Cover Story: SPACED OUT - Shippers face shortages of vessel space
and containers � along with rising rates

By Bill Armbruster

It’s déjà vu for a lot of shippers and forwarders. It seems like only yesterday that they were scrambling for vessel space and facing sharp spikes in freight rates, but that was before the market crashed. Now the squeeze is back � despite the waves of large container vessels spilling out of shipyards and trade volumes still lower than of a couple of years ago. Moreover, we’re still months away from peak season.

On the export side, this year’s shortages of vessels and container space are eerily reminiscent of the dilemmas that shippers and forwarders faced in late 2007 and the first half of 2008, when they often had to book their shipments four to six weeks in advance � and hope they could find containers to carry their goods. For importers, the analogy goes back further � from about 2004 to the first half of 2007, when cargo volumes were rising at double-digit rates and they often found themselves at the mercy of the carriers.

For the lines, those years were the best of times. Despite low freight rates on the export side, carriers were raking in record profits due to high rates on imports and booming business in other trades, particularly the Asia-Europe markets.

Then came the turnaround. The dollar began to weaken in late 2007, spurring a surge in exports while other economies were still going strong, even as the U.S. began sliding toward the worst recession in 70 years. While the weak dollar was good for exports, it was bad for import volumes. With demand for vessel space plummeting, shippers gained the bargaining edge. Panicky carriers slashed import freight rates in order to maintain market share � regardless of the impact on their bottom lines.

A new strategy
As the carriers hemorrhaged red ink and several teetered on the verge of bankruptcy, they came up with a new strategy in 2009 � control the supply of vessel space in order to drive up rates. Through a combination of laying up older vessels, returning chartered vessels to the owners, sharing vessel space, and slow steaming, the carriers drove active capacity down. Maersk Line, for example, had 19 vessels laid up as of early February.

But with cargo volumes surging, suddenly there is a capacity squeeze. The Transpacific Stabilization Agreement, which represents most carriers in the Asia-U.S. trade, said in January: “Forward bookings by the individual TSA lines suggest that vessel utilization levels in the trade will remain in the mid-high 90 percent range in most trade segments in the coming months.” In effect, that means they were at full capacity.

The TSA and its counterpart, the Westbound Transpacific Stabilization Agreement, have raised rates several times since late 2009, including the TSA’s “emergency recovery charge” of $400 per container. In addition, some carriers charged shippers an extra $200 per container during the weeks prior to Chinese New Year to guarantee that their cargo would move on the booked voyage.
The net result is that rates have more than doubled on many routes over the past few months. “Some shippers have told us they feel like they are being blackmailed by carriers who are showing little or no respect for contracts,” said Simon Heaney, editor of Freight Shipper Insight, a new monthly report published by London-based Drewry Shipping Consultants.

“It looks like the animosity between the two sides is intensifying, especially after the announcement by the Transpacific Stabilization Agreement carriers to impose an Emergency Revenue Charge mid-contract,” Heaney added.

Despite the recent increases, rates are still not high enough to cover costs, said Howard Finkel, executive vice president of trade for Cosco North America, expressing a commonly held sentiment among the carriers. Shippers and forwarders agree with the carriers that rates fell too low last year and that the lines need more revenue in order to survive.

“We’re hoping nobody goes out of business. Less competition is bad,” said Klaus Schnede, marine procurement manager for Eastman Chemical Co., a Kingsport, Tenn.-based exporter.

But like other shippers, he contends that the recent increases are “absolutely unreasonable.”
Shippers have made commitments to their customers at certain price levels, and now they have to pay freight rates twice as high as they anticipated, he said. “How can anyone run their business this way? We can’t help it that the carriers stumbled over themselves to reduce rates by so much in 2009.”

Getting rolled
Just as they did two years ago, Schnede and other exporters now find themselves booking shipments four to six weeks ahead. Still, it’s not uncommon to have their containers “rolled” � stranded at the piers because the carriers are giving priority to bigger customers and/or those that are willing to pay more than the rates specified in their contracts.

“If we want to make a booking, we have to wait four or five weeks. Then they roll you over because they don’t have equipment or space. It’s a catastrophe,” complained Peter Schauer, chief executive of Orion Marine Corp., a Chicago-based forwarder.

Importers have found themselves in similar predicaments. Pat Moffett, vice president for global logistics and customs compliance at Audiovox Electronics Corp., said his containers had been rolled six or seven times even before the end of January. Moffett was particularly peeved that on most of those occasions, the containers were loaded in Shanghai, but then taken off the ship in Busan so the carrier could replace his boxes with higher-paying cargo at the Korean port.

Asked if he would ever do business with that carrier again, Moffett responded that he had little choice because he needed that carrier in other markets. “Sometimes you have to bite the bullet.”

That’s already been a mighty big bite, but shippers will have a lot more to chew on in the coming months. Moffett said carriers are talking about raising rates by $1,000 per container when current contracts expire.

Shippers who still have time left on their contracts sometimes find themselves squeezed out of space by other shippers. “It goes to the highest bidder,” said Tibor Marosi, director of logistics services for New York-based Aries Global Logistics. “If you have a contract expiring on March 31, but the carrier signs a new contract with someone else starting February 1, then the guy with the new contract will get the space.”

Repositioning costs
Exporters, particularly in the interior sections of the country but also in Houston and the Pacific Northwest, face another quandary � a shortage of containers. That’s partly because carriers have reduced their intermodal service, which hurts importers, too, but also because the lines are unwilling to reposition empty containers from, say, Salt Lake City to Denver, to pick up an export load.

Consequently, shippers have to make their own arrangements with a trucker or a railroad to carry their cargo to a major intermodal center. That could easily cost the shipper an extra $1,500 to $2,000 a box.

Schnede of Eastman Chemical has found a solution by working out deals with truckers who are carrying inbound boxes to sites near his plant in Tennessee to bring empty containers to his facility.

Roger Scarbrough, president of Scarbrough International, a Kansas City-based forwarder, said he has not had too much difficulty finding containers for his export customers, but that he tries to book two to three weeks ahead. “It’s the last-minute stuff” that’s the problem, he said.

For the most part, finding containers is not that difficult for exporters if they are shipping port to port, Marosi said. But that’s not true in all cases. Even though Houston is a major port, shippers there face a chronic shortage of both vessel space and
equipment.

“Some lines have withdrawn service. They’ve created this nice artificial shortage. This is most evident in the trans-Atlantic,” he said.
Some relief may be on the way for shippers. Carriers returned 49 vessels to service in January in response to stronger demand and rising freight rates. But that still leaves 10 percent of the total container fleet idle, and with a large number of new ships scheduled for delivery this year, the overall capacity surplus likely will increase. Deliveries in January alone totaled 30 ships with a combined capacity of 133,000 TEUs of capacity, according to Alphaliner, the Paris-based consultant.

So maybe shippers won’t be so spaced out the rest of the year. If the economy goes into a double-dip recession, as some analysts predict, there may be plenty of excess capacity. Or the space squeeze may get worse, if the economy picks up and carriers remain firm in holding back capacity. Stay tuned.

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