Market Overview

A Perfect Storm: Double-Digit U.S.-Asia Export Growth Coincides with Soaring Fuel and Inland Rail Costs, Equipment Constraints

U.S. containerized exports to Asia grew by a surprising 16.7% in 2007, according to the most recent PIERS figures, and are forecast to grow by another 12.8% in 2008.

A weak dollar has spurred already rising consumer demand in developing countries for agricultural commodities, as well as government and private sector demand for equipment and materials used in manufacturing and infrastructure buildout. Strong demand; drought in Australia and Europe; and a booming ethanol market have produced shortages and driven up world prices for corn, rice, meat, soybeans and other commodities. High bulk shipping rates and smaller, more frequent orders have made it attractive to ship more traditional bulk cargoes in containers.

Containerized horticultural exports more than doubled in 2007; metal scrap shipments were up 48%; dried fruits and nuts grew by 39%; paper was up 37%; newsprint exports increased by 85%; animal feed exports were up 23%, and meat and poultry grew by 20%. Total 2007 shipments were up around 700,000 TEU over 2006. Current growth trends are expected to continue through 2008.

Soaring cargo demand and higher overall shipment values are clearly positive trends for carriers and shippers. But they do not come without operational difficulties:

-  Net transpacific ship and equipment capacity has contracted as much higher-volume, higher-value import traffic has slowed and fuel costs have risen.

-  Capacity has migrated to other segments of carriers’ global operations – primarily Asia-Europe and intra-Asia – where demand, ad freight levels, have been measurably higher.

-  The more than 2:1 cargo and equipment imbalance that continues to favor imports also necessitates dedicating outbound vessel space for empty containers being repositioned to Asia.

-  The export cargo mix is heavier – compressed wastepaper and cotton bales, metal scrap, hay and alfalfa pellets, forest products, chemicals, steel, plant and construction machinery – constraining the number of containers loaded aboard ship.

-  Most long-term intermodal rail contracts are up for renewal over 2006-08, with sharp increases in rates, and little or no price break for repositioning empty equipment.

-  Import and export cargoes are not picked up and delivered in the same locations at either end of the transpacific move, requiring additional drayage cost over simply repositioning an empty container back to port.

-  Many major outbound cargoes such as wastepaper, cotton, feed, and animal hides, require cleaning, fumigation or other maintenance of the container at destination in Asia before repositioning for an import load, further adding to costs.

All of these elements, with their cost and service implications, challenge shippers and carriers to look for creative operational solutions that streamline processes and contain costs, as they also begin to re-think the westbound transpacific pricing structure.

Containers returning to Asia loaded must first be positioned over long distances from urban centers and regional distribution warehouses to rural and industrial load points, incurring significant rail and/or trucking costs. At destination in Asia this process, and the related costs, are repeated. Container equipment carrying industrial or agricultural commodities often requires cleaning, fumigation and/or repair before delivering the unit for loading in Asia.

A difficult question container lines often face is economic: Does the revenue contribution from a loaded outbound container outweigh the efficiency benefits of quickly repositioning empty containers directly where they are needed, in terms of time and cost?

This dilemma is further complicated by rising rail and trucking costs. Railroads have renewed many of their long-term intermodal contracts at higher rates (on the order of a 30% average increase) to cover new network investment; trucking rates continue rising, to retain drivers and cover regulatory compliance costs. The impact of these increases falls hardest on empty repositions that have no direct revenue offset.

Fuel Costs.  Marine fuel accounts for more than half of total operating costs for a transpacific round trip sailing, and marine bunker fuel prices have risen from $295 per ton in January 2007 to more than $550 in April 2008 - roughly an 87% increase.

This adds to pressure on carriers to collect full, floating bunker fuel surcharges – especially on intermodal moves, where ocean carriers are also paying rail and truck fuel surcharges – because half of a typical westbound sailing is empty containers that, at best, may have a small portion of pro rated fuel cost factored into eastbound rates at present.

Lines have begun to address the problem as key commodity rates come up for review, setting surcharges separate from base rates and allowing them to float so that carriers can more quickly recover costs as prices rise, and return savings to customers as prices fall.

Equipment scarcity. Getting empty containers to exporters’ premises for loading and covering the associated costs isn’t the only difficulty facing ocean carriers. Most container lines operate global networks, and that means at any given time trade lanes compete for a carrier’s global assets. Markets where demand is greatest, where equipment can be turned more frequently, where overall rate levels are highest, tend to attract capacity.

Transpacific inbound U.S. demand drives outbound vessel capacity and equipment availability. U.S. containerized imports slowed by 1.1% from Asia in 2007, while Asia-Europe and intra-Asia traffic grew by double digits. In the case of intra-Asia, demand has pushed up rates, and shorter sailings have increased equipment turns. As carriers have dialed back their transpacific schedules to save on fuel in slight of slower demand, ship and container capacity have shifted to other trades.

Refrigerated equipment. A reverse imbalance exists with respect to refrigerated containers: roughly four refrigerated loads move to Asia for every one returning to the U.S. A temperature-controlled container may cost as much as 10 times that of a standard dry container, and incur additional per voyage maintenance, repair and monitoring costs.

Demand in other trades such as intra-Asia and Asia-Australia/New Zealand and Asia-Latin America places operational and pricing pressures on transpacific equipment. At the same time, U.S.-Asia exports of fresh and frozen produce, citrus, frozen potatoes, meat, poultry and other commodities are expected to post steady growth again in 2008.

Here the competition on a westbound sailing is most intense – between full and empty containers, the transpacific versus other trades, and refrigerated equipment that poses an eastbound revenue disadvantage versus dry containers. Lines introduced incremental rate increases on a commodity-by-commodity basis during 2007, and have continued the strategy in 2008, to recover from the westbound segment a more realistic share of two-way transpacific sailing costs, and attract equipment back from other markets.

Solutions

Shippers and carriers have gradually begun addressing equipment availability problems, although there is no immediate quick fix.

To the extent that customers are able to plan their bookings well in advance – as much as 8 weeks out – they are able to secure equipment.

Year-round shippers and customers with a diversified mix of cargoes in both directions have used those advantages to make more favorable equipment arrangements.

Increased use of truck “street turns”, matching trucks that have just dropped off a load to a return load without returning to the port or some other central location, have increased truck and container velocity.

A growing number of shippers are moving cargo from their premises by truck or rail cars to the port – or a regional rail hub where empty marine containers naturally collect, such as Chicago or Dallas – for transloading.

Ports, ocean carriers, railroads, equipment lessors, commercial real estate interests and other stakeholders continue to study proposals for limited equipment pools, shorthaul rail shuttle service between ports and central container receiving facilities near inland distribution centers, and other strategies.

On both sides of the contract negotiating table, parties are sharpening their pencils to cut costs and improve utilization, as equipment and cost recovery become the deciding factors in keeping U.S. exports to Asia moving.

top


Home > About WTSA > Markets > Rate Guidelines > Ancillary Charges > News