Bennett Commentary: Early signs of trouble

By David Bennett, vice president, global logistics sales,Schneider Logistics International

From rate increases to clean trucks
“Sustainability” was the buzzword of 2009 and I have to admit, I am guilty of overusing it. As we enter 2010 and start to review the predictions that I made in my last column, I am afraid I may find myself in a position of reminding everyone, “I warned you of this!”
Right out of the gate, the members of the Transpacific Stabilization Agreement, the group we all know as the “TSA,” announced an “emergency revenue charge” or ERC program that was going to take effect on January 15, 2010. Unlike the previous attempts to raise rates in July of 2009 when market conditions were still relatively unstable, the timing of this program was very well planned. What makes this revenue recovery program so different from the last attempt?

As I noted last month, at the beginning of each winter, carriers begin implementing their annual slack season capacity withdrawal in anticipation that a sharp decline in demand will follow the last push of cargo for the holiday season. Maintenance and repair programs are needed on the vessels that are in constant service, so it makes sense that for a short period - after Thanksgiving and through Chinese New Year - to complete this service when demand drops. With holiday sales stronger than anticipated, retailers continued to push merchandise out of the factories about two weeks later than normal, due to lower inventory levels vs. last year. As a result, space became extremely tight in December, which caused some bookings to be rolled, especially in North China, where capacity has been withdrawn at an aggressive pace. This has given carriers the momentum they have been desperate for since demand started to drop in 2008, and everyone knows what happens in this industry when demand starts to drop: rates follow.

Typically when carriers initiate a revenue recovery program like this one, the NVOs tend to take the full force of their actions, while BCOs get some form of preferential treatment because of their ability, over the years, to create individual boilerplates. As a NVO, the boilerplate is a non-negotiable item; however, the larger BCOs have managed to force their boilerplate on carriers over the last several years.

From the beginning of this trend, I felt this was an awful mistake by the industry, because it set different terms and conditions between these two groups of shippers. However, this is the beauty of operating under the ocean shipping reform act that allows carriers and shippers to enter into individual agreements that are “supposed” to remain confidential. This attempt by the industry is much different than previous attempts to obtain an increase while demand is slower than normal because they have figured it out this time! Stronger than anticipated demand during the winter, combined with the push to get orders out before Chinese New Year, have created the perfect scenario to obtain increases.

I am afraid this is an indicator of what lies ahead in the spring as carriers remind everyone that unless rates move towards compensatory levels, you can expect bad things to happen. The successful implementation of this ERC is a red flag warning that more increases will follow this year.

Clean Truck Program
We have all been reading and preparing for the impact of the Clean Truck Program and as the first week of January approached, everyone watched carefully to see how many truckers would be eliminated near the ports of Los Angeles and Long Beach. I have spent the majority of January in Southern California and I have to admit, I was shocked to see the drastic difference in traffic patterns on the world-famous 710 freeway! One of the key products we offer at Schneider Logistics is a port drayage service in several key gateways, so we have a significant stake in this event. Based on the level of phone calls in the first couple of weeks, it’s obvious the market is going to be under pressure to provide enough dray capacity in the market to meet the demand. It’s too early to determine how many drivers were unable to obtain new trucks or trucks that would allow them access, but it is very obvious that a significant number of trucks have left the business.

It is important as a shipping community to understand the ocean carrier and terminal operator side of this issue as well. With the
alliances in the trade, CKHY, Grand Alliance, New World Alliance and other vessel-sharing agreements, carriers have a need to move equipment around from terminal to terminal. Chassis and empty containers can easily become out of balance and many dray drivers made their living simply moving equipment around the terminals. With excessive capacity withdrawn from the market, finding drivers who are interested in this work is going to become a massive issue. Clean truck capacity will be in high demand for the cargo flowing into the inland empire and other regions locally. In order to get the required capacity to manage vessel and terminal operations, carriers will be forced to pay more. At the end of the day, that means shippers will have to bear that burden because the carriers certainly aren’t in a position to do so.

Carriers’ attempts to raise rates have been successful and dray capacity issues are surfacing immediately, which will result in significant increases in local trucking charges in Southern California. Now, if I could only pick the winning lottery numbers I could retire and let the younger generation deal with these issues! Since this isn’t going to happen, we must work together as stakeholders in this to find long-term solutions to these early signs of trouble.

In This Issue

Up Front

News, Trends & Analysis
New Items

Trade Tools: How Uncle Sam helps exporters

Capital Watch: Larger issues loom behind federal transport agendas

Supply Chain
Chris Steele: Development opportunities north and south of the border

Compliance Corner: Denied Party Screening – Make sure you comply...
comprehensively and timely

Tech Trends

Product Review: Invoicing and Auditing solutions

Commentary
David Bennett: Early signs of trouble

Gateway Glance
Panama

China

The Port Community
Game Changer: Expansion of the Panama Canal will reshape global trade patterns

All-weather ports are “all-in”

Breakbulk Quarterly: East Coast - Thinking outside the box

Breakbulk Quarterly: Brighter outlook for West Coast breakbulk in 2010

The Shipping Environment

Casualties
Navy tanker breaks loose, container crane topples,
longshoreman dies at Virginia port ... and much more

Final Say
Getting TIGER by the tail