State of Ocean Cargo 2012 and Beyond: Part II

Coinciding with the advent of container shipping’s “peak season,” Supply Chain Management Review—LM"s sister publication—asked Brian M. Conrad, Executive Administrator, TSA/WTSA to provide readers with an in-depth forecast

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?

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

Brian Conrad: In the transpacific, we see several trends worth noting: While the market remains uncertain and prone to volatility, indicators suggest a sustained upward trend in cargo demand in both directions. Contract negotiations are less service-focused than in 2010-11 as space and equipment are more available. External parties and forces in the pricing process – 3PLs, portals, spot rate indices – add new complexity to pricing. Finally, carriers are doing a better job of managing and recovering their costs as it becomes clear, in the current market environment of thin margins and tight credit, that revenue concessions made today are money permanently left on the table.

SCMR: Ocean carrier capacity still seems to be outstripping demand. When will this trend be reversed?
First, it should be stressed that TSA and WTSA do not influence or manage vessel capacity decision making; that is a function purely for individual carriers based on their internal economics and objectives.

That said, capacity imbalances have existed in global trade lanes for centuries; it is an inevitable condition of the industry. Scheduled carriers invest in ships and equipment over a 25-year time horizon while their principal revenue stream is freight rates based on 90-day bookings and 12-month contracts.
Recent decisions to purchase ships and container equipment are based on long-term economic and competitive factors – expanding global trade, high fuel costs, pursuit of lower slot costs through scale – along with external considerations such as favorable shipyard terms, cost of capital and exchange rates.
Demand will eventually rise and come into line with supply; most estimates show that happening in the next 2-3 years. The question is how effectively carriers will manage assets and pricing in the meantime.

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

Conrad: Asia-US market volatility is not going away any time soon, so there is always cause for concern. External factors such as Europe and Washington gridlock will generate increasing headwinds if critical policy issues go unresolved. At the same time, there are positive signs eastbound:

Consumer sentiment, spending, incomes and retail sales have held steady, despite weak housing and job markets. The cargo mix has broadened to include more Industrial imports from Asia such as machinery, parts and chemicals relative to retail consumer goods, suggesting increased business activity and orders. Finally, the U.S. remains Asia’s primary export market as Europe, Brazil, India, and even China, see slower relative growth.

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?
Conrad: Ocean carriers understand that visibility and reliability are key elements of the supply chain value proposition. Carriers have developed their own internal schedule integrity metrics for multiple reasons. They broadly recognize the competitive benefits of improved schedule reliability. Beyond that, they need to understand internally how their particular service configurations and business processes affect schedules, space, equipment and other service elements. And they need identify choke points and solutions across the entire operation, alongside perspectives from individual accounts and third parties.

Each of the various metrics offers useful visibility into overall schedule integrity, and will probably be applied in combination in future contracts. Carriers have long argued that contracts should focus to a greater extent on mutually beneficial service features than on simply exchanging a volume commitment for a discount. We expect, going forward, that they will. But the key phrase is ‘mutually beneficial’, offering expanded, tailored service at compensatory rate levels.

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?

Conrad: Ocean carriers began to understand as early as the mid-1990s the need reduce the industry’s environmental footprint. The direct benefits of reduced fuel consumption and emissions are obvious, but it has also been demonstrated that greener operations, by reducing waste, ultimately improve productivity while managing costs.

Carriers have embraced global strategies, from slow steaming of ships to cold ironing in port, to use of cleaner-burning fuels in vessels and yard equipment, to low-friction hull coatings and paints. Terminal productivity can also be viewed as “green” - minimizing turn times, reducing truck waits, optimizing crane, forklift and yard hostler moves – and those strategies must be accelerated.

The big challenge for carriers rests with compliance costs for programs outside carriers’ control, such as port clean truck programs, rules requiring ships to burn cleaner fuels within harbor areas, and user fees levied for different purposes. It makes sense that these compliance costs should be shared across a broader base that includes carriers, ports, terminals, shippers, local communities and, ultimately, consumers.

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?

Conrad: Exports are likely to grow faster than imports in 2012, for a variety of reasons, but the balance of trade probably will not change materially. Transpacific container lines entered 2012 with a 1.94 to 1 ratio of inbound Asia-US cargo to export backhaul cargo.

If we accept a hypothetical 5% import growth and 7% export growth in 2012, the impact on the overall trade balance should be relatively minor. Imbalances also fluctuate seasonally: In the Q1 2012 off-peak period, the cargo ratio has been around 1.8 to 1; during the Q3 2011 peak, it was roughly 2.1 to 1.

A new normal could emerge, as China imports more; as increased foreign manufacturing investment in the U.S. generates two-way cross-border shipments; and as U.S. manufacturers look overseas for growth as U.S. demand is slow to recover.  For now, however, we see the historical imbalance trend continuing, with significantly more cargo with higher shipment values moving inbound at higher rates. As a result we believe the inbound headhaul will continue to drive carriers’ internal decisionmaking regarding service offerings and deployment of assets .

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

Conrad: Hopefully. Right now only a handful of U.S. ports can accommodate a container ship with greater than an 8,000-TEU rated capacity, fully loaded. Channels, turning basins and berths need to be dredged to at least 50 feet. Berths must be extended to handle more than one ship at a time. Terminals need cranes with adequate speed and reach, along with automated gate and yard processes, to work larger vessels efficiently. Highways and rail lines leading out of harbor areas must be reconfigured expedite freight traffic.

In 2004-05, we saw the canary in the coal mine: Chinese ports that had leapfrogged us in terms of technology and processes, were pushing cargo out three times as fast as our ports were in a position to receive it. Port development in other emerging markets has followed suit. U.S. ports are gradually addressing obstacles relating to infrastructure project funding, burdensome permitting and review, and waterfront labor contract provisions. But the rate of progress has been slow, and troubling, for cargo interests.

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

Conrad: At this time there is still no clear picture as to exactly how widening of the Canal will affect shipments. Assuming the Panama expansion is completed on schedule, it is not clear how many and which ports will be ready to receive and efficiently work the larger ships; whether inland infrastructure will be in place from the East and Gulf Coasts to handle the added volumes; how transit times and costs will compare at the end of the day; and what competitive steps West Coast ports and railroads will introduce by 2014. Over time, Panama Canal expansion will no doubt expand carriers’ and shippers’ options, but the devil will be in the details.

Tomorrow: The third and final installment on this forecast with the shipper’s perspective, featuring Peter Friedmann, Executive Director, Agriculture Transportation Coalition