JULY 2008

Freight space shortages to Asia continue

Container shipping lines in the Westbound Transpacific Stabilization Agreement (WTSA) say they are working closely with United States exporters to address continuing space and equipment shortages to Asia. But sorting out the complex operational and cost factors behind those shortages has left both carriers and shippers with difficult challenges.

A weak dollar and robust Asian demand for agricultural products, industrial raw materials, machinery, and other commodities, led to westbound cargo growth of nearly 17% in 2007, with a further 12-13% growth forecast over 2008-09. Other factors have also fueled the explosion in containerized export cargo. For example, earlier this year, commodity demand in Asia and rising grain prices pushed up bulk vessel charter rates to historic levels, causing shippers to shift more grain exports from bulk ships to containers.

While eastbound traffic grew by less than 1% in 2007, the volume of loaded containers shipped from Asia was still more than twice that of loaded container volume for return United States exports. That imbalance means transpacific carriers must continue to scale their fleets, routing and schedules for the higher-volume Asia-United States “headhaul” segment, and the current soft inbound market does not justify adding new capacity, particularly given record fuel and other fixed operating costs.

Thus, United States exporters and their carriers find themselves squeezed by factors affecting both directions of the Transpacific trade: A sharp increase in Asia demand for United States products, driven primarily by the weak United States dollar, along with a significant falloff in eastbound volumes as the United States economy has slowed, resulting in little to no new capacity entering the trade. Furthermore, vessels and equipment cannot easily be reallocated among trade lanes in a matter of weeks, given ship sequencing requirements, customer commitments in affected trades, vessel size and draft restrictions, port and terminal capabilities, and other considerations. In addition, the Transpacific routes are competing for assets with trade lanes that are still growing and offer more attractive economic returns, such as Intra-Asia, Asia/Europe. This situation is likely to persist until there is an improvement in the economics of serving the United States trades.

“No one sets out to turn away business, but at this point carriers face hard choices with each sailing about how best to balance competing customer demands for limited vessel space and equipment. To say that carriers are not doing all they can to accommodate the maximum amount of export cargo their networks will handle is simply inaccurate,” explained WTSA chairman Ronald D. Widdows, who is also CEO of Singapore-based container line APL Ltd. “Carriers are doing the best they can to work with their customers to satisfy their need for space under very difficult circumstances.”

Widdows added that the westbound commodity mix of heavier cargoes – frozen poultry, metal scrap, forest products, steel or machinery, for example – reduce a ship’s effective capacity, by reaching the weighted limit of the ship with fewer containers. Depending on the vessel involved and the cargo mix, a westbound sailing may load 35-50% fewer containers due to added weight. He acknowledged that, for the first time in over a decade, some United States exporters to Asia have experienced difficulty getting container equipment delivered to their premises for loading after having made a booking. The dramatic change in trade flows caught many shippers and carriers unprepared, Widdows said, necessitating some adjustment in cargo flow and equipment repositioning patterns within the United States.

Getting equipment to rural Midwest and Plains state grain exporters proved both difficult and costly, as inland rail and truck rates have increased on the order of 25-35%. Shipments of scrap metal and wastepaper, which has represented more than a quarter of the total export container market, have also surged, creating competition for vessel space with the higher demand for agricultural products and manufactured goods.

As vessel space has become suddenly scarce, some shippers have compounded the problem with multiple bookings in an effort to assure equipment availability. “On the one hand, WTSA lines report customers on the phone with shipments ready to go, desperate for containers and space,” Widdows explained. “On the other, they have phantom bookings with container and space reserved and cargo that never materializes.” This adds significantly to carriers’ challenges in matching vessel space and equipment with available loads. Most carriers’ westbound sailings are now fully booked six to eight weeks in advance, he added.

A final complication is that the westbound and eastbound trade lanes are reverse images of one another in terms of commodity and service characteristics. Eastbound equipment is typically unloaded at inland retail distribution centers that are nowhere near key agricultural and industrial load points for export traffic. Conversely, delivery points for United States produce, scrap metal, animal hides, chemicals and similar export shipments to Asia are often far from the Asian contract manufacturers of apparel, consumer electronics or toys awaiting that container for loading. The current surge in exports magnifies the logistical strains caused by these differences in the inbound and outbound trades.