Pacific Rim Report: Transpacific chief shoots from the hip

Brian Conrad, executive administrator for the Transpacific Stabilization Agreement (TSA), is not only regarded as a “thought leader” in the ocean shipping arena, but also as a man of uncommon candor. For the past several years now, he has weathered the storm brought on by shippers’ associations challenging pricing and operations in the world’s most active—and vital—trade lane linking North America and Asia.

In an exclusive interview with Logistics Management recently, Conrad says that it’s too soon to tell what carriers’ profits will be in 2013; however, there are many factors that will certainly weigh on their financial situation over the next several months. Among them is the volatility of the price of fuel, which continues to represent 60 percent or more of carriers’ voyage costs. 

Conrad says that prevailing market rates are approaching “sustainable levels,” but in order for the carriers to see better financial results in 2013, this pricing must be maintained and carriers need to avoid the volatility and erosion of previous years.

Most importantly, he adds, longer-term contracts need to be concluded at rate levels that more closely reflect the prevailing market—representing a “meaningful” increase relative to last year.

“It’s unrealistic to expect that carriers can return to profitability carrying cargo for another 12 months to 14 months at 2012 rates,” says Conrad. Even in the recent past these rates were not “viable,” he adds—an assessment easily verified by carrier quarterly returns in the first half of last year.

Meanwhile, most of the carriers’ energies are focused on three main areas today:

• Managing costs, particularly fuel costs because it is a large share of operating cost per sailing.
• Environmental compliance, which requires not only meeting existing rules and standards, but anticipating future mandates; and not just government requirements, but customer “green” supply chain concerns as well.
• Improving productivity and service predictability toward a more time-definite service model within the industry.

These efforts, says Conrad, will produce subtle enhancements with cumulative effects over time. Furthermore, with manufacturing costs rising in Asia—most notably China—and government incentives for manufacturers shifting toward domestic production, carriers expect a revitalized U.S. manufacturing sector. This trend, combined with a renewed U.S. export promotion effort, will help narrow the structural 2-to-1 imbalance of transpacific cargo and equipment.

But here, too, it will take time for these forces to combine and yield measurable results. Conrad says that it’s important to remember that a large share of Asian manufactured exports to the U.S. grow out of U.S. firms’ relationships with contract manufacturers and, in some cases, significant plant, equipment, and staffing investment.

“Also, Asian factories still enjoy cost and scale advantages worldwide, so it’s likely that U.S. consumers’ reliance on imports from Asia will remain strong for some time,” says Conrad.

It should be emphasized, however, that shipyard order books are much lighter this year in view of global overcapacity, depressed revenues, and fewer ship finance options. This explains the expectation that transpacific supply and demand will come into closer alignment during 2014 as cargo growth accelerates.

Finally, Conrad notes that despite a sense that underlying economic trends are positive and that business and trade are poised for a breakout, no true catalyst has emerged. Shippers minimized orders and drew down inventories in 2012, while carriers were reluctant to invest in equipment or new services, especially at the depressed rate levels seen throughout the year.

“We can only hope that 2013 will bring some resolution,” adds Conrad.