Ocean Cargo Roundtable: What’s in store for 2017?

Just how disruptive was the SOLAS VGM amendment to global shippers? Was the Panama Canal expansion indeed the game changer it was meant to be? And have container carriers finally come up with a strategy to restore rates while improving standards of service?

In this roundtable discussion, these and other vexing questions are explored by key maritime experts including Jonathan Gold, vice president, supply chain and customs policy for the National Retail Federation; Andrea Morriera, international logistics manager for Orchard Supply Hardware; and Andrew Lubin, a professor of international business and logistics at Rosemont College and Ashford University’s Forbes School of Business.

Logistics Management (LM): Despite many concerns, the implementation of the SOLAS VGM amendment seems to have been implemented without too many disruptions in service. Does this demonstrate a new level of efficiency and cooperation in global shipping?

Andrea Morriera: Yes, I think so. The implementation of VGM amendment was efficient because all affected parties worked together with the same initiative—to minimize the disruption of the global supply chain. Also, this is a good example of the adaptability of the maritime industry to pressures from external parties.

Andrew Lubin: It reminds me of the Y2K scare that amounted to lots of worry over nothing. Once the shippers and carriers realized VGM was going to happen, it was implemented and became a non-issue.

Jonathan Gold: Still, the concerns about potential disruption from VGM implementation were rightly justified. There was a great deal of misinformation as well as a lack of information about how the requirement would be implemented across the globe. Even today, a majority of International Maritime Organization member nations have not issued their guidance or regulations. For those that have, there is a lack of harmonization.

LM: This raises a serious question about harmonization in the global security arena. Cyber security in the ocean cargo supply chain now appears to be a pressing issue. Just how serious is it, and what steps can shippers take to address it?

Gold: Cyber security is not just vital for the supply chain, but for businesses in general. Our members are taking this issue—and that of data breach—extremely seriously. They’re working to protect their systems from intrusion while also making sure their vendors and partners have protections in place as well.

Morriera: I agree with Jonathan. The demand to improve the supply chain is driven by how quickly we can send and retrieve data. It’s not only the cyber security of your individual supply chain, but also the cyber security of the third party providers who have received proprietary intellectual property that’s important. The C-TPAT program encourages this behavior, and offers resources on how to effectively secure a supply chain and partner ecosystem.

Lubin: Frankly my biggest concern is the actual physical threat to shipping. We have to realize that ISIS or some other terrorist group could load a bomb in a box and ship it through some “failed state” to detonate in Jebil Ali, Algeciras, or the Suez Canal. The closure of any one of those choke points would cause an immediate slowdown and paralyze container shipping worldwide.

LM: While ocean cargo carriers continue to consolidate, do you finally see an end to this trend by 2017?

Lubin: Consolidation and the shifting of alliances does nothing to solve the problem of too many boxes chasing too little freight. This won’t end until certain governments realize that national flag carriers lose hundreds of millions of dollars annually and are no longer economically viable.

Gold: I’m afraid that’s correct. It’s unclear that consolidation will end in 2017. The trend may continue until carriers find a way to start turning a profit.

Morriera: And it’s important to realize that the actual consolidation may be slow; however, the residual effects of alliance shifting will be endured by the shipping community through the second quarter of 2017. Both shippers and forwarders will have to make adjustments to accommodate new or omitted port calls, new strings and evolving carrier alliance relationships.

LM: Carriers will also impose a number of surcharges to bring rates up to a sustainable level. Would shippers be better off just giving in a bit more during contract negotiations?

Gold: Shippers are willing to pay more for improved service. That’s the bottom line. Unfortunately, it seems as if the carriers are only focusing on maintaining market share by offering the lowest price possible. A healthy carrier industry is critical to the success of shippers and the global supply chain.

Morriera: Yes, that’s a win-win, Jonathan. Shippers benefit when carriers are profitable because it limits additional variable costs in the form of surcharges. The carriers are responding to the overage of capacity that is saturating the market.

LM: So what’s the best advice for shippers in this situation?

Morriera: A seasoned shipper would allocate a fixed amount in their budgets to account for the inevitable carrier surcharges. Even with preparation the actual cost is unknown, making it a variable cost, which is detrimental to a forecasted budget. Cost transparency that’s associated with a higher rate is a more sustainable cost atmosphere.

LM: It also looks like slow steaming is here to stay. Is that a good thing?

Lubin: Slow steaming is a matter of bunker prices and fuel efficiency, along with being a competitive issue. If a fuel-efficient vessel can steam faster and cheaper than an inefficient one, then the efficient carrier has both pricing and a marketing advantage. That advantage would be even more pronounced if crude jumps back to $75 a barrel.

Gold: It’s unclear if slow steaming is a good thing or not. With lower fuel prices and more fuel-efficient ships, it makes sense for the time being.

Morriera: Yes, but the low fuel rates are not reflected in the transit time and are not leveraged. From my perspective as a logistics manager, slow steaming is the primary cause. Carriers have unwisely chosen the strategy to deploy extra vessels instead of increasing their vessel speed and improving the transit time. The historical low container rate forces carriers to develop tactics that protect their projected loss instead of what could benefit their customers.

LM: Some carriers are re-thinking their “mega ship” strategies. Do you think we’ll see a reversal in this trend? And if so, what vessels make the most sense on the major trade lanes?

Morriera: It was a risky thing for carriers to do to begin with. Considering the multiple years required to build ships of this capacity, the carriers had to commit to their ambitious plans and absorb the consequences of a weakening global economy. However, one can’t blame them. When economic growth is restored and demand ramps up, carriers will be poised to capture more cargo and charge sustainable rates.

Gold: I don’t know if there’s a vessel size that makes the most sense for major trade lanes. However, there needs to be better coordination between carriers, ports, marine terminal operators and others in the supply chain to ensure larger ships can actually be handled at the ports. The larger vessel issue is one that’s continuously cited as a cause of port congestion. Better planning and coordination is needed to ensure vessels can be worked as efficiently as possible without causing congestion and backups at ports.

Lubin: I’ll add that those carriers should have thought about this two years ago. Unless they start paying some cancellation or postponement fees, there will be 104 ‘megas’ in service by 2017. So, until you see a major boom in world trade, there will be low rates for years until the excess containers are utilized.

LM: Finally, just how great an impact has the expanded Panama Canal made? Was it much ado about nothing or a real game changer?

Lubin: In no way is it a ‘game changer.’ In fact, I expect rates to drop from the Asia to the U.S. East Coast. There’s only a one-day advantage over shipping through the Suez. However, I do feel that it will hurt Asia-U.S. West Coast volume, as it should siphon off their intermodal business into the U.S. Midwest and Northeast.

Morriera: I agree with Andrew, and I don’t believe it’s a ‘game changer,’ but it is a new resource for growth in the global economic markets. We need to consider that the impact in shipper’s shifting routing options is a direct result of the Panama Canal expansion. During the West Coast labor dispute a few years ago, shippers began to review to all water services to the East Coast. The expansion increases opportunity and changes the behaviors of the consignees; and it’s more attractive to minimize the land dray cost and utilize distribution hubs on the East Coast.

Gold: I guess I have to agree with both Andrew and Andrea. It’s going to take some time to see the full impact of the expanded Panama Canal. Shippers were not going to rush in right away to change their supply chains until there was confidence about a shift through the canal. This not only includes the rates, routes and fees, but also the readiness of East Coast ports to handle the larger vessels.