AgTC Perspective: State of Ocean Cargo 2012 and Beyond

While “collaboration” was the watchword for supply chain managers reliant on ocean carriage, it appears that in 2012 it is going to be “accountability.”

Many carriers, for example, have built in schedule integrity metrics for shipper contracts, promising a new level of on-time service. What then, becomes of “slow steaming” and other energy-saving trends? Coinciding with the advent of container shipping’s “peak season,” Supply Chain Management Review—LM’s sister publication—asked one of the industry’s most prominent shipper representatives to provide readers with an in-depth forecast.

Joining us for the third and final part of our exclusive market intelligence report is Peter Friedmann, Executive Director Agriculture Transportation Coalition

Supply Chain Management Review: From your perspective, what represents the biggest change in ocean market forces this year?

Peter Friedmann: There will be both an immediate and longer term change in ocean market forces this year.  The immediate is the drought here in the US, which is reducing supply of corn, soybeans, cotton, etc. due to the drought.  In these situations, foreign customers of US agriculture producers tend to look elsewhere, to countries such as Australia, Brazil, and India. Also, in the short term, the slowing Chinese and European economies mean less demand for US exports, and also impacts the volume of imports.  Carriers had hoped for rising demand, but I’m afraid we will not see any increase in demand for capacity, both inbound or outbound. Longer term, unless China and Europe rebound quickly, we expect demand for ocean shipping capacity to remain flat, because global demand for US raw materials and US consumer demand for Asian-produced consumer goods will remain flat. There is hope that the still relatively new Korea-US Free Trade Agreement will continue to increase the flow of commerce between our countries and the volume of US exports to Korea and imports from Korea. We expect this to increase, even while trade between the US and other Asian countries remains flat.

SCMR: Ocean carrier capacity still seems to be outstripping demand. When will this trend be reversed?

Friedmann: Carrier capacity will outstrip demand as long as capacity continues to grow with the introduction of new vessels, and demand remains flat, or declines.  The trends for demand must be viewed on a longer term basis than the ocean carriers typically do.  Instead of looking just to the next quarter, ocean carriers would do well to follow the railroads’ model of looking five years out to the future, to better understand the agriculture exporters’ business, the global demand for their products, global competition for their exports, and thus, have a better idea of the long term demand for capacity.  Failure to do so will mean that the carriers will have a bumpy ride as they introduce additional capacity without understanding the fundamentals the determine whether demand for that capacity will actually materialize.

SCMR: Will the Asia-EU peak season be weakened by the ongoing “Eurozone crisis,” or will we see volumes remain stable through August?

Friedmann: It appears that the Eurozone crisis is becoming more serious as time passes, not less.  Thus, volumes will decline through the end of this year.

SCMR: What is your forecast for the Transpacific peak season? Should carriers be concerned about another slump in the fourth quarter?

Friedmann: Since April, I have been saying that there will not be any appreciable Transpacific peak season.  If peak season means that there will be a significant increase in shipping volumes for the back to school rush, and then later, the holiday shopping seasons, I do not believe there will be a noticeable “peak season.” Maritime economists have a habit of telling their ocean carrier clients what they want to hear.  The carriers want to hear about a peak season and it seems the maritime economists are reluctant to pass on bad news. The carriers would be well served if they listened carefully to what the non-maritime economists are saying, the economists that are not being paid by the carriers.  Those non-maritime economists are fairly gloomy about U.S. and global consumer demand.  Without consumer demand increasing, there will not be peak shipping periods.

SCMR: Carriers are initiating their own “schedule integrity” metrics of late. How are shippers responding? Should we expect to see this reflected in future service contract negotiations?

Friedmann: “Schedule integrity” is a critical element of US agriculture and forest products exporters’ assessment of a carriers’ overall service.  The carriers with the better schedule integrity tend to do the best on the AgTC’s Annual Ocean Carrier Performance Survey.  It also appears that some ag and forest products exporters are willing to pay more in their service contracts to those carriers who are most dependable.  Therefore, I believe that “schedule integrity” is already reflected in service contract negotiations. There are some carriers which have a reputation for poor “schedule integrity” but they are able to attract cargo due to their lower rates.  There is room for both—a higher priced carrier with strict “schedule integrity” and a lower cost carrier, whose schedule is either “flexible” or “undependable”, depending on one’s perspective. “Schedule integrity” can come at a cost.  A shipper from time to time may have additional cargo, or face unexpected delays in getting that cargo to the terminals, etc.  A carrier with strict schedule integrity protocols will have to leave that cargo behind, while another carrier might delay departure in order to accommodate the delayed cargo. Both models have value.

SCMR: Shippers are also placing increasing pressure on “green” practices. Will carriers have the financial resources to respond without passing on a great deal of the cost?

Friedmann: Shippers understand that carriers have costs, and ultimately the shipper, or the shippers’ ultimate customer, will pay those costs.

SCMR: With new trade agreements, and a federal policy to increase U.S. exports, should we expect to see a greater balance of trade in the next 12 months?

Friedmann: The trade agreement that has the greatest potential for increasing cargo volumes will be KORUS.  Already US meat exports, particularly pork and beef, have increased dramatically.  The average US tariff is under 2%, so any increase in imports from Korea will be modest.  The average Korean tariff was approximately 18%, and removal of that tariff opens a huge market for US ag exports.  At the same time, one should not overlook the trade expansion that the US-Colombia FTA is generating. The TransPacificPartnership is a current trade negotiation involving US, Canada, Mexico, Vietnam, Malaysia, Australia, New Zealand, etc. It has the potential of significantly increasing transpacific trade volumes, but is still a year or so away from reaching any conclusion. But the promise is extremely interesting to US exporters and importers.

SCMR: May we expect to see more investment in port infrastructure both in the States, and in the markets U.S. shippers serve?

Friedmann: The President just announced the expedited permitting and regulatory review for five major port expansion projects on the East Coast of the United States.  Florida, NY, South Carolina, Georgia state governments are making unprecedented investments in port infrastructure – deepening channels and removing structural impediments to larger vessels. Virginia is considering privatization of some of its port infrastructure. Meanwhile, the Inner Harbor project at Port of Long Beach provides an exciting opportunity to add efficiency and capacity.  Landside,  BNSF and UP are making major investments in transload capacity and facilities at US West Coast ports to more efficiently move grains and grain by products into containers for shipment to Asia.  I expect this trend of infrastructure expansion to accelerate in the coming years.

SCMR: With the Panama Canal expansion on schedule, are shippers telling NVOs, forwarders, and carriers how future deployments should be configured?

Friedmann: With two thirds of the US population living east of the Dallas-Chicago axis, some major consumer brands are building massive distribution facilities at East and Gulf ports.  Yet, for agriculture and forest products, the most direct route is a straight line from the South and Midwest, to the West Coast ports.  The ag exporter is dependent upon being able to access ocean containers and routing of ag exports will follow container supply, either at the ports or at the inland locations where they are positioned by the railroads on behalf of the ocean carriers. It is likely that ocean carrier’s decisions on vessel deployment, either to the West Coast ports or through the Panama Canal, will be driven by their desire to serve the import cargo to the US.