed any growth at all: Asia to Europe and Asia to the United States, says Tom Boyd, marketing manager for Maersk Line. "Shippers remember that rates increased in these trades by 14 percent, but they forget that traffic levels from the United States to Asia collapsed and forced rates down by 30 percent," he says. "On a round trip between the United States and Asia, the carriers are losing $800 per slot."
No industry can thrive with these kinds of economics. To help bring the container shipping industry back to health and to provide shippers with the services they need, some carriers and shippers jointly pushed the Ocean Shipping Reform Act of 1998 (OSRA) through Congress earlier this year. The most important provisions of OSRA, which took effect on May 1, allow shippers and carriers to sign confidential contracts and individually negotiate rates and services.
Both sides can benefit from new freedoms allowed under the law. "The confidential contracts provision allows carriers and shippers to share more information and strategies that can help both sides meet their goals," says Doug Coates, a partner in the San Francisco-based consulting firm of Manalytics International. That will be a major change from past practice, he notes. "The old conference system backed carriers into a situation where they had to offer costly services that were available to everyone. Carriers had to assume that whatever they offered to one shipper would have to be offered to all. Not surprisingly, shippers would not show a conference confidential information," he explains.
Based on how other transport modes have fared under deregulation, Coates believes ocean carriers should be able to improve their financial results significantly through rationalization and cost cutting. "The maritime industry is never going to rival the high-tech industry's returns," he says, "but [it] can do as well as truckers and the railroads, assuming carriers keep capacity under control."
But OSRA will succeed in bringing the maritime industry back to health only if both sides change how they work together, says Clint Eisenhauer, vice president-marketing communications for Sea-Land Service. For example, carriers will have to take a more strategic look at shippers' business, he says. "They will have to analyze the profitability of each shipper and develop pricing accordingly. Carriers then can drive down costs by not offering services to shippers they don't want."
Shippers also have greater responsibility than they did before, Eisenhauer says. They can't just wait for a carrier to offer them a good price but instead must develop their own strategies. "If big shippers just wait for the carriers to offer them lower rates," he says, "they are missing the point."
Eisenhauer thinks it likely will take at least two years for OSRA to produce significant changes in the maritime industry. "It will take two to three waves of contracts before shippers and carriers get a vision of how we should work together," he says.
Now that shippers can sign contracts covering multiple trade lanes with carriers, opportunities abound for them to consolidate their freight volumes and improve their negotiating positions. In order to take advantage of those opportunities, Eisenhauer says, large shippers will have to manage their global traffic patterns differently and look at their businesses on a more integrated basis.
Tom Boyd of Maersk adds that the new emphasis on global service will have a far-reaching impact on the number and size of carriers in the industry. "Customers are going to work with fewer carriers to get rates [based on] the highest volumes," says Boyd. "Consolidation among carriers will be inevitable. If the smaller carriers want to remain independent, they are going to have to focus on niche markets," he predicts.
Ports Oppose New Tax
Turning to another sector of the maritime industry, the biggest problem facing U.S. ports today is finding a solution to infrastructure funding issues that have been the subject of several recent legislative initiatives. (See related story on Page 129.)
When the U.S. Supreme Court declared the Harbor Maintenance Tax (HMT) on exports to be unconstitutional last year, it reopened a decade-old controversy over how to fund routine harbor-maintenance dredging fairly. Ports want routine channel maintenance paid for out of general federal funds, instead of from the HMT proceeds. At the same time, they want to see increased federal funding for new port-improvement projects.
The American Association of Port Authorities (AAPA) supports the Support for Harbor Investment Program Act, known as the SHIP Act, which would repeal the Harbor Maintenance Tax and authorize funding the cost of operating and maintaining federal navigation channels out of general revenues. "The SHIP Act ends the failed and unconstitutional experiment of the Harbor Maintenance Tax, and it restores the 200-year-old federal obligation to fund operation and maintenance of the nation's harbors, " says AAPA President Kurt Nagle. "This legislation recognizes that adequately maintained federal navigation channels provide significant economic and national security benefits throughout the United States and appropriately funds the costs of this maintenance out of general revenues."
The SHIP Act is in direct opposition to the Clinton administration's proposal to impose $1 billion in new taxes on the maritime industry through a Harbor Services Fund (HSF). The fund would replace the Harbor Maintenance Tax, which still is collected on imports. (The World Trade Organization is expected to challenge the HMT on imports soon.)
AAPA and a host of other organizations strongly oppose the administration's proposal, Nagle says. "It is a hastily crafted solution to a complex problem that took years to resolve. The HSF proposes to raise nearly twice what is needed for maintenance dredging and, for the first time in our nation's history, the federal government is suggesting that it completely abdicate its financial responsibility for navigation-channel maintenance."
While this issue continues to simmer, ports have secured a significant source of federal funding for new improvement projects. After a year-long delay, Congress in late April passed the 1999 Water Resources Development Act (WRDA), which authorizes deepening channels and other modifications of federal navigation projects at the nation's ports.
"Deeper navigation channels translate into greater employment and other economic benefits," says AAPA President Nagle. "Passage of WRDA is integral to the nation's competitiveness in international markets."
Funds for WRDA '99 already have been allocated to several major port projects, including channel deepening at the Port of New York/New Jersey to accommodate Maersk and Sea-Land's biggest ships.
Other major port projects funded under WRDA '99 include improvements along the Columbia River in Oregon and Washington and at the ports of Baltimore, Md.; Oakland, Calif.; Savannah and Brunswick, Ga.; and Jacksonville and Tampa, Fla.
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