Ups and downs
Weak economy, oversupply of ships, other challenges make 2013 a bumpy year for shippers.
By Chris Dupin
Aweak global economy and continuous deliveries of large new containerships seem likely to make 2013 a challenging year for relationships between liner carriers and their customers.
While many carriers reported a big improvement in earnings in the third quarter of 2012, it’s unclear whether they will be able to stabilize profits and how much sympathy they will get from shippers after ratcheting up rates in 2012.
The financial crisis of 2008 continues to reverberate throughout the world economy and unrest in the Middle East is contributing to geopolitical uncertainty, said Martin Dixon of Drewry Supply Chain Advisors. He predicted “volatility will be a defining feature of this decade and how the industry adapts to these new normal circumstances will be fundamental to its future shape and fortunes.”
This has “profound implication for conduct of shipper-carrier relations, which have hitherto been based largely on fixed rate contracts,” Dixon said.
Last year shippers had reminders of other uncertainties in the shipping business.
A strike by office clerks and sympathy action by the International Longshore and Warehouse Union (ILWU) shut down the ports of Los Angeles and Long Beach last fall and the ILWU and grain terminal operators in the Pacific Northwest were at loggerheads with each other. Contract negotiations between the International Longshoremen’s Association (ILA) and its employers on the East and Gulf coasts dragged on for months with little progress and still were not resolved in mid-December.
Those labor problems are “very unsettling for agricultural and forest product exporters,” said Peter Friedmann, executive director of the Agriculture Transportation Coalition.
One thorny issue, Friedmann said, was the almost simultaneous announcement by many carriers that they would institute “congestion surcharges” of $800-$1,000 in the event of a strike by longshoremen, even at ports on the West Coast that are unaffected by the strike.
“That would create a crisis situation,” he said. With that kind of surcharge, he predicted most agricultural exporters would not load or ship their products because the surcharge would eliminate all profit. And it was troubling to many shippers that they would apparently still be subject to force majeure even if they were hit with the congestion surcharge.
Hurricane Sandy also caused extensive damage in the Port of New York and New Jersey, and Michael Berzon, president of the logistics consulting firm MarLog, said the need for contingency planning in the event of weather issues could become a bigger topic of discussion between shippers and carriers.
“It is something we need to look at more closely, because we are going to be hit again and we have to be prepared for it. We are looking at bigger waves and stronger winds,” he said. “We don’t control the weather, so what you are left with is contingency planning based on the possibility that there is going to be a problem.”
Berzon said he is concerned some carriers or shippers, who escaped severe damage, are saying, “‘gee that was great, nothing happened.’ That is about the worst position you can take against an unknown quantity like the weather.”
Sandy also brought to the forefront a host of ancillary issues for discussion among shippers and carriers, said Peter Gatti, executive vice president of the National Industrial Transportation League. He noted these issues include delays in cargo availability at terminals and the fairness of demurrage and detention charges if fuel is unavailable or trucks and chassis are in short supply to haul containers because of storm damage.
“The impact in transportation certainly becomes acute because margins are so tight,” he said. Thus, transportation budgets for shippers are tight, “and there is not a lot of room to adjust when you start talking about spikes caused by a strike or natural disaster.”
Gatti said “quite frankly, what I see more is contingency planning in the case of a disruption rather than trying to factor every conceivable happenstance into the contract.
“You can put all you want in, but if the carrier is unable to perform due to an act of God or an act of man in the case of a labor situation, the only alternative is for the carrier to discharge cargo at its earliest opportunity and then it is going to be up to the shipper to become responsible for getting it to where it needs to be,” he said.
Friedmann praised the performance of some carriers and ports, particularly Norfolk, Va., in the wake of Hurricane Sandy, noting it responded by opening additional truck lanes and extending hours to handle cargo that had been diverted from the Port of New York and New Jersey.
He said planning for crisis management could reveal some important issues. For example, many agricultural products are very heavy, and there’s a lack of heavy-weight trucking corridors in some states, for example, New Jersey. That meant when cargo had to be rerouted, it had to be unstuffed from containers so that it could be legally moved.
Financial Stability Needed. Carriers say they need more stable profits if they are going to continue to attract capital for reinvesting in their business.
Greg Tuthill, senior vice president of sales and marketing at NYK Line (North America), said at a seminar sponsored by the Traffic Club of New York in November that the financial condition of the liner shipping industry is “still far away from where we need to be.”
Container shipping companies need long-term, stable returns to continue to generate interest from the investment community, he said.
“Most in the investment community would say we have lower returns than most other sectors, including components within the transportation investment sector,” Tuthill said.
Alphaliner said last month 18 liner carriers reporting results by early December had average operating margins of 4 percent in the third quarter of 2012, up from just 1 percent in the second quarter of 2012 and the best result for the industry since the fourth quarter of 2010.
“Most carriers faced severe losses in the first half of the year, coming off a 2011 where there was a collective $5 billion loss,” said Vince DelPrete, vice president of national accounts at OOCL, speaking at the same traffic club seminar. “The positive news is that in the last two quarters most carriers are reporting profit.”
But he said most of that profit is based on activity outside North America — intra-Asia and Asia-Europe. The transpacific, he said, was losing a significant amount of money and there was a big emphasis on cost control.
Despite tough times in the first half of 2012, DelPrete said carriers are “getting their arms around operating costs, managing costs and also balancing supply and demand and managing capacity.”
Uncertain Economy. Andy Huckbody, vice president of global ocean freight services at UPS, said the integrated carrier is “looking at 2013 as a growth year, better than 2012.” He said depending on the trade lane, UPS expects to see ocean container volumes increase from 3 to 5 percent.
Some economists are painting a gloomy outlook for the coming year. In late November, the Organization for Economic Cooperation and Development (OECD) opened its twice-a-year economic outlook by stating “after five years of crisis, the global economy is weakening again… The risk of a new major contraction cannot be ruled out. A recession is ongoing in the euro area. The U.S. economy is growing but performance remains below what was expected earlier this year. A slowdown has surfaced in many emerging market economies, partly reflecting the impact of the recession in Europe.”
Still, Huckbody said the North American market is in better shape than Europe, and noted trade with developing markets should remain buoyant.
Just back from a recent trip to India, he said it’s “becoming a bigger consumer market — and they are not alone. There are a lot of countries still developing and the commercial trade in those markets will continue to grow. Maybe volume today is not substantial, but growth on a percentage-basis year-over-year is interesting to us.”
“The one glimmer that you’re starting to see in the U.S. is housing formation improve,” said Ken Bloom, chief executive officer of the shipping portal INTTRA. “So, for example, housing prices year-on-year are now in positive territory. Interest rates have never been lower, so sales will resume and when sales resume you start to get people purchasing durable goods. Durable goods are typically bulky items that need to be shipped and so that is a bright light.”
Stepping Up. Drewry’s Dixon said volatility in freight rates is happening at a time when shipowners are making what he calls a “step change” in ship size, bringing on larger, more technologically advanced ships to drive down costs.
Shipyards have delivered or orders through 2015 for 162 ships with capacities of 10,000 TEUs to 18,000 TEUs, and 130 with capacities of 7,500 TEUs to 9,999 TEUs, said the research firm Alphaliner in a Nov. 1 summary of the containership order book.
Alphaliner explained that after growth in the world container fleet of 7.9 percent in 2011 and 6.7 percent in 2012, capacity is expected to grow 9 percent in 2013, so that there will be annual capacity in the world container fleet of 17.9 million TEUs from now, even after delays in deliveries and scrapping of ships is taken into account. By the end of 2014, that number is expected to jump to nearly 19 million TEUs.
Those deliveries have a global effect, Dixon said, as big ships in East-West services cascade into North-South and regional trades, unsettling supply and demand balances.
“What carriers are trying to do is drive unit costs down, and that is being driven primarily by fuel cost,” DelPrete of OOCL said. “There is a trend to push toward the largest potential vessel to serve a specific market.”
As those mega-ships come on, “hopefully there will be more cargo to be moved,” Hubert Wiesenmaier, who is executive director of the American Import Shippers Association, said. The association negotiates rates on behalf of many apparel companies.
He gives deference to carriers. “It is not as if they add capacity willy-nilly. They usually have some pretty good plans on how they can get into a somewhat balanced situation. They know if they have too much overcapacity rates will just plummet,” he said.
Wiesenmaier said carriers are more quietly adding or reducing capacity on routes as they shuffle ships.
“They used to make a lot of announcements, but now I think they do it quietly so that shippers don’t get too upset when capacity is withdrawn, eliminating certain loops and consolidating others. They have become more sophisticated in working their capacity vis-a-vis available cargo than they have been in the past when huge amounts of capacity came on. I think they try to balance that better,” he said.
Service configurations and port rotations, Tuthill of NYK said, are tethered to vessel sizes. The industry needs to figure out where it is going to deploy larger ships, he said, “but there is a versatility piece of this that is important. The 4,200-TEU vessel still serves a very good market and we need to make sure we have those particular class of vessel sizes in our rotations so we can continue to build products that are a little more flexible than what we have today.”
Demand for container transport is not as strong as it once was,” Tuthill added. Where growth was once 11 to 12 percent per year, now he said companies have to build their fleets and services based on growth of 3 to 5 percent, “at least for the next few years.”
Fueling Change. In May 2008, when fuel costs were $552 per ton, the World Shipping Council said fuel costs represented as much as 50 to 60 percent of total ship-operating costs, depending on the type of ship and service. In early December, the cost of bunker fuel was around $630 per ton, and ranged in the past year from about $570 to $740 per ton. Low-sulfur fuel, which carriers must burn in so-called “emission control areas” in North America and North Europe, is even more expensive.
At a Marine Money conference in November, Petter Haugen of the Oslo-based DNB Markets, said bunker cost for a VLCC (very large crude carrier) now accounts for about 80 percent of the cost of operating a ship. As a result, ships have reduced their speeds, increasing transit times for cargo. Haugen said the average speed of containerships with capacity of more than 6,000 TEUs has dropped from around 25 to 26 knots in 2008-2009 to around 22 knots this year.
However, slow steaming is unpopular with some shippers.
“How many days is it going to take from Shanghai to New York? They are already at super-slow steaming,” said Sara Mayes, president of Gemini Shippers Association. “What’s next? Rowboats?”
DelPrete said slow steaming has become widespread because it can sharply reduce operating cost.
Haugen said slow steaming has also become a significant tool in controlling over supply of ships. He said about 27 percent of transport capacity in the container shipping industry has been consumed by slow steaming. Without slow steaming, he said, container fleet utilization would amount to less than 65 percent; with it, utilization is in the 85 percent range.
DelPrete said cooperation among shipping companies is growing and alliances are getting larger in order to reduce cost and provide shippers with the port coverage and rotations they need. One downside of alliances is the time it takes carriers to make decisions.
Another part of cost-control, he said, is increased use of automation — both electronic data interchange and portals such as those provided by CargoSmart, GT Nexus and INTTRA — to drive both value and data quality.
Tuthill said carriers need to figure out how to reconfigure their businesses, and make sure they have a better model going forward. For example, that might mean looking at contract structures or whether liner companies want to be wholesalers or retailers. “I think we try to do both today, which is difficult, but that does not mean it can’t exist,” he said.
He also noted many shipowners have increased debt or raised equity in public or private markets, creating problems for themselves in terms of meeting debt service or maintaining financial ratios such as equity to debt or cash position against debt. To deleverage, there has been a “lot of focus on cost containment and efficiency at, perhaps, service-related issues. So we have to get back to service,” he said.
Tuthill said reinvestment involves not only vessels, but “soft services” such as information technology and staffing of companies and education of employees.
Bloom of INTTRA said he recently attended a conference at which he heard about “how terrible things are for ocean carriers and how shippers want improved quality… I wonder if ocean carriers actually can listen to the requests from shippers for service and value. Part of me says ‘yes’ and part of me says ‘no.’”
On one hand, his company began offering last year a product called Ocean Metrics, which measures reliability of container deliveries, or what percentage of containers arrive to their destination on time.
“If you look over time, just over the past 12 months or so, you see generally speaking an improvement in container reliability,” Bloom said. “In fact, the gap among the carriers is starting to narrow, meaning more and more containers are arriving on time as promised by carriers. Not just one carrier, but more and more carriers.”
That improvement “makes me feel carriers can actually hear what shippers are looking for,” he said. And when carriers improve their reliability, he added this also allows carriers to “reduce their costs because they minimize the number of exceptions to handle.
“We must wonder if carriers ultimately can close that gap between what their customers say they want and what their customers want and will pay for,” he said.
Bloom noted his company primarily serves freight forwarders and that business has been growing four-times as fast as container traffic. That makes him believe “forwarders have continued to gain share and I think it’s precisely because they have the ability to listen to what the shippers want and they have the capability to go get that from the carrier for the shipper.
“The wild card is can the carriers ultimately deliver to the market what forwarders are already being quite successful in delivering and here I’m not so optimistic,” he said.
Bloom predicted 2013 is “going to be a challenging year for the industry because, of course, we’re not seeing too many reasons why volume should increase. We’re seeing lots of new capacity come online. And we’re seeing shipper demand for information increase. All of that creates a challenge for carriers.”
While key performance indicators like those measured by INTTRA’s Ocean Metrics are the basis of shipper-carrier discussions, Bloom said he is not aware of them being used in contracts.
Mayes of the Gemini Shippers Association said it’s “pretty much a given that your goods are going to be delivered on time.”
Outlook For Rates. Alphaliner said in early December that “prospects for rate increases planned for mid-December on both the Asia-Europe and Asia-U.S. routes are looking increasingly slim, with vessel utilization levels staying stubbornly low. Carriers are hoping for a year-end cargo rush to boost their chances of success, but it will be too late to lift the carriers’ prospects of turning in a positive fourth quarter.”
The Transpacific Stabilization Agreement, a discussion agreement for 15 carriers that control over 90 percent of U.S. inbound trade from Asia (it covers most of the continent from the Russian Far East and China all the way down the Pacific Coast to Singapore and over to Pakistan), has ambitious goals for the coming year. It sought a $400-per-FEU general rate increase to the U.S. West Coast and $600 for other destinations on Dec. 1, but then delayed that recommendation until Dec. 15. In 2013, it is recommending liner members seek a GRI of $800 to the West Coast and $1,000 to the East and Gulf coasts when carriers renew their services contracts with shippers, typically around May 1.
Mayes believes TSA’s goals are overly ambitious. “Every year they come out and state these numbers and they are just not well thought out. I don’t want to say they are unreasonable. Everyone is entitled to a profit,” she said. “But you have to remember whose goods are on your ships. If you’re carrying a guy who’s barely breaking even and you are going to hit him with a $600 increase, is he still going to stay in business and is he still going to be profitable? The carriers are entitled to be profitable, but so are the shippers.”
Cherry Wang, container derivatives broker at the London office of brokerage firm GFI, said there was a lot of volatility in both the U.S. and Asia-Europe trade lanes. She said based on futures prices the outlook for rates next year for both those trade lanes is “fairly weak, and that is purely because of a fundamental issue and that is an oversupply of capacity, more so on the Asia-Europe trade lane.”
A downside risk on the transpacific in 2013, she added, is consumer confidence, and whether carriers will continue with a pricing war like they did in 2011. Speaking in late November, she said transpacific rates had significantly deteriorated in recent weeks.
“Regardless of how long you are in the business, it is typically the same stuff,” Wiesenmaier said. “You try to do your best to get competitive rates and to protect yourself as much as possible, to hold carriers up to certain levels of providing services.”
He said rates this coming year will depend on from where and to where you are shipping. If you are shipping to the West Coast, rates are going to be more competitive than if you ship to interior points. East Coast rates may go down somewhat, but it all depends on the carrier and how desperate they are to retain market share.
“For them it is always the same sort of game — do you retain market share or can you afford to allow some cargo volume go because you do not make money on it. And not making money on a container has not normally been a great deterrent in the past. They still have to fill ships,” he said.
Joseph T. Saggese, executive managing director of the North Atlantic Alliance Association (NAAA), agreed and said “it looks like rates are going to continue to be under a lot of pressure.”
He said shippers are paying “record low rates compared to 20 years ago.”
When the ships are full, Saggese said many issues — including the availability of space, equipment, and free time — are likely to be the subject of discussion. “In a declining market like we have — Europe in a recession, China being off — it’s all about the rate,” he said.
The NAAA represents non-vessel-operating common carriers, forwarders and custom brokers and negotiates many export rates on their behalf.
While shippers and consumers benefit from low rates, Saggese also said they are not without consequences. Carriers “cut systems, they cut people, you don’t get trucking — a lot of things go away with low rates. It is not healthy for the industry.”
“The economic conditions out there will dictate whether we see increases in rates,” the NIT League’s Gatti said, noting there were a wide variety of economic forecasts being made in December, driven in part by whether Congress takes action to prevent the economy from falling off the so-called “Fiscal Cliff.”
But Gatti also noted while “there are expectations that carriers will see increases in rates, it depends on the leverage of individual shippers on whether they will be realized.”
As to the outlook for rates, Huckbody of UPS said “carriers in most lanes have done a pretty good job in trying to get rates back to where they are compensatory for them in the second half of 2012.
“For them it has been like a yo-yo,” he said. “They bleed and then they recover. Our hope is that they can stabilize instead of as we saw in the transpacific eastbound trade in 2012 where they tried to reset nearly every month, which causes a lot of problems for our customers. There is no way that they can budget 50 or 100 percent increases.
“I think in 2013, from a carrier rate standpoint, it’s going to hopefully stabilize and I think the biggest challenge the ocean carriers may have is probably pulling the BCO (beneficial cargo owner) or direct customer rate levels maybe closer to the NVOCC rate levels,” Huckbody said.
Dixon believes that multiyear contracts where freight rates are adjusted to reflect the spot market will become increasingly popular in coming years. He said such agreements would prevent contract defaults — when shippers in a down market decide not to tender cargo to a carrier because they can get a better freight rate from other carriers in the spot market, or conversely, in an up market, when carriers are not carrying or rolling cargo because they can get better rates from another shipper.
Huckbody said in certain trades carriers’ NVO rates have floated more with the market and that as rates have risen, they took a bigger percentage, while those for some beneficial cargo owners did not. He said that preferential treatment, however, can be a double-edged sword, because carriers may only move committed volumes at contract rates and “anything over, either they want a premium or the customers move that cargo out to the NVO networks. This was seen in 2009 when there were capacity shortages.”
He said NVOs were able to take advantage of that and in many trade lanes their control is growing. However, he added it is a little different in North America where carriers have a higher percentage of direct retail customers as opposed to forwarders or NVOs.
Huckbody also said companies like UPS are able to sell value-added services to shippers, such as purchase order management, customs or other regulatory compliance, and enhanced visibility to supply chains. Another advantage to using a forwarder, he said, “is what we call one throat to choke. There is just less people involved in your supply chain, from the door of the vendor to clearance to delivery. “
‘Hot Button.’ DelPrete of OOCL said “the most hot button” issue for many shippers in recent years is the decision by most carriers to reduce their costs by no longer routinely providing chassis for merchant haulage of containers beyond terminals.
“It has been about two and a half years since some of the carriers started disengaging from chassis in the U.S.,” he said. “My best guess is we are about halfway through the process.”
He said most carriers are “taking it relatively slowly to minimize disruption.”
Wiesenmaier said the carrier exodus from chassis “has been much smoother than I anticipated.”
While problems sometimes arise, he said shippers also “had chassis problems when the carriers provided chassis and there were not enough chassis available. I think it is a bigger problem for the unions than importers.”
The International Longshoremen’s
Association made retention over maintenance and repair of chassis a major issue during contract talks last fall. While last July the union and its employers said they had an “agreement in principle” on chassis, it was unclear whether that issue was fully resolved.