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Transport-Inland
NS to open Heartland Corridor next week
   Norfolk Southern Corp. said it plans to open the Heartland Corridor next week after completing a three-year project to upgrade its rail route between Hampton Roads, Va., and Chicago by modifying 28 tunnels and other facilities to accommodate double-stack containers.
   Set to open Sept. 9, the new gateway will eliminate about 250 route miles and a day or more of transit time from current train schedules. The first phase of the tunnel work began in October 2007.
   Double-stack trains must take longer routes by way of Harrisburg, Pa., or Knoxville, Tenn. The Heartland Corridor goes across Virginia, through southern West Virginia and north through Columbus, Ohio.
   The railroad said efficiency gains from major infrastructure improvement projects, such as the Heartland and Crescent corridors are part of plans it has to lower greenhouse gas emissions per revenue ton-mile 10 percent by 2014, compared with 2009 emissions.
   The Crescent Corridor program improves infrastructure and other facilities geared toward creating a high-capacity, 2,500-mile intermodal route spanning from Louisiana to New Jersey.
   Blair Wimbush, vice president real estate and corporate sustainability officer, said Norfolk Southern's emissions reduction strategy also focuses on ways to achieve better fuel economy, including purchase of new, more fuel-efficient locomotives; continued deployment of idle-reduction and train handling technologies; and refined engine maintenance practices.
   Further efforts will address direct and indirect emissions from energy used for heating, cooling and lighting buildings and other facilities on the railroad. Nearing completion is a systemwide lighting upgrade that is reducing electricity consumption, and the company continues to adjust its non-rail vehicle fleet to save fuel and emissions. — Chris Dupin
Logistics
U.S. Commercial Service suffers internal woes
   A congressional watchdog agency said the Commerce Department’s Commercial Service requires better management controls if it’s going to successfully help the White House achieve its goal of doubling U.S. exports in the next five years.
   The Government Accountability Office found the Commercial Service’s workforce has declined about 14 percent from its peak in 2004 through attrition -- “affecting the mix and distribution of personnel.”
   President Obama’s 2011 budget requested $321 million for the Commercial Service, $63 million more than its 2010 appropriation. The agency is allocating $5.2 million of its 2010 appropriation to begin recruiting staff.
   The Commercial Service plays an important role in U.S. export promotion, especially for small and mid-sized companies. The agency has about 300 staff in Export Assistance Centers throughout the country and another 1,000 field staff located in overseas embassies.
   However, the GAO said it found the Commercial Service “lacked key planning elements, including a clear sense of strategic direction and in analysis to determine its workforce needs,” and further warned that “adding more staff could be delayed because CS’s human resources office is itself understaffed and because CS requires up to two years to hire and train new foreign service officers.”
Transport-Ocean
MSC hikes transatlantic rates
   Mediterranean Shipping Co. said it will implement general rate increases in the transatlantic on Oct. 1.
   MSC said the rate for cargo moving from the United States, Mexico or Canada to Northwest Europe, including the United Kingdom, will increase $200 for 20-foot containers and $300 for 40-foot containers. For cargo moving to Scandinavia or the Baltic, the increase will be $300 for 20-foot containers and $400 for 40-footers.
   MSC also said freight rates for cargo moving from the Northwest Continent to the United States will increase $200 per 20-foot and 40-footers.
   The increase from the Northwest Continent/Baltic region and the Mediterranean to Mexico and Canada (including Canadian cargo moving cross-border) is $100 for 20-foot containers and $200 for 40-footers.
Top 20 container lines

By Eric Johnson

HIGHLIGHTS OF 2010 RESULTS
• Top carriers augmented their fleets by 11% since August 2009,
while operated capacity on major lanes increased 12%.

• Capacity injected into Asia/Europe double that of the transpacific.

• Lines shifted emphasis to chartered capacity, with a few exceptions.

• CSAV shot up the list based on an aggressive ship chartering strategy,
while NYK posted largest reduction in fleet size.

      The past 12 months have been the container shipping industry’s bounce-back year.
      Volumes have recovered, as have rates. But so too has capacity. The world’s top 20 ocean carriers added more than 1.2 million TEUs of fleet capacity since August 2009, according to analysis by American Shipper.
      Cries have rung out from shippers throughout 2010 that capacity is at a premium and that carriers are to blame for withholding capacity. But the numbers tell a somewhat different story. While the top 20 carriers collectively added 11.3 percent worth of fleet capacity in the last 12 months, 12.1 percent of operated capacity has been collectively added by them on the primary east/west trades (the transpacific, transatlantic and Asia/Europe) in that same period, according to American Shipper research affiliate ComPair Data.
      But the capacity added in the main east/west trades — the ones that affect the greatest number of global shippers — has not evenly matched the overall growth in fleet capacity. According to ComPair Data, operated capacity grew 11.6 percent on the westbound transpacific but 22.7 percent from Asia to Europe.
      Overall, however, carriers have put into service more capacity on the main trades than they have added through vessel deliveries and charter hires. That doesn’t necessarily jive with shipper concerns over lack of space.
      Shippers could well fire back that carriers were withholding a substantial amount of capacity one year ago, and that’s true. The idled containership fleet neared a record 12 percent at the turn of 2010. But as of mid-July, the pendulum had swung fiercely back, with only 2 percent of the global fleet shelved.
      The reintroduction of services since spring, and the significant increase in vessel deliveries in July, has shone a light on another issue — a shortage and imbalance of ocean freight containers, chronicled by American Shipper’s August cover story (“Boxed out,” see www.AmericanShipper.com/links).
      More than 200,000 TEUs of capacity were delivered during July alone, and more than 1 million TEUs of capacity have come online since Jan. 1, according to the maritime news service Alphaliner. That’s more than 7 percent of the global fleet, and another 500,000 TEUs are due to be delivered through the rest of 2010.
      On the surface, this seems to be great news for shippers. More capacity has ostensibly meant lower rates in the past. But carriers have shown a greater resolve to individually and collectively control capacity this year. Perhaps lessons have been learned from 2009, or perhaps carriers are just cautious about a recovery that may or may not stick.
      In any case, in the past an influx of so many vessels would have surely meant a glut of operated capacity. Not so this year. A 12 percent increase of operated capacity against a 11 percent increase of physical capacity represents a reasonable supply/demand balance.
      There’s one more important factor, of course, and that’s actual demand.
      According to Drewry Shipping Consultants’ Container Forecaster, global container volume is forecast to rise 8.6 percent in 2010 to 145.4 million TEUs. In the first quarter of the year, for which numbers are real and not forecast, volume grew 15.1 percent. But that growth is expected to have tapered off to 9.8 percent in the second quarter, and slow further still to 5.9 percent in the third quarter and 4.5 percent in the fourth.
      Global projections from another analyst, IHS Global Insight, tell a similar, if somewhat more optimistic story. IHS Global Insight forecasts global container trade to rise 9.2 percent in 2010 — with a 10.6 percent rise in trade on the main east/west trade routes — dropping to 6.8 percent growth in 2011.
      Even if you take a midpoint between the Drewry and IHS Global Insight forecasts — about 9 percent — carriers in the past 12 months have still added capacity faster than demand has grown. At least on a global level.
      Yet, it’s hard to ignore that shippers have found space constraints on a trade-by-trade level. Nor has capacity been introduced in a gradual manner that perfectly tracks demand growth.
      Carriers have largely reacted to — rather than anticipated — better-than-expected demand in certain markets. For instance, capacity soared by huge amounts on the Asia/Europe trade lane from January to May 2010. That’s not unusual for the Asia/Europe lane, perpetually more turbulent than the transpacific because of the prevalence of shorter-term service contracts and — since October 2008 — a lack of a coordinating body for carriers.

Uneven Capacity Growth. In the past year, the top 20 lines’ operated Asia/Europe capacity rose 22.7 percent to 337,092 TEUs weekly. That’s compared to an 11.6 percent increase in operated capacity on the eastbound transpacific, which is nearly right in line with the top 20’s overall increase in offered capacity — 12.1 percent — on the main east/west routes (see Table 2).
      Demand grew 23.4 percent from Asia to northern Europe in the first quarter of 2010, according to Drewry. It was projected to have grown 3.1 percent in the second quarter and is forecast to grow 0.9 percent in the third quarter and actually drop 1 percent in the fourth quarter.
      On the eastbound transpacific, demand grew 16.3 percent in the first quarter, is projected to have grown 8.5 percent in the second, and is forecast to grow 6.3 percent in the third quarter and 4.3 percent in the fourth quarter.
      Slot utilization, as measured by Drewry, was much better in the first quarter but is only projected to be marginally better (or worse) in the remaining quarters on both the headhaul Asia/Europe and transpacific lanes.
      Those efforts to pump in capacity, particularly between Asia and Europe, are beginning to have deleterious effects for carriers. Reports in late July suggested rates are coming down as peak season approaches and that announced peak season surcharges aren’t sticking as carriers would have liked.
      The Shanghai Containerized Freight Index — far from a flawless measure — said the rate for one TEU from Asia to northern Europe was $1,895 on July 23. That’s a drop of nearly 13 percent from mid-March, when shippers in North America and Europe complained of having their cargo rolled due to tight capacity. The Shanghai index suggests rates on the transpacific have been dropping of late too.
      There’s another angle that obscures the amount of capacity carriers have introduced, and that’s the effect of slow steaming, a measure carriers introduced to cut down on fuel consumption that also had the benefit of reducing ship emissions and soaking up excess capacity.
      In theory, as a transpacific service goes from five to six ships and increases its round-trip voyage time from 35 to 42 days, the weekly capacity, as measured by ComPair Data, doesn’t change. But what does change is the amount of fleet capacity a line can employ. This gets at the difference between what ComPair Data measures (the amount of weekly capacity available to shippers in any given trade route or port pair) versus what raw databases of fleet capacity measure (that is, how many container slots and vessels a carrier has).
      Before the advent of slow steaming, a shipper could reasonably expect that if a line received a ship, that ship would be put into service and that capacity on that trade would grow. Now, it’s not always a certainty that a new ship provides extra weekly capacity. Rather, slow steaming has expanded the amount of gross capacity on the water at any given time, but has not augmented by the same factor the amount of capacity available to shippers.
      Yet ComPair Data accounts for this, and that’s why it’s not fair to argue that carriers have merely used slow steaming to account for added fleet capacity while not adding operated capacity. As shown in the accompanying tables, carriers have added fleet capacity while also adding actual capacity that shippers can see.

Structural Change? So the next question is whether 2010 represents a year of structural change in the industry or whether carriers were simply able to effectively manage capacity this year alone. That is, have the proverbial lessons of 2009 been learned, or will bad habits reemerge next year?
      There are signs that lines have begun chasing the hot market — a familiar pattern in years past.
      Mediterranean Shipping Co., the world’s second-biggest carrier, pumped in a massive 78.5 percent of operated capacity into the Asia/northern Europe trade. Maersk Line grew its allocated weekly capacity between Asia and northern Europe by 10.8 percent in the last 12 months, while CMA CGM, in comparison, has been downright austere, raising Asia/northern Europe capacity 5.2 percent.
      As the three biggest providers of capacity between Asia and northern Europe, a collective 22.8 percent increase represents a massive influx of space for shippers, and that will inevitably affect rates, not even taking into account what other lines do (the remaining 17 lines raised their collective capacity 15.2 percent).
      But these increases can also be taken as signs that carriers are retreating to their positions of strength. For MSC, Asia/Europe is the key lane. For a carrier like APL, the transpacific is more vital. And APL’s transpacific capacity has risen markedly — by 42 percent from Asia to North America — to an extent that it is now the largest provider of capacity between Asia and the U.S. West Coast after being the fifth-largest in August 2009.
      COSCO Container Lines, part of the CKYH Alliance that owns the top position on the transpacific, saw allocated capacity increase nearly double from Asia to North America the last 12 months. That increase is partially offset by the fact that the transpacific capacity of CYKH partners “K” Line, Yang Ming and Hanjin collectively dropped 2.1 percent, but the alliance as a whole still grew its capacity 14.8 percent.
      On the Asia/Europe lane, CKYH’s capacity grew 6.6 percent last year. But COSCO’s dropped 21.6 percent, while Hanjin’s grew 71.2 percent on that lane. Clearly, Hanjin has begun playing a more prominent role in CKYH’s Asia/Europe plans the past year while COSCO has taken on a greater transpacific role for the alliance.
      Table 3 shows another example in the Grand Alliance. As member OOCL pulled a significant amount of transpacific capacity to the West Coast (55 percent), its partner Hapag-Lloyd raised its capacity there by 109 percent, while the other member, NYK Line, also added a fair share. But all in all, the alliance only grew transpacific capacity 0.4 percent in the last 12 months.
      These inter-alliance machinations shouldn’t obscure the fact that the top 20 lines, as a whole, grew allocated transpacific capacity 11.6 percent, including 16.1 percent to the U.S. West Coast. As the Grand Alliance held steady and Europe’s big three largely pulled transpacific capacity, the New World Alliance took advantage. APL, Hyundai Merchant Marine and MOL collectively added 44 percent capacity from Asia to North America, including a 47.6 percent increase to the West Coast.

Lightening Asset Load. A somewhat under-discussed aspect of the container shipping industry in the last 12 months has been the large shift from owned fleets to chartered vessels (see Table 4).
      While much has been made of the top 20 lines’ massive orderbooks, the reality is that those lines’ owned fleets have grown marginally in the past year — around 273,000 TEUs — while their chartered fleets have grown substantially — by around 941,000 TEUs.
      What’s more, the growth rate of chartered fleets in the past 12 months screams out that carriers actively wanted to reduce their asset load even as scores of huge new ships arrive. Chartered capacity rose 17.9 percent,
compared to a 5 percent hike in owned capacity.
      Indeed, nine of the top 20 lines actually reduced their owned fleet size in the last 12 months, compared to six that reduced their chartered fleet.
      This aspect of the industry shows most clearly where lines diverge in strategic thinking. In 2009 and 2010, lines like OOCL, Zim, Hyundai and “K” Line have focused on growing their owned fleets and decreasing their chartered fleet. MSC, Hapag-Lloyd, COSCO, Hamburg Sud, CMA CGM and PIL have taken a balanced approach to fleet growth, increasing both owned and chartered fleets. The other half of the top 20 overwhelmingly shed owned capacity and took on huge amounts of chartered capacity.
      The carriers that reduced their owned fleets and increased their chartered fleets no doubt did so to take advantage of a glut of capacity held by non-operating ship owners eager to see some return on their assets in a down market.
      Many carriers returned vessels in the depths of the 2009 recession but only some took full advantage of lower rates at the tail end of 2009 to inject tonnage back into their fleets. In many ways, the extreme pain of 2009 looks like a long-term gain for some lines.
      No carrier rose up the top 20 list faster than Chilean line CSAV, and no line employed chartered capacity at quite the same rate in the past 12 months. CSAV took on more than 295,000 TEUs of chartered capacity in that time, roughly one-third of all new chartered capacity among the top 20. To put that in perspective, the line had 270,000 TEUs of total capacity 12 months ago.
      At the same time, CSAV dumped 47 percent of its owned capacity since August 2009. This extreme strategy of relying on chartered capacity is no doubt influenced by the line’s financial troubles the past few years. According to American Shipper’s annual Who’s Making Money report (see www.AmericanShipper.com/links), it is one of only three lines in the top 20 to lose money each of the last two years, and it has lost $753 million the last five years combined. During that time the other carriers surveyed by American Shipper averaged five-year profits of $192 million.
      In other words, CSAV would not appear to be in the kind of position to increase its fleet size by 95.5 percent in the last year. But through aggressive use of chartered ships, it has.
      By ambitiously adding chartered capacity, the line has also seemingly minimized the impact of its ordered vessels. Last year, the line’s order book represented nearly 30 percent of its existing fleet (including chartered and owned vessels). This year, the order book has been reduced marginally, but that coming capacity represents only 12 percent of its existing fleet.
      Clearly, CSAV is eyeing the revenue-producing opportunities a larger fleet can provide to help steer it into the black this year and help fund its future deliveries.
      On the other end of the spectrum is NYK, which decreased its overall fleet by 9.5 percent, reducing both its owned and chartered capacity. At the beginning of 2010, the Japanese line said its goal was to become asset lighter in the container shipping industry, and it is well on its way to achieving that goal. Only OOCL operates less chartered capacity, and NYK’s order book (by capacity) is now the smallest among the top 20 (after Evergreen recently announced its first ship order in nearly a decade).
      And here’s a way to measure that lines are not merely capitalizing this year on higher volumes. NYK in late July upped its profit and revenue forecast. While revenue was expected to rise only 5 percent over that forecast in April, profit was projected to increase by 98 percent. The forecast covers the whole NYK Group (including divisions outside of liner shipping), but NYK’s liner division first quarter profit margin (April through June) was 33.6 percent.
      The implications are clear. Liner carriers are putting to good use the cost reductions they achieved in 2009. As rates have risen, costs have held steady and the revenue is helping carriers move well into the black. That NYK is the line that withdrew the most capacity in the past 12 months speaks to the fact that a reduced asset sheet could very well benefit carriers currently outside the top six or seven.

Fleets Will Grow. Of course, the carriers in that top tier see fleet investment as the way forward. Collectively, the top seven lines have more than 1.8 million TEUs of capacity on order (or an average of 257,000 TEUs per carrier) while the remainder of the top 20 have 1.3 million TEUs on order (103,000 TEUs per carrier).
      A healthy portion of the top 20 lines are doubling down on owned capacity, with eight lines slated to increase their fleets by one-third or more. And that excludes the top two lines — Maersk and MSC, which together have 1.3 million TEUs on order — because their existing fleets are already so large.
      Yet it’s also important to remember that not all ordered ships will be delivered ships.
      A hint of how canceled orders reduced the gap between excess capacity and demand in the past year comes from United Arab Shipping Co., whose order book dropped from 18 ships, representing 156,035 TEUs of capacity, in August 2009 to nine ships, representing 117,900 TEUs of capacity, in August 2010, all while UASC’s owned fleet stayed exactly the same in those 12 months.
      In other words, the Gulf-based carrier shed more than 38,000 TEUs of future capacity while not taking a single delivery in the last year. The line did, however, grow in that time because it increased chartered capacity from 39,000 TEUs to 94,000 TEUs.
      Average ordered capacity among the top 20 dropped 22.9 percent in the last year, from 206,051 TEUs in August 2009 to 158,906 TEUs in August 2010, due to deliveries and cancellations.
      As mentioned earlier, vessel deliveries have ramped up in the summer. At some point, it’s hard to question the carriers’ commitment to providing capacity when the industry has taken delivery of a record amount of capacity in July at the same time that the global idle fleet fell to 2 percent. In fact, only three carriers, according to Alphaliner, still have any appreciable amount of capacity shelved — Maersk, Hanjin and Zim.
      Given that most of the world’s containerships are in service (albeit some employed only via slow steaming) and given that shippers are nevertheless still bothered by capacity suggests that the container shortage addressed in last month’s American Shipper is largely to blame.
      This doesn’t shift the burden from carriers, who are responsible for providing a supply of containers just as they are for vessel space. But what it does suggest is that once the container shortage is rectified — a far easier and shorter term problem to solve than lack of vessel space — the capacity situation will largely be resolved.
      It will then fall to carriers to decide if they will continue to manage capacity as they did in early 2010 — by controlling supply and easing rates higher — or whether they will fall into the familiar patterns of injecting capacity into hot trades until rates subside and then search for the next big thing.
      One last note: the word consolidation has been conspicuous by its absence in this report, and that’s largely because no major acquisitions seem in the offing. While the biggest carriers stress the need for fewer players, the market doesn’t appear to have the appetite for a blockbuster deal. That’s mostly because lines are counting on higher revenue this year to wipe away the massive losses of 2009, and thus don’t have the financial clout to absorb a major competitor.
Latest issue’s cover
American Shipper +
Last Updated: Thursday, September 02, 2010 11:51:59 AM GMT
Transport-Ocean
Transport-Air
Transport-Inland
Logistics
Intermediaries
Ports & Terminals
Opinion
Better days ahead
      For the past two years, the transportation industry has hoped for an eventual resurge in cargo volumes to rejuvenate idle workers and equipment.
      Now that freight volumes have started rolling in, carriers across modes have found themselves suddenly struggling to get box capacity back in service and in the right locations. This scenario has dampened their credibility among already frustrated shippers. Who would have thought that more freight would equal more headaches for starved transport providers?
      On the seas, many shippers still accuse ocean carriers of withholding container capacity just to raise their freight rates, when in reality these operators are struggling to reorganize their box flows. It also doesn’t help that during the recession these carriers set aside internal improvements and watched experienced personnel exit the business.
      Similarly, the North American trucking industry, which dominates transport of merchandise coming into the continent by ocean container or plane, has struggled to jumpstart its driver and equipment pool after more than two years of near idle.
      Only the air cargo carriers, as highlighted in this issue by American Shipper, appeared to have had an easier time so far meeting shippers’ transport capacity demands, albeit at premium rates. This is the benefit of a transport sector with an already engrained mindset of rapid assets deployment, when compared to other modes.
      Many industry analysts interviewed by our writers in recent weeks increasingly indicate that the worst of the capacity crisis for shippers may be over and that better days are now ahead.
      It’s understandable from a business perspective that during this recovery most carriers will cautiously reintroduce capacity to the market. However, it seems old habits die hard in the shipping industry. Adding capacity irresponsibly in a sudden grab for market share will only put the carriers right back to where they started.
Logistics
Compound errors

Walter Kemmsies
Moffatt & Nichol

Difficult environment, slowing growth mask a very positive thing — the economy is increasingly growing on its own.

      Many sectors of the economy, not just the freight movement industry, have been unprepared to handle the economic recovery, and capacity issues are likely to persist due to the uncertain economic outlook and unstable financial markets.
      Part of the problem is the unusual financial sector-driven nature of the recession, which caught most policymakers, decision-makers and forecasters off guard. However, there were other contributing factors such as the liabilities some industry segments incurred, such as ocean carriers placing orders for larger vessels. Other companies required dramatic capacity reductions to staunch large operating losses.
      Severe financial problems usually require drastic changes that carry the risk of overreaction. Even as the economy and financial sector continue to recover, slowly or quickly, capacity issues are likely to persist across a wide range of industries.
      In the 50 years since 1960 there have been eight recessions. Only two of these recessions were caused by a negative shock to the supply of resources that impact the ability to produce any good or service:
      • The first occurred in 1973-1974 when the Arab Oil Embargo resulted in severe oil shortages in North America and Europe. Energy is an essential input into the production of all goods and services.
      • The 2007-2009 recession can also be thought of as a supply-side recession in that credit, like energy, is required by all forms of economic activity.
      The reason it was so difficult to predict the financial sector-driven recession is the banking system is not very transparent. Consumer and mortgage debt had grown at a high rate for a very long time. It was clear a debt problem was developing. However, it also was not clear when a crisis would occur and how policymakers would react.
      It can be argued policymakers waited too long. Nonetheless, when they finally recognized the nature and severity of the problem, the policy prescription to address it was well known and executed accordingly. Whether the recovery policies could have been better designed and/or executed is tangential to the topic at hand.
      It is possible some people were excessively negative on the economic outlook because they hoped the developed nations’ governments would not intervene and let events run their natural course. However, that was politically unviable.
      The bottom line is policymakers took action and succeeded in bringing about a recovery. This did not come for free. It’s reasonable to expect growth in the near to medium term to be below the long-term trend rate, as the economy recovers and governments get their finances in order. How much lower and for how long depends on policymakers’ actions.
      The credit crunch impacted everyone who owed money. In 2007 mortgage loan default rates began rising and eventually reached the highest recorded rates in at least the last few decades. Bank failures began to rise. As the credit crunch began to unfold in 2008 many companies drew down lines of credit and deposited those funds in their checking accounts to ensure they met short-term payment obligations. Companies and municipal debt issuers needing to refinance experienced great difficulty doing so.
      The freight movement sector was not exempt. Well-run carriers had significantly increased their liabilities, mostly in orders for large and expensive equipment.
      Enterprises, private or public, that had worked hard to avoid insolvency were unsurprisingly more concerned with cutting costs than with future expansion. As the recession lengthened to become the longest and deepest since the Great Depression, the focus had to remain on cutting costs. The relative minority of companies flush with cash took advantage of opportunities presented by others’ predicaments but were nonetheless still cautious.
      As the economy and trade began recovering in 2009, companies were generally unprepared, since they were still focused on cost-cutting and financial issues. In the second quarter of 2010, most industrial companies reported better than expected profits and raised 2010 growth forecasts.
      However, large manufacturers could be held back by difficulties securing critical components from supply chains weakened by the downturn. Some suppliers to large industrials are finding it hard to rapidly increase production capacity and report financing remains expensive and difficult to access.
      U.S. and European manufacturing supply chains are showing signs of straining to cope with demand. The Financial Times reported a survey by MFG.com, an online marketplace for manufacturers, found 51 percent of big U.S. manufacturers reported “significant supply chain disruptions” in the second quarter. And 42 percent of small and mid-sized suppliers said they had received queries or work from larger companies in need of urgent assistance because of supply chain problems.
      Generally speaking, the economic outlook is good. The slowdown in economic growth is to some extent attributable to the decline in the fiscal stimulus, which has left expansion increasingly dependent on consumer spending growth.
      Consumer spending is growing slowly because the recovery in employment has been slow. Companies have posted more job openings than layoffs, however the offered salaries are low enough that many may feel they are better off staying on unemployment benefits until better opportunities come about.
      Supply chain constraints that are slowing the economic recovery are likely to continue for some time. As the financial sector recovers and the bottlenecks become more critical it is likely that growth will increase again. The timing of all that may be uncertain, but it will be well-received news because it will show that the recovery has become self-sustaining.      
      Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or e-mail, wkemmsies@moffattnichol.com.
Opinion
Intellectual trade barriers
On Second Thought ...
Dietmar Jost,
Dietmar Jost Consulting

      In September, the International Chamber of Commerce (ICC) in Paris will publish the next version of the international commercial terms, in short Incoterms 2010.
      These terms will enter into force Jan. 1. This is the first revision since 2000 and the seventh overall since Incoterms were first published in 1936.
      Incoterms provide an international standard for buyers and sellers to determine their obligations in international cross-border trade (i.e. at which stage in the supply chain the commercial risk and liability for the goods move from the seller to the buyer).
      Currently there are 13 commercial terms, the most commonly used being “CIF” (cost, insurance and freight), “FOB” (free on board) or “DDP” (delivered duty paid).
      Incoterms play a very important role in international trade. Every exporter and importer, big or small, uses these terms and relies on them being understood and identically applied by both parties of a contract. Customs authorities worldwide use them for risk assessment and customs valuation, the basis for the calculation of duties and taxes. Incoterms also help in calculating trade balances in foreign trade statistics.
      There are usually a wealth of sources where information on Incoterms can be found. However, at this time of change, information sources have become very limited. It is exactly at this moment in time, though, when access to the new Incoterms and an explanation of the changes is most critical.
      Experts of the ICC and its member organizations, such as the U.S. Council for International Business or the Association of Chambers of Industry and Commerce (DIHK) in Germany, have worked out the new release of the Incoterms. They are a small elite group of people in international trade with knowledge about the changes. The ICC has announced that the new revision will be released in September and that the changes will be significant. However, the changes are not being made public.
      The only information made public so far is the number of terms have been reduced from 13 to 11. Two new terms have been added and some older, little-used terms have been deleted.
      Every participant in international trade and transport knows that knowledge about the amendments and the assessment of the potential impact on the business operations will be critical. Small changes in the wording of a term can bear significant business risk and financial implications. In the case of the Incoterms 2010, the changes are said to be big.
      The ICC and its member organizations must have seen this and turned the situation into a business opportunity. For any interested party wanting to learn about the new terms, you first have to buy the new release of the Incoterms from one of the official ICC bookshops (e.g. $55 in the United States or 39.95 euros in Germany). To learn about the changes and to be able to make the impact assessment on your business operations, you are encouraged to sign up for one of the many training courses offered by the ICC and its member organizations (e.g. $350 in the United States, 390 euros in Germany).
      At the moment there seems to be no other way to learn first-hand about the changes and to make any necessary adjustments to trade and transport contracts prior to the terms taking effect on Jan. 1.
      It has become quite common for international and non-profit organizations to turn to such means to generate additional revenue, as their main source of funding — annual member contributions — are under constant review. Likewise these organizations are asked to do more and more with less and less. However, why use easy access to critical information in international trade as a way to make a few dollars?
      Customs administrations have to follow Standards 9.1 and 9.2 of the General Annex of the Revised Kyoto Convention, requiring them to ensure that all relevant information of general application, and any amendment, is readily available to any interested person. This key principle of trade facilitation should equally apply to those organizations that constantly demand trade facilitation from governments.
      It goes without saying that Incoterms are relevant information and that they should be readily available as requested by the Revised Kyoto Convention.
      Note: Trade facilitation is a constant political and business goal to identify improvements in the international trade supply chain. In times of economic crisis it helps to reduce the impact and to initiate economic recovery and in times of economic growth it helps to increase the impact on the national economies. This is the first column that I am writing for the American Shipper as an independent consultant. As from September, I have started a customs and trade consultancy business to assist governments in implementing World Customs Organization standards and other trade facilitation measures, as well as to assist international businesses in trade data management and trade compliance capabilities.
Logistics
IT thinking ‘inside the box’

      You probably noticed that a theme of this edition of American Shipper is centered on capacity constraints across modes and lanes.
      Our readers have made it abundantly clear that the lack of available space is the pain shippers and intermediaries are feeling this peak season.
      Much has been written on the nature of this capacity crunch including the lack of available trucks, drivers, containers, ships and aircraft. Far fewer discussions have focused on the importance of maximizing capacity inside of the box.
      “We are hearing horror stories of shippers trying to secure equipment and space,” said John Painter, vice president of worldwide sales at logistics technology provider LOG-NET Inc. “There is an explicit need to have a tool to help them ensure they maximize the utilization in the container or trailer.”
      “Load configuration capability applies to any box or piece of equipment including FEU, flatbeds, railcars, trailers and more,” said Derek Gittoes, vice president of logistics product strategy for software giant Oracle Corp. “Given that you have an assortment of products, what’s the best way to load them into a container or any equipment for that matter?”
      Correctly configuring and stuffing loads within the box is important in general but some modes demand more attention than others. “The biggest challenge here relates to ocean shipping,” Gittoes said. “You have to book your space far in advance of the time when you actually load your container. Stuff does not always show up exactly as you planned it.
      “Inside of Oracle Transportation Management we call this application load configuration or planning,” he said. “The tie-in to transportation management provides visibility to the product en route to be stuffed. This allows the plan to be reconfigured based on updates.”
      A number of technology providers provide load configuration and container stuffing systems and, like most logistics applications, deliver an array of models.
“Load configuration capability applies to any box or piece of equipment … Given that you have an assortment of products, what’s the best way to load them into a container or any equipment for that matter?”
      “What differentiates our load configuration application is it’s integrated into Oracle Transportation Management,” Gittoes said. “It’s not a bolt-on.”
      Similar functionality is available from other prominent transportation management systems (TMS) providers such as JDA Software, which acquired i2 Technologies in January. Standalone applications are also available from specialist systems developers.
      “The solution is designed to take into account weight, cube, dimensional and stacking constraints in an effort to maximize the utilization of a container or a trailer while meeting all the pickup and delivery parameters,” explained Razat Gaurav, group vice president of JDA Software Group. “In addition to creating a three-dimensional configuration of the container or trailer, the solution also provides loading instructions that can be used at the docks.”
      This type of load plan is particularly important when the dimensions of the products are large and the density is low, which will often cause a shipment to “cube-out” (surpass the space parameters of the box) before it would “weight-out” (surpasses the weight limits imposed to transport the box).
      Measures of an item’s fragility are a critical component of these load configuration systems. When an assortment of products is loaded into the same box these applications apply some intelligence to how they are stacked.
      Common sense would dictate that refrigerators should not be stacked on top of light bulbs and certainly these applications will tell you as much. What is more important is the less-obvious scenario where products in the same box might appear roughly equal in weight but differ in crushability.
      “Having the technology to enhance and maximize your stuffing procedure is very helpful,” Painter said.
      The benefits shippers and logistics services providers can expect from this type of applications can be summed up in a few key points.
      “The primary benefit is reduced transportation cost,” Gittoes said. “By definition the more you get in that box the lower the per-unit cost becomes.” Today boxes, and capacity to carry them, are scarce, which makes cost more than a measure of what you pay per shipment. The opportunity cost associated with failing to get every possible item included in each shipment is very real.
      “Secondary benefits include reduction in damage to freight,” Gittoes said. “The system looks at how you can load and stack product in the box.” This helps to ensure the least amount of loss possible.
      Gittoes outlined how more sophisticated users can leverage these systems for further benefit. “If you’re loading or delivering at multiple points there is a material handling and labor benefit. The system allows you to load with an understanding of unloading.” For example items destined for the first stop on a route can be loaded last so they are most accessible.
      JDA’s Gaurav points out that all of these benefits also lead to a reduction in carbon footprint. “By better configuring containers and trailers, shippers can significantly reduce the number of containers and trailers being shipped for the same amount of cargo leading to reduced fuel consumption” he explained.
      Shipment volume and variety will dictate the demand for a load configuration system. “Every logistics provider should have this kind of technology,” Gittoes said. “Large-sized shippers with significant import or export operations and multiple lines of business are also prime candidates.” These shippers will be more likely to    stuff    boxes with multiple products with varying dimensions and characteristics. Conglomerates such as Samsung may ship flat-screen televisions, air conditioners, and kitchen appliances in one load.
      Any shipper with far-reaching control over its supply chain should consider the benefits of these applications. Shippers who design their own load plans would not only save transportation cost and prevent damage; they can maximize the carrier capacity that is available to them by using the least space and equipment possible.
Ocean
Final straw for Southern California?

      The recent stalemate between unionized clerical workers and employers at the ports of Los Angeles and Long Beach has brought back some unpleasant memories in Southern California from the past decade.
      No thoughts of palm trees gently swaying, just nightmares of locked-out longshoremen, dozens of anchored vessels and extreme congestion.
      The threat of work stoppages hovers over the nation’s most important container gateway like a guillotine, always accompanied by the harrowing financial impact such actions might cause on a daily basis.
      But if work were to stop this time, the problems might be even more severe. In 2002 and 2004, when labor disagreements or structural supply chain challenges got in the way of the ports functioning as they should, trade was booming and Southern California had no realistic challengers to handle more than a fraction of their throughput.
      Only at the tail end of the frustrating peak season in 2004 did thoughts of cargo vacating Los Angeles and Long Beach seem real. But this year, the ports aren’t coming off huge growth.
      In fact, they’re just starting to return to volume levels seen five years ago. In December, they ended an 18-month run of declining cargo volumes. As the U.S. economy struggles to regain a lasting foothold, this much is clear: the San Pedro Bay ports are in a much more fragile position than they have been.
      But also, the U.S. goods movement industry is in a far more fragile position. There’s a real question as to how shippers and carriers would be able to handle a labor impasse at Los Angeles and Long Beach. As it was phrased to me by one shipper, “you can’t just redirect everything from L.A. and Long Beach.”
      The impacts would ripple not just to Southern California’s harbor, but all the way to factories in Asia — a region, it should be mentioned, that is also recovering from a 2009 that saw purchase orders stopped and factories shut down.
      With vessel space from Asia to the U.S. West Coast opening up in recent weeks — to the benefit of cargo owners — a work stoppage could be catastrophic for shippers who last year navigated dampened demand, then earlier this year fought tight vessel capacity and now face ocean container shortages.
      If it’s not one thing, it’s another.
      But getting back to the Southern California ports specifically, any sort of prolonged disruption at the two ports could finally convince shippers with discretionary cargo that they need to avoid the major West Coast gateway. Which would be a shame, since the two ports have plenty of capacity — and are building more — to handle additional volume.
      As the shipper told me, though, supply chain consistency is absolutely critical, and a shipper will do whatever they can to eliminate unplanned disruptions.

Important few months
      The next couple months should provide a clue as to whether strong demand will hold through the end of 2010 and into the first half of 2011.
      Drewry is forecasting headhaul transpacific demand to grow 5.3 percent in the second half of the year — in other words, solid but unspectacular.
      “In the containership business segment, there are a number of causes for concern, including the impact on the real economy of euro depreciation in Europe and sluggish growth in personal consumption and depressed home sales due to the employment stagnation in the U.S.,” said “K” Line in a statement announcing its first quarter results in late July. “Nevertheless, as the peak season approaches, robust cargo movements are expected to continue for some time on all routes, and especially on east/west routes.”
      Banking on huge growth during the peak season could be a dangerous game. Container volumes started strengthening in the last quarter of 2009, and also remember that volume in early 2010 was abnormally strong. So even a decent showing in early 2011 could lead to volume reductions on key lanes.
      Most analysts are forecasting growth for 2011, but at far lower levels than that seen this year.
      “K” Line’s statement is a good measure of the carrier industry at large — conscious and wary of the underlying economic problems, but ready for and hopeful that demand will stay strong.

Nhava Sheva congestion real or imagined?
      Reports in mid-July suggested that congestion at India’s biggest port complex — alternately called Nhava Sheva or Jawaharlal Nehru port — was becoming problematic.
      Carriers, including Maersk Line, OOCL and APL, started instituting congestion fees for shipments moving through the port. In Maersk’s case, it said the port was “facing severe congestion, which unfortunately causes inconveniences and delays both to you and to Maersk Line.”
      In late June, APL used the same phrase — serious congestion — in announcing its own surcharge.
      But officials at the port called the congestion charges “misleading and confusing” to the trade, and that the port strongly opposed the “unjustified” surcharge, according to a report in mid-July by Containerisation International.
      I suppose this is a question of what constitutes congestion. What a carrier deems a delay may seem like nothing at all to a port. But if numbers are any indication, the three terminals at Nhava Sheva are operating over capacity, if not necessarily busting at the seams.
      A proposal to construct a fourth terminal has been waylaid by typical bureaucracy in the Indian government (as has a dredging project that would allow more heavily laden vessels to arrive at the port, though this may be a blessing in disguise in the short term).
      Having visited two of the three terminals — ones operated by DP World and APM Terminals (the other is government-managed) — it’s safe to say they operate efficiently and to an international standard. But efficiency or not, when a terminal reaches its capacity, congestion is likely to occur.
      That landside infrastructure problems plague ports in India hurts the ability of those terminals to unlock latent capacity. These issues are often out of the reach of port officials, and so it’s understandable that they would decry surcharges that paint a picture of inefficiency at Nhava Sheva.
      But if the carrier deems a surcharge necessary, and if the shipper accepts it, it’s likely that congestion is a problem. There’s no escaping that reality.
Forwarding & NVO
Paper weight

      Freight forwarders are masters at moving freight, as well as paper across their desks — and lots of it!
Saphir
      “Honestly, I think there is more paper today than before computers,” said Albert Saphir, president of Weston, Fla.-based ABS Consulting, a firm specializing in customs broker and forwarder matters.
      There are numerous reasons why today’s forwarders are unable to rid themselves of paperwork, but one of the biggest obstacles is that “too many business partners — local and overseas — still deal with paper as their primary method of correspondence,” said Saphir, who annually visits numerous forwarder offices.
      Paper documents have also long been the forwarder’s security blanket, so to speak, against legal actions, government audits and customer service inquiries. These documents are tucked inside manila folders and contained in filing cabinets until at a certain point they are hustled off in lots to a warehouse for storage.
      Forwarders can easily spend tens of thousands of dollars a year in storage fees, never mind dealing with the logistics nightmare that may unfold when an employee must have a particular file or document pulled from storage, said Cara Fascione, vice president of transportation and logistics for Omtool, an automated document management services provider.
      It’s not as though there are tools on the market to help forwarders absorb the physical burden of paperwork. Omtool, for example, has helped other paper-intensive industries, such as health care, finance and legal, find ways to receive, organize and track documentation in an automated fashion.
      Integrated carriers, namely UPS, FedEx and DHL, have done a remarkable job within the industry to eliminate paper for their shipments, including commercial invoices in paper form. There are even some forwarders that have started to head in this technological direction.
      “Expeditors is probably one of the best examples out there that has very little paper left. I think they even shred everything they receive, unless it is originals needed for a certain transaction,” Saphir said. “It’s kind of eerie when you go to some of their offices and do not see the mountains of paper records you see elsewhere.”
      Expeditors may be best described as a “technology company that happens to be in the logistics business,” Saphir explained. “The amount of IT staff they have is enormous and they develop a lot of their own applications.”
      Most forwarders, however, don’t have the financial resources to support a large staff for in-house technology development. Yet the documentation burden for these companies is real. “Many of them are going crazy with all the paperwork,” Fascione said.
      E-mail has helped the industry to eliminate physical delivery of paper documents in recent years. But once these messages arrive in the forwarder’s computer, printouts are often made for rekeying data into other programs and to accommodate manual recordkeeping.
      Forwarders are generally apprehensive about considering sophisticated IT applications, thinking that it will cost them millions of dollars to implement and radical changes to their operations. But that’s starting to change. “Now there are ways to do it that are more affordable and you can immediately see the return on investment,” Fascione said.
      She recently met with a forwarder who employs about 250 staff in the United States and an equivalent number abroad. The company was in the market for a $125,000 system, but couldn’t find one to meet its needs for under $250,000. Some of the inexpensive IT tools it did find only met about 20 percent of its requirements.
      “Most of their information comes in by e-mail and they wanted to route it to where it needs to go, build upon it when necessary, and store it,” she said.    “Our system can meet this requirement significantly below their budget.”
      Andover, Mass-based Omtool started in the early 1990s as a fax services provider, before it moved into the electronic document capture, conversion and distribution business. According to the company, its AccuRoute system is designed to be accessible from any desktop computer or network-enabled scanning device and makes documents immediately accessible where and when they are needed.
      “In the case of a forwarder, it allows it to establish an electronic filing cabinet,” Fascione said.
      Other benefits of AccuRoute for forwarders include:
      • Centralization and management of “mixed-mode” documents, meaning it can combine both paper and electronic documents into a single distribution.
      • Creation of specific document formats and document compressions.
      • Integration with existing IT investments.
      The entry price for implementing AccuRoute is about $12,500, and the system is scalable according to a forwarder’s needs. The implementation takes about two days. “You don’t have to change everything in one swoop,” Fascione said.
      Omtool competes mostly with Hyland Software and EMC Corp., but these companies offer programs that are generally more sophisticated and expensive than the average forwarder requires or can afford, she added.
      Will the forwarder industry ever be able to clear its desks of paper? Not likely anytime soon, according to Saphir.
      “The forwarder segment is highly fragmented and the tens of thousands of carriers they use make it virtually impossible to go paperless as one system does not exist,” he said. “I know several forwarders who are trying to do whatever they can electronically only with ocean and air exports and it seems to work well on certain lanes if all play along.”
      The International Air Transport Association announced that its e-freight for domestic shipments went live in the United States in early July and is operational at 58 U.S. airports. IATA’s e-freight improves service and cuts costs by taking the paper out of the air cargo supply chain. The implementation team in the United States was led by American Airlines Cargo in close cooperation with forwarding giant DB Schenker Logistics.
      International e-freight in the United States went live in October 2008 and operates at Chicago, New York and Miami for imports and exports, and Atlanta, Dallas-Fort Worth and Los Angeles for imports only. There are plans to increase the number of U.S. ports for both export and import over the coming months, IATA said.

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