Container Shipping Changes With Shifting Market Tides

April 1, 2008
As commerce has become and continues to be more international, ocean container shipments have grown exponentially as a means of moving most any kind of

As commerce has become and continues to be more international, ocean container shipments have grown exponentially as a means of moving most any kind of freight from one port to another. Buffered by waves of change touching other modes of transport, ocean carriers are in a constant process of altering the way they conduct their business to meet current needs of shipping customers.

While chartered to serve a wider public with insight about the industry, the Container Shipping Information Service (CSIS) is able to provide a spokesperson from one of its 24 member companies to treat objectively with commonly shared issues. Andres Kulka, senior vice president of CSAV Group North America (Compañía Sudamericana de Vapores) shares just such insights.

LT: Anecdotal evidence is that import ocean container shipping is becoming more attractive than airfreight to the US-based shipping community. Is that an accurate perception? If so, what factors are working to facilitate such a modal shift?

Kulka: We do agree that is an accurate perception. In 2007, airfreight carriers grew at a lower rate than long term averages: 4% vs. 7%. In contrast, some shipbrokers estimate global containerized trade grew by 11% in 2007, and is expected to grow about 9% in 2008.

In an environment of high transportation costs, ocean container shipping’s mix of speed, cost, availability and capability offers a superior value proposition, especially as logistics and supply chain management processes and systems are implemented by a growing range of shippers.

Because of their shelf life or time value certain commodities must be transported by air. Increas
es in the need to speedily transport these commodities along with the greater economy will be a primary factor for airfreight growth in the future. But spiraling fuel surcharges and resulting cost consciousness among shippers opens opportunities for ocean carriers to gain market share in the broader spectrum of nonperishable commodities where airfreight’s cost effectiveness has diminished.

LT: There have been reports of shortages of containers, particularly for cargo moving from Asia. Is that true today? If so, what is being done to ease the shortage? What about the availability of containers for use in export from the US?

Kulka: Shortages of containers is produced by commercial imbalance situations. When exports outgrow imports in a geographic region, you may face equipment shortages, as was the case in Asia. When you add imbalance by type of equipment to the situation, the situation worsens. While at present leasing containers are available to meet the demand in Asia, container pricing has reached levels of $2,500 for a dry, due largely, to the increase of commodities costs and deterioration of the US exchange rate. Naturally, under these conditions, shipping lines are relying primarily on empty repositioning to Asia rather than use of fresh equipment.

The shortage of equipment in the US today is due to two primary factors. First, exports are growing at high rates, mainly because of devaluation of the US dollar. Additionally imports are pretty much staggered causing, again, a commercial imbalance. Secondly, last year many nonprofitable international intermodal lanes were eliminated. This reduced the stock of containers at some inland locations available for exports.

Location specific equipment shortages have created the need for increasing empty container repositioning. That is one of the reasons export freight rates have gone up.

LT: Media pays great attention to Asian business, but how healthy is container shipping in other regions, say Latin America?

Kulka: Trade with Latin America has been sensitive to the sharp fall of the US dollar. For example in 2007 the Brazilian real was down 17% and the Chilean peso fell 7%.

For exports total 2007 volumes for Latin America were about 800,000 TEU (twenty- foot equivalent units), approximately 20% greater than 2006. Top commodities exported to Latin America have been resins, chemicals, plastics, forest products and general merchandise. Higher rates have followed the increase in export demand.

Foodstuffs and forest products dominate import volumes from South America, about 970,000 TEU in 2007. Unlike exports, import volume growth—5.5% greater than 2006—has slowed due to the decline of the US dollar. Import rates have risen, but not nearly as strongly as export rates.

So far in 2008 the US dollar has continued its downward trend. We are very cautious about the future outlook. Even though exports will probably continue growing at high rates, imports might continue decreasing.

LT: Customer service is critical for the carrier community. What does the industry see as major requirements of its shipping customers and how is it responding to those needs?

Kulka: The industry sees three major needs for its customers. First, schedule integrity and equipment availability. The ability of complying with agreed schedules to deliver cargo and provide access to containers. Second, continuous improvement in documentation timeliness and accuracy: faster bill of lading delivery and a decrease in error rate. Finally, more efficient call centers with shorter holding times and better problem resolution.

LT: Security is a major issue for all modes. What sorts of technology is being used by container shipping providers?

Kulka: Concern about security is widespread and has been a topic of discussion for some time amongst all stakeholders in the shipping industry. Measures that are common practice today are bolt seals and cable locks and/or navalock (Locking bar securing devices).

In the future, passive RFID (radio frequency identification), like electronic seals will be the industry standard. The technology is fairly expensive at the moment and requires additional equipment to read and record data. With adequate scanners, seals can be read remotely and at various intervals during transit: upon receipt at the terminal; by stackers in the yard; at the crane at time of loading/discharge and at delivery with a full record of the scans and instant notification of a breach. Still, given its high cost it is difficult to think that in the short term it will be widely accepted by the industry.

Active RFID like GPS technology does not yet perform well under several transport conditions (under deck, container stacks, etc.) and so far are expensive to purchase, control and maintain. At some point, technology improvements will probably allow its widespread implementation. Various types of X-Ray equipment are now used, here and abroad, mostly under Customs control.

Also, all terminals are now employing a registration/I.D. system for anyone entering any terminal in the US, the Transportation Worker Identification Credential (TWIC).

LT: Diminishing freight volumes and higher bunker fuel costs, among other factors, have caused carriers to rationalize their lanes and frequency of calls. What does this mean in the short and long term?

Kulka: In general, shipping companies have low operational margins. When they face cost increases that are difficult to charge to customers and that make services unprofitable, one of the measures that they take is to rationalize capacity. Before eliminating a particular service, a carrier might try to operate a service with fewer vessels or lowering the speed of the current system to decrease fuel consumption. It might be done by canceling some ports on a rotation or by reducing its frequency, so that instead of providing a service on a weekly basis, it is offered every 8,9 or 10 days.

These measures have two main impacts. On one hand they reduce the service cost structure. On the other, there is reduction in supply. In the short term, the provider ends up with a less expensive operation and hopefully higher freight rates. In the long term, however, forces of supply and demand should prevail and the shipping company would end up having the necessary capacity and right prices for that market.

Today, in most of our lanes to and from the US, we have been able to charge customers for some bunker increases. Since it is a very “hot” topic in the media, everyone is aware of what is happening with the price of fuel. We have explained the situation to customers and added in most of contracts a variable surcharge fee. Fortunately the majority of our customers have been very receptive.

LT: In broad strokes, what challenges face members of the CSIS as they apply to shipper’s supply chains?

Kulka: Today supply chain management is more important than manufacturing as a differentiator. Many companies have changed the sourcing or location of their raw materials or manufacturing. So the real competition between companies is with their supply chain management.

In this context we are an important part of customers' processes to deliver a product on a timely basis to their customers. We are a very efficient means to transport products with regard to cost and environmental friendliness. We are also working very closely with customers to understand their needs in order to improve the quality of service.

However, we still face some important challenges as part of shipper supply chains. Key is being consistent in the schedules offered. Given the nature of our business, historically, this is something with which shipping companies have had difficulty. The industry is working toward improving in this area, starting with measuring our performance. Today we do provide more reliable service but believe we can do more.

Another issue is information exchange to and from the customer. Our customers need to know where their product is and when it will arrive. We are investing to improve our processes and systems in order to provide better tracking and tracing of cargo.

At the same time in order to provide better service, we need more accurate information from our customers. A better forecast of their needs is a key component in our operations. It’s been said that, ”Information can replace inventory,” which is something very important for both parties.

About the CSIS

Bring up the subject of ocean container shipments and images of those in transportation may stray to stacks of them below and far above deck.

While the shipping community understands the importance of such shipping, in order to share information about the movement of international cargo, 24 of the largest container shipping companies in the world joined in 2007 to form the Container Shipping Information Service (CSIS), Its aim is to reach a larger community, and as the web site notes, to provide, “a one-stop shop of information about the industry, accessible to anyone in the world, so that consumers, businesses, journalists and any other interested parties can find CSIS’ views, facts and figures at the touch of a button.”

As Goes the Economy . . .

Port Tracker predictions for traffic at the major US retail container ports are rather glum. The dominating factor is the national economic slowdown. Anticipation is the ports will see weak growth or declines in traffic when compared to 2007.

The monthly Port Tracker is produced by the economic research, forecasting and analysis firm, Global Insight for the National Retail Federation (NRF), the world’s largest retail trade association.

As far as congestion at the ports, at the time of this writing only Seattle and Tacoma were rated as medium for congestion due to short-term weatherrelated delays. All other ports surveyed–Los Angeles/Long Beach and Oakland on the West Coast; New York/New Jersey, Hampton Roads, Charleston and Savannah on the East Coast, and Houston on the Gulf Coast–were rated low for congestion.

Regarding current predictions, NRF vice president for Supply Chain and Customs Policy, Jonathan Gold, says, “Container traffic at the ports is a leading economic indicator because it reflects retailers’ expectations for sales. With the industry expecting the slowest growth in half a dozen years, we’re going to see little increase in cargo on the docks.”

Global Insight Economist, Paul Bingham, observes, “Most ports are operating without congestion from the harbor to the gate. Rail service showed continued adequate performance in January and apart from some weather disruptions intermodal rail operations are expected to continue to perform acceptably over the next six months.”

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