Jan 31 2016 0

2016 Ocean Cargo Roundtable: Capacity front and center

Our panel suggests that carrier consolidation will continue, but will be largely confined to specific trade lanes and commodity niches. In the meantime, shippers and carriers must cooperate at an unprecedented level for sustainable solutions to emerge.

The ocean carrier industry remains in the doldrums, as providers still struggle to find the right formula for profit. Shippers want service delivered on their terms, but know they must work with carriers to address pending regulatory hurdles. In our annual “Ocean Cargo Roundtable,” three leading business leaders take on the hard questions regarding new mandates, capacity and rates—and come to some rather startling conclusions.

Featured in this year’s roundtable areDon Pisano, ocean cargo chairman for the National Industrial Transportation League (NITL) and vice president in charge of imports for the American Coffee Corporation; Brian Conrad, Transpacific Stabilization Agreement (TSA) executive administrator; and Dan Smith, principal with The Tioga Group, a prominent freight transportation consultancy.

Logistics Management (LM): On July 1, 2016, a new amendment to the convention “Safety of Life at Sea” (SOLAS) will go into effect that mandates a “verified gross mass” for all shipping containers prior to loading aboard a containership. The International Maritime Organization (IMO) adopted this amendment in furtherance of its safety mandate, noting that intentional and accidental mis-declaration of container weights has been the source of various marine casualties. Are shippers and carriers adequately prepared?
Don Pisano: Frankly, I don’t think so. In fact, many shippers are not even aware of the new requirements. I’m sure some have asked their carrier representatives for guidance, although there is little if any to be found out there. The best resource for information is likely any trade association that the shipper may belong to.

Brian Conrad: I agree that the industry is not yet fully prepared for compliance with the new SOLAS container weight certification rules, but supply chain parties are coming together in various working groups and are making good progress in pursuing a fair, standardized set of weighing and documentation solutions.

Dan Smith: Indeed, industry readiness for SOLAS varies widely. Many export commodities are sold by weight and are already routinely weighed. Some marine terminals already weigh every load that enters the gates. In those cases, there will be a near-term challenge to certify the scales and the weights and to provide those certified weights on a timely basis. There will inevitably be some confusion, as SOLAS becomes effective, but those issues should be quickly resolved.

LM: How will carriers and shippers cope with the advent of mega-vessels in various trade lanes? What are the benefits and challenges?
Smith: The rush to order mega vessels has increased fleet vessel capacity much faster than trade is growing. The massive order book and the relatively flat trade growth outlook suggest that capacity growth will continue to outstrip cargo growth. In this environment, shippers are benefiting from rate wars as carriers cut rates to fill the seemingly bottomless pit of capacity. Carriers are not getting the full benefit of lower slot costs unless they can fill the slots. Instead, carrier top lines are shrinking from rate cuts.

Don Pisano: Time will tell, but I don’t believe carriers and terminal operators have proven that the mega-vessels are providing any significant benefits thus far. Surely, the carrier will benefit from the scale provided that they’re filling their capacity. However, much of any current benefit seems to be offset by costs at the berths.
Shippers will benefit if the cost savings are passed along in the freight rates, and of course there will be a positive impact on the environment. But in the meantime, shippers can expect to suffer from increased terminal congestion, the potential reduction in free-time privileges, and the frustration that comes along with it all.

Conrad: Obviously, in a global environment of sustained, relatively flat trade growth and low rates, achieving scale is critical to carriers’ long-term survival. The recent monetary environment of near-zero interest rates has offered an added incentive for lines to order new ships as part of their long-term cost reduction strategies. The assumption is that global demand and fuel costs must begin rising again sometime.

LM: Should logistics managers expect to see more vessel sharing agreements [VSAs] and consolidation?
Conrad: We will likely see some further reshuffling of VSA memberships as consolidation continues and as market conditions evolve in 2016. As to consolidation itself, prospects for further consolidation appear limited, and are likely confined to three categories. The first is smaller or niche carriers that don’t have extremely patient capital behind them to defend their niches. These are vulnerable and likely to be absorbed.

The second would be carrier pairings where the partners are not direct competitors and are looking to expand geographic or service scope to better utilize assets, such as an east-west carrier and a north-south one. The third possible category would involved multiple carriers with the same national origins, access to financing, and overlapping customer bases. These types may want to merge to achieve scale and defend their home market interests.

Smith: I agree with Brian, and would add that VSAs will grow and proliferate as carriers struggle to fill big ships and manage capacity—and consolidation will likely continue for the same reason.

Pisano: Keep in mind that it’s likely that carriers will look to maximize every strategic option available to ensure their profitability, which of course will include more VSAs and consolidation. The reality is that shippers want strong, reliable partners in the supply chain, and this will allow for more predictability and less volatility.

LM: Will we see advances in schedule reliability this year? What elements complicate this picture?
Pisano: Actually, I think we may see less schedule reliability as opposed to any improvement. I suspect that the larger vessels entering the trade will cause delays until there is better coordination and planning between carriers and the terminal operators servicing them.

Smith: Chronic unreliability is one of the biggest headaches for customers, terminal operators and drayage firms. Reliability was very poor before the 2014-2015 port congestion and remains poor. In fact, published data show that the largest vessels are the worst offenders. Complexity, poor stowage and the stress placed on terminal resources are all to blame. To improve reliability, carriers and their customers will have to accept significantly longer port dwell times for mega vessels. There’s simply no way an 18,000 twenty-foot equivalent unit [TEU] vessel can keep a schedule passed down from a 6,000 TEU vessel string.

Conrad: With the U.S. West Coast labor situation and related congestion resolved, the next hurdle with schedule reliability is the ability of ports and terminals to handle more concentrated surges of cargo in and out of terminals from mega-ships operating under vessel-sharing alliances.

In this case, it should be kept in mind that because of port, terminal, inland rail, Panama Canal and other infrastructure constraints, the average trans-Pacific vessel calling on the West Coast is still around 9,000 TEU, and the average trans-Pacific vessel overall is 7,600 TEU.

LM: With the Panama Canal expansion finally becoming a reality, will carriers redeploy their fleets to capture new share?
Conrad: The potential impact of the Panama Canal expansion on overall supply chain planning is difficult to predict and will be influenced by a number of variables. Key determinants will include the mix of discretionary cargo going forward; relative availability, reliability and pricing of truck and intermodal service; the new fee structure to amortize expansion; and the potential for vessels in significant numbers to exceed the new canal’s 14,000-TEU vessel size constraints, whether due to demand growth or cascading pressures.

Smith: I believe that carriers will respond to the new, larger locks by gradually increasing the size of their vessels to match trade growth. Those larger vessels will be cascaded from other services. However, there is little evidence that carriers are ordering canal-specific vessels in significant numbers. Since canal tools are based on vessel size rather than vessel load, jumping to very large vessels moving half full would be a financial disaster.

Pisano: I would hope to see additional routes being offered, because options are good for shippers.

LM: Finally, from your unique positions in watching this vital segment of the freight transportation market, how should carriers address their ongoing capacity management problems?
Smith: There’s no effective mechanism for capacity management between carriers, and every previous effort has failed in the long run. VSAs can facilitate capacity management on individual services, but not over multiple trades or in the fleet as a whole. Consolidation may be the only means of lasting capacity management, but there’s no guarantee that consolidation will result in order book restraint.

Pisano: To be honest, it’s a very difficult question to attempt to answer. However, there appears to be an obsession with size—size of vessels, size of fleets, size of market share—as opposed to an obsession for service, reliability and fair value, which in most other industries leads to success. Perhaps carriers should consider hiring some senior level managers from outside of the carrier industry or diversify their boards—no disrespect intended.

By Patrick Burnson, Executive Editor

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