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Pacific trade frets over U.S. backups
U.S. Port and Rail Terminal Congestion Confuses Price Negotiations, Supply and Demand Analysis
"Not so speedy delivery" is the mantra heard from many shippers. As 2005 progresses closer to the peak shipping season, concerns about port congestion arise once again. In the April issue of American Shipper, logistics professionals explain some of the challenges and strategies facing importers and exporters.
The article considers use of secondary ports, intermodal transportation, and distribution services among some of the strategies to reduce delivery times. Allow Deringer's experts to provide recommendations for speeding up the delivery of your international cargo transportation. Contact Matt Walker, one of Deringer's logistics experts, at 847-734-0007, for more information.
It's going to happen again, just like summer follows winter and spring.
The only questions are:
How bad will transportation congestion be in the United States in the coming peak season?
How long will the peak season and its associated problems last?
Have international shippers, intermediaries, ocean carriers and port operators planned well enough to deal with the capacity bottlenecks and delays when they arise?
"The topics facing non-vessel-operating common carriers in the months ahead are similar to those facing our carrier and customer partners in this trade," said Gary Osterbach, vice president, ocean, inbound at BAX Global. These include "guiding customers' shipments through the bottlenecks in the supply chain that will develop during the course of the year" and keeping up with new security requirements.
"Our logistics capabilities will be tested, and we are gearing up for the challenges that we will all face in 2005," Osterbach added.
Few transportation users or providers would disagree.
"It is more than likely that the situation will result in delays just as long, and potentially worse, this peak season," said Xavier Demay, director, regional tariff and product manager at Panalpina North America. "Neither the railroads nor the Los Angeles-Long Beach ports have short-term plans to build out the infrastructure needed to support the flow of the increased volumes."
Ocean carriers and NVOCCs have warned shippers that port and rail congestion will not end this year, given the investments and time required to fix the problems.
"With the estimated volume for 2005 and all the new 8,000-TEU vessels calling only the U.S. West Coast, we will still face the same port congestion as in the peak season of 2004, if not worse," said George Chien, tradelane manager, China and Asia at DGX/DHX, a Rancho Dominguez, Calif.-based NVO.
During the fall of 2004, delays for shipments via Los Angeles and Long Beach reached a week or more. Wisdom suggests that importers should expect the same delays this year if they still ship their containers via the southern Californian ports.
"The advice to customers is, of course, that they should not make their supply chains too tight," said Stephen Ng, senior vice president, transpacific at OOCL (USA). "They should allow more lead time."
"We have warned our clients to plan ahead, get organized and ship early," said Stephane Rambaud, president of Phoenix International, a major Midwest-based NVO. "We are warning them that the arrival of 8,000- and 10,000-TEU vessels, combined with an unprecedented rail gridlock that will not see much improvement before two years, do not augur well for the future."
"Inland Point Intermodal (IPI) moves are seeing delays of several weeks," he said.
"In addition to pure rail delays, containers seem to get stuck in container yards for a long time. Imagine the challenge in time spent chasing cargo, and customer service demands ... So essentially the importer is faced with ... higher costs and longer transit time," Rambaud noted "No wonder air freight volumes are increasing."
Infrastructure. Port and rail operators are scrambling for ways to increase physical capacity or improve the way existing capacity and terminal areas are used.
In July, the port of Seattle will reopen Terminal 25, which had been closed in 2002. The fast-growing Pacific Northwest port also expanded Terminal 46, used by Hanjin Shipping, late last year.
However, there is little space left for new terminals in Los Angeles and Long Beach, and none is under construction.
"Only one new container terminal - Pier S in Long Beach - is even in the design stages," Brian M. Conrad, deputy executive director of the Transpacific Stabilization Agreement, told the Women in International Transportation conference recently in Newport Beach, Calif.
"For most West Coast ports, any further buildout involves environmental and land use conflicts subject to lengthy government review and public opposition," he added.
Congestion "is always a threat," said Art Wong, spokesman for the port of Long Beach. "You never know how fast the trade is going to grow."
Wong hopes the new PierPass system encouraging off-hour terminal gate operations will help minimize congestion.
From this summer, shippers will only be able to avoid a new fee of $40 per 40-foot container in Long Beach and Los Angeles if they collect containers from the marine terminals during night and weekend hours, or use the Alameda Corridor for rail. The PierPass fees will subsidize the cost of operating off-hour gates at the terminals.
Some observers are hopeful that longshore manpower shortages this year will not be as acute as in the 2004 peak season, after the Pacific Maritime Association's recruitment of hundreds of new longshoremen for West Coast ports.
But one untapped source of asset efficiency at West Coast ports would be the extension of port working hours during nighttime for the loading and discharging of vessels.
"The terminals are not open 24/7 as in other major ports worldwide," said Peter Gruettner, president of Extra Logistics.
Occasionally, a carrier will hire night labor to load or discharge a containership, but it's not the normal practice. Carriers prefer to pay for less expensive daytime labor.
"We would like to see (the nighttime vessel handling) as a matter of course," said a spokesman for the Port of Long Beach. "We're trying to encourage (the carriers) to spread it out."
"In Europe and America, port developments have been delayed because of concerns over sustainable growth, and rail services lagged because of under investment," David Lim, president of Neptune Orient Lines, told an industry conference Feb. 28.
"This was made worse in some ports by their low productivity of terminal operations as compared to Asian ports, because of constraints in the growth of labor resources and the slow adoption of technology," he added.
"While the longshore labor situation will be improved from last year, basic port and rail infrastructure issues still exist, as does a shortage of harbor truckers," Osterbach said. "In addition the impact of PierPass, now delayed until June at least, is questionable, as the addition of a night shift may result in insufficient labor to man the day shift."
"There are many uncertainties, but BAX Global is certainly discussing various options with our customers now, before the actual problems begin," he said. "In addition, the length of the peak season remains to be seen - it could be as long as six months, which makes the situation even more critical."
"One of the things we're working on is ... to try to make sure that we can move the container out of the terminal in a very fast manner," Ng said.
However, additional concerns this year are the congestion of the Canadian port of Vancouver and the effect of the transfer of cargoes to U.S. East Coast ports, which are also becoming congested. The problem is spreading to other parts of the U.S. transportation network.
Lim said shipping lines "not only need ship capacity, we also need matching capacity in terminals and land transportation systems so that containers can be cleared all the way from start to final destination."
"This matching capacity had until recently been something taken for granted," he noted. "But the continuing growth of cargoes coming out of Asia finally exceeded the capacity of port and railway operators in some major markets last year."
Another sign of the premium put by terminal operators on available space is the introduction of much tighter rules on demurrage. These rules determine when and at what level charges are levied on containers that stay on the docks or in the terminal after an initial free time.
Terminal operators are putting pressure on shippers to pick up their containers very quickly after they have arrived. They are not tolerating the use of terminal space as a substitute for warehousing. The goal of marine and rail terminal operators is to avoid a gridlock and improve what they call "fluidity."
For shippers and intermediaries, the stricter demurrage rules mean the imposition of tougher deadlines and new operational constraints.
In February, Maersk Sealand warned shippers that terminals and railroads in North America will tighten container free time and possibly increase demurrage rates this year to maximize the use of existing space in their facilities. Referring to the widespread terminal congestion, rail and truck delays and equipment shortages experienced in 2004, Maersk Sealand said that an expected 11-percent growth in container volumes this year points to "an even greater strain" on land-side transportation assets.
Beginning March 15, Maher Terminals in the port of Newark was scheduled to introduce a tiered demurrage fee structure that increases fees as equipment remains in demurrage, Maersk reported. In addition, effective May 1, Maher will cut free time from five to four days for dry cargo.
Similarly, BNSF Railway will change its free time and demurrage charges at its U.S. rail ramps. Effective May 1, BNSF will calculate free time in calendar days, including Saturdays and Sundays, where previously the first weekend was excluded. In addition, it will raise demurrage fees.
"We anticipate more marine terminals and rail providers will announce similar adjustments," Maersk Sealand said. The ocean carrier suggested that this may lead to changes to its own tariff with shippers. It said it would monitor this trend and "align" its demurrage and free time policy with its landside service providers.
"We have already seen such a move among terminals," Ng said.
"The rail allows now only two days' free time at the rail heads for pickup," Gruettner noted. "So, you'd better have all your customs work done, your pickup number from the carrier ready and checkbook out. There is no flexibility or margin for error ... you have to follow the container like the space shuttle landing."
To expedite the shipment of containers through the port of Long Beach, OOCL is asking shippers to change their customers clearance from "local clear" to in-bond clear. Doing this allows containers to be moved immediately out of the terminal without waiting for local customs clearance.
Many of the measures to avoid the pinch points of congestion are well known, including the diversion of cargoes to U.S. East Coast or Pacific Northwest ports. In addition to preventive measures, there will be the daily task of managing disruptions.
"There are several options to minimize the impact of port and rail delays," Demay said. "First, increase all-water capacity to Gulf and East Coast ports. Second, explore transloading options as a last resort for some IPI movements. Third, the utilization of Oakland and Seattle-Tacoma ports as an alternative."
"Everyone is now using Seattle-Tacoma more than ever," Rambaud said.
The port of Seattle's box volume soared 54 percent to 170,565 TEUs in January, compared with the same month in 2004.
In February, the port of Portland's Columbia River Container Service Committee decided to study the cost of trucking containers to California in an attempt to position the upriver and underutilized Oregon port as a less congested gateway and alternative to the ports of Los Angeles and Long Beach.
Officials of the Oregon port, government and business representatives discussed a range of proposals to help attract additional container business to the port during the inaugural meeting Feb. 16.
To minimize the impact of expected delays and congestion in Los Angeles and Long Beach, OOCL said it is reviewing several changes, such as making Oakland the first U.S. inbound port of call, and transferring services to less congested terminals.
OOCL is also adding on-dock rail capacity at its Long Beach Container Terminal to accommodate three trains a week instead of two.
Hapag-Lloyd, a member of the Grand Alliance alongside OOCL, P&O Nedlloyd and NYK, has said it is considering calls at alternative ports such as Portland and Prince Rupert in Canada, or starting calls at additional U.S. East Coast ports.
Ng said OOCL is also evaluating the ports of Portland and Prince Rupert, "but at this point, there is no firm decision." It could take more than a year for Prince Rupert to develop the right infrastructure for large containerships, he added.
Ron Widdows, chief executive officer of APL, said recently the shipping industry "will seek other gateways" in North America as alternatives to the most congested ports (March American Shipper, page 89).
It appears that the traditional intermodal hinterland of Los Angeles-Long Beach is shrinking, as shippers consider moving Midwest-bound transpacific shipments via East Coast ports instead.
"Larger NVOs such as ourselves even envisage RIPI (reverse IPI) for this upcoming season," Rambaud said. This would mean Asian shipping cargoes via a U.S. East Coast port and then moving them back westbound overland.
"We do more transloading than ever before and use more all-water service, as well," Rambaud said.
"The main difference between today and the previous situation in Long Beach (strikes) is that we all know that Long Beach is a problem on every voyage," the NVO executive noted. "We plan accordingly, keep a closer eye on certain (hot) containers, change routings, etc. ... The impact and demands are enormous on our staff. What used to take three phone calls or checks on a Web tracking system, takes five to 10 times that."
"Shipco is introducing ... many direct services from all Asian origins to inland points in the U.S., with containers moving intact, rather than through a West Coast hub," said Klaus Jepsen, president of Hoboken, N.J.-based neutral NVO Shipco Transport. "These containers move either through the Pacific Northwest or ... via all-water services to the North and South Atlantic ports."
"More than ever before, we have diversified the types of carriers we deal with," Rambaud said. "We once thought that everyone wanted the fastest and best carriers at all times. With the current constant disruptions, it is important to offer different options when it comes to transit times, ports and pricing. What matters to the importer is a supply chain that does not have big gaps."
"The ripple effect of bottleneck issues pushes the responsibility to the service provider to resolve and avoid delays where possible," Demay said. "In many cases, when delays are unavoidable, the most we can do is proactively manage and continuously update transit information for our customers."
But Demay said U.S. Customs and Border Protection is working around the clock to clear containers. "The piers are making similar efforts to open for operations during night hours," he added. There has been no expansion in the number of port truckers, though.
This year is the first when NVOs can offer their customers NVO service arrangements, or NSAs.
"We will work closely with our customers to clearly identify mutual expectations," said Kenneth David Sine, director, transpacific trade at C.H. Robinson Worldwide. "Many of our clients have expressed their desire to formalize our discussions under a contractual arrangement."
"Panalpina has signed up customers on NSAs and we will continue to promote and encourage NSAs to more customers," Demay said. "This helps bring stability and commitment to the relationship."
But some NVOs remain skeptical about the benefits of NVOs.
"It is only my opinion, but the NSA is a tool we would only consider to realize a commitment from a customer when handling freight with a fixed asset such as a warehouse," Gruettner said.
Several carrier executives, including the Transpacific Stabilization Agreement (TSA) carrier group, have recently told shippers rates or surcharges may have to rise because of the increase in the charges of subcontractors such as ports and railroads.
But the Hong Kong Shippers' Council has dismissed this warning as a mere "routine" attempt to talk up rates as the new round of transpacific service contract negotiations starts.
"I would not take that seriously," said Sunny Ho, executive director of the Hong Kong Shippers' Council. "They're doing that every year."
Ho said all indicators point to a downturn or a "mild growth" in U.S. consumer spending this year. He also cited the record U.S. trade deficit, the weak U.S. dollar and high oil prices. Ho said 2004 was a very good year for transpacific carriers, who have reported record profits.
But, this year, transpacific cargo growth should be slower and a large number of containerships are expected to join the market, he added.
There are 60 post-Panamax containerships due for delivery worldwide this year, according to Drewry Shipping Consultants. "Past experience suggests that maybe 40 percent of these could enter the Pacific market - this would equate to five new strings of ships averaging 7,200 TEUs," said Mark Page, research director at the London-based consultant.
But the TSA and its carriers predict that the eastbound Asia-to-U.S. trade will expand 10-12 percent this year, after growing nearly 15 percent in 2004. Drewry Shipping Consultants also forecasts another year of double-digit traffic growth for 2005.
Carriers appear unconcerned about a slowdown of the transpacific trade and an increase in ship capacity.
"We are pretty positive as far as consumer spending, consumer confidence in the U.S. are concerned," Ng said. OOCL Projects 10 to 12 percent growth in eastbound volumes, he added.
"What we are seeing is that the unit price or cost per item is on a decreasing trend," Ng noted. "Even if consumer spending just stabilized at a certain level, for an absolute amount (in dollars), the volume of container imports would still increase."
"China is good at bringing the cost of all the commodities down," the OOCL executive added.
TSA said in November its carriers will seek May 1 rate increases of $285 per 40-foot container for Asia-to-U.S. West Coast shipments and $430 per 40-footer for all-water shipments to the U.S. East Coast and Gulf ports. The growing demand for U.S. East Coast all-water services will likely support a bigger rate increase than for shipments to the West Coast.
Chien, at DGX-DHX, believes the trade can absorb rate increases of about $200 per 40-foot container. Rambaud, at Phoenix, predicts eastbound rate increases should be "fairly conservative."
"For the past few years, carriers have become accustomed to creating fees," he added.
"The peak season surcharge (PSS) was originally viewed as a fairly original way of increasing profits, yet was believed to be short-lived. This year it probably will go from $300 to $400.
"Between the fuel and the rail issues, the carriers have a right to increase fees that are pass-throughs and somewhat legitimate. Importers will adjust their pricing accordingly, but I do not see these as a deterrent, other than maybe for a few importers. As long as we inform our clients ahead of time with clear bulletins (which we do) we seem not to have a problem billing increased FSC/BAF, corridor, PSS etc.," Rambaud added.
"Increases in transpacific eastbound rates really have to be looked at more in the light of the imbalance between eastbound and westbound volumes," observed Jepsen, at Shipco Transport. "They can't be looked at in isolation and each trade lane has to be evaluated on a 'round trip' basis. As such, in this case, modest increases may be warranted."
Drewry Shipping Consultants estimates ocean carriers had combined revenues of $25 billion on the transpacific route last year, of which about 84 percent came from eastbound traffic.
This produced "a massively imbalanced business structure for operators," said Drewry's Page.
"The almost complete marginalization of the westbound trade dates to the Asian crisis of 1997-98, when Asian imports plummeted at the same time as U.S. imports took off, and since then that trend has been further reinforced by the impact of China's massive industrial expansion," he said.
While "$4 billion of westbound income is hardly chicken feed, compared to $21 billion of eastbound revenue, it's clearly not going to be uppermost in carriers' thinking when making strategic decisions for this trade lane," Page added.
"The weak U.S. dollar has not done much to balance the trade since eastbound freight movement has by far outdone westbound growth," Jepsen said. "Furthermore, some larger economies operate with currencies linked to the U.S. dollar and therefore the impact may not be quite as obvious."
But Sine, at C.H. Robinson Worldwide, said China's "vast appetite for raw materials and capital goods" would continue to be strong.
Whatever the structure of the two-way transpacific trade, the fact is that Asian port infrastructures are coping with growing cargo volumes much better than U.S. landside infrastructures.
"Probably for the first time, congestion is a developed country problem, and not one for developing countries only," Page said. "Congestion surcharges will become more common - in some surprising places."
The Trans-Atlantic Conference Agreement introduced a West Coast port congestion surcharge last year and said it may resume it this year.
Rising transpacific eastbound rates will ultimately result in "somewhat higher costs to importers," Osterbach predicted.
Most parties involved in this tradelane understand the various underlying factors that affect carriers' costs, such as increased security measures, costs involved in truck and rail moves, but there is also the factor of supply and demand, the BAX executive added.
"While we and our customers can certainly understand this, what BAX Global would seek is some predictability and reliability of service in return," Osterbach said. "The most impacting costs are those that are not planned for, such as port delays that result in longer supply chains and increased inventory carrying costs to USA importers."
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