Features
CHINA: Supply Chain Retooling

Increasing capacity and service frequency to China is going to cost more

By Richard Knee

It’s never easy to do in a slow or slumping economy, but port officials and maritime community members have some suggestions:

Ocean carrier representatives have some advice to U.S. exporters and importers doing business with China: If you want shipping lines to increase capacity and service frequency to China, consider shelling out a bit more. And if you want containers to be more readily available, consider taking a more active role in arranging it.

Moving toward the money

Westbound rates, which shipping lines describe as historically low, and declining eastbound volumes have prompted them to shift vessels from the trans-Pacific to trades that they say are more profitable. They’ll return to the trans-Pacific if it makes economic sense, representatives say, but the biggest concern, irrespective of trade lane, is the oil- and fuel-price juggernaut.
“More tonnage has been deployed to support trades that are yielding more and growing faster than the Pacific. It is a good sign of market efficiency,” says Dana Magliola, a U.S. spokesman for Maersk Line, a Denmark-based vessel operator. “The Suez route to the U.S. East Coast has so far had a minimal impact on the Pacific market, as it represents a very little fraction of the total cargo.”

Bunker fuel blues

Osuma Suzuki, who has held the titles of president, CEO and chairman of MOL America, added that some U.S. consignees are trying to buy goods on a cost-insurance-freight (CIF) instead of a free-on-board (FOB) basis — in other words, taking possession of shipments once they land in the U.S. rather than at the time of lading overseas — “to pass the risk of bunker surcharge fluctuations to the shipper.” But he thinks it’s a temporary measure.

“The more critical issue will be how long oil prices continue to rise and to what extent factories in China can absorb higher energy costs,” says Suzuki. “Inflation in China is yet another area of concern when it comes to maintaining a stable supply of consumer goods to U.S. importers.”

Magliola has a similar account regarding the CIF-to-FOB shift: “Large retailers seem to favor more and more the domestic purchase of imported goods. They no longer try to take control of the goods in Asia on a FOB basis, but wait until the goods are in the U.S. to purchase them from the supplier. This shortens their supply chains and helps them reduce their inventory.”

Small vessels may be in the future

The decline in Asia-to-U.S. volume is prompting carriers to shift vessels from the trans-Pacific to the Asia-Europe trades, and trans-Pacific services will suffer from bunker price rises if carriers bring smaller vessels — with capacities under 6,000 TEUs — into those shipping lanes, Suzuki says.

“Carriers may look for further consolidation of services through inter-alliance cooperation arrangements, which will allow the deployment of vessels larger than 8,000 TEUs,” he says.

For all-water shipments, the Panama Canal route is speedier than the Suez Canal, but the latter accommodates ships too large for the Panama waterway, and the smaller vessels that must be used on the Panama Canal are less fuel-efficient than the megaships, he says.

Accepting higher prices

At a recent gathering in San Francisco of agricultural-products shippers, the former managing director of the trans-Pacific rate cartels said higher shipping prices are likely to be a fact of life but don’t necessarily guarantee business success for U.S. exporters.
“The international container carrier community has finally realized that they must be recompensed … for these record fuel prices, and they are, to my limited day-to-day knowledge, extracting contracts and terms that actually reflect the bunker surcharge tables,” Albert Pierce, who headed the cartels and their successor “talking” agreements, said at the annual meeting of the Agriculture Ocean Transportation Coalition.

“Will simply paying for additional costs cover your needs, or will they not?” he continued. “Not sure, since there are other sources for your products — I don’t think as good a quality, nor in such abundance, but nonetheless, there are alternative sources. You and your buyers … have got to step up to the plate and accept the fact that things are never going to be what they were.”

He suggested that in contracts with ocean carriers, shippers and/or their customers take responsibility for returning empty containers to carrier-selected points in the destination country “or come up with a corporate plan to partner with an importer here in the U.S. to ensure containers are available where and when you need them.”