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Bennett Commentary: REAL signs of trouble By David Bennett, vice president, global logistics sales,Schneider Logistics International Last month my column was entitled “Early Signs of Trouble.” Based on what the market has encountered since the beginning of this cold, wet winter, we are in for “Real Trouble” as spring arrives. As previously reported, the carriers implemented the emergency revenue charge known as the ERC on January 15, amounting to a $400 increase for a 40-foot standard container moving on the transpacific trade. This increase was well-planned, well-executed and well-timed, as demand for the reduced capacity grew as Chinese New Year approached. Based on conversations we had with carriers and customers, most felt demand would fall off after Chinese New Year. As I commented last month, I believe the strength of this market might take many companies by surprise as rates are recovering almost as fast as they fell in 2009. The Georgia Port Authority recently held their annual trade conference, where stakeholders gathered in a to discuss challenges being faced in this market. For the first time that I recall, we had key import and export shippers faced with the same dilemma - rapidly rising rates and very tight capacity to meet their needs. To his credit, an executive from one of the top four ocean carriers in the industry faced these challenges head on, explaining why the carriers have no choice but to increase revenue. I have used the word “sustainability” tirelessly over the last year. Clearly rates were not sustainable, resulting in losses for carriers that have been reported to be in the neighborhood of $20 billion. The industry veteran outlined the issues the industry has faced, and the facts are difficult to debate or ignore. Shippers are now complaining loudly that rates are rising too fast and by too much. Typically a problem for importers, this time the same complaint is coming from the export market, which cannot find equipment inland; and when they do, the rate is considerably higher than anticipated. What good are service contract agreements if the agreed-upon rates rise within 30 days? How can rates be rising this quickly with so much excess capacity sitting on the sidelines? How can we plan shipping costs with merchants who negotiate purchasing agreements months in advance when the rate we provide today is different six months later? These are the questions on everyone’s mind and the level of frustration is growing daily. In fact it may be higher than it was back in 2002 during the labor dispute on the West Coast, when cargo was sitting off the shores of Southern California with the fall retail season kicking into high gear. One of my responsibilities in my current role at Schneider Logistics is China trade development , which is a fancy way of saying “pricing manager” for our NVO services. Throughout my career, I have been fortunate to be in positions that have taught me valuable lessons. Contrary to what people say, you can teach “an old dog new tricks.” We have taken a very cautious approach to this market over the last year and adopted a model similar to the Asia to Europe model. In this environment, rates fluctuate quarterly or in some cases every 30 days. It is obvious the rates established back in the spring of 2009 could not and would not hold up as the year progressed. It is not sustainable when it costs a carrier more money to lift a container onto the vessel than the generated revenue. Shippers lined up outside carriers’ doors and essentially created a bidding war for their volumes and it worked. Rates dropped to record lows. I have been warning shippers and customers not to fall into that trap door. Rates will increase as demand returns and rates are recovering much quicker than anyone predicted. In recent weeks, as Chinese New Year approached, we witnessed actions by carriers who provide the local NVOs in Hong Kong and Shanghai. This clearly reflects trouble for the shippers. Carriers utilize these important stakeholders to fill slots with aggressive spot rates week-to-week, based on load factors. There are times when the local CNF shippers get very attractive rates, known as the co-load market. It is a big market, and over the years this has played a huge role in the industry. As demand increased for the beneficial cargo owners (BCO), who have direct contracts with carriers (specific language written into their contracts that prevents increases without 30 days’ notice), the carriers began forcing a “Pre Chinese New Year Peak Season Surcharge” in local markets. In other words, to secure space, you had to pay a premium. Rates were increasing with a 24-hour notice by as much as $300 per container. It was even reported that some carriers were threatening to charge for “dead freight” against a booking that was made but not delivered. Never in my 20-plus years in this business have I seen such action or attempts to hold a market hostage for demand. Fortunately, our partners on the carrier side respect our relationship with them as a NVO partner and did not make these outrageous attempts. However, the effects of this could be interesting as spring approaches. There is absolutely no doubt that rates are going to increase in the next contract cycles. Demand in March looks much stronger than forecasted, and with the economy growing, we could see demand increase back to 2007 levels. In most cases, 2010 transportation budgets have been established and I hope that shippers planned for a volatile season, as early indicators show we will see continuous pressure on rates.	In This Issue Up Front News, Trends & Analysis News Trade Tools: Missing money Capitol Watch: Focus on job creation Supply Chain Chris Steele: Why you might be buying industrial real estate soon Compliance Corner: Use the Web for denied party lists Tech Trends: From open source to terminal visibility Product Review: Trucking drayage and chassis management software Commentary David Bennett: Real signs of trouble Gateway Glance New England Southern California The Port Community Bumpy Ride: Rebuilding PNW containerized exports Southwest Intermodal: Can intermodal incentives show the way? The Shipping Environment: Engaging in the community, slow steaming, and new green products Oceans are making waves Casualties The Big Texas spill leads off this month’s rundown Final Say Top 25 TIGER projects
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Bennett Commentary: REAL signs of trouble