Roll-up your sleeves for the next phase

By David Bennett
Vice President, Global Logistics Sales, Schneider Logistics International

In recent months I have discussed sustainability issues and what we should expect in the coming months as a result of current market conditions. Over the last several weeks, we have been in contact with providers on the ocean carrier side, discussing the latest round of rate increases (sustainability issues).

The feedback from the market has been volatile, as one would expect. Constant movement in the rate levels this year has created a very confrontational environment between the stakeholders.

Unfortunately, I believe this trend will continue, as the market remains in a state of chaos.

Being responsible for controlling cost in your supply chain has not been a pleasant experience in 2009 (thank goodness the New Year is around the corner!). As I predicted earlier, rate reductions achieved during the annual contract period in the spring were short-lived. Almost as quickly as the ink dried on those new contracts, carriers began publically stating that huge sums of money were being lost as a result of the reductions, and new revenue plans were being discussed immediately.

I realize this sounds like a broken record, but I warned that the current demand for implementation of a Peak Season Surcharge (PSS) and a Floating Fuel Surcharge would be coming during the third quarter. Ocean carriers are critical partners in your supply chain and when they are faced with losses in the billions, such as is being reported this year, anything can happen. After many discussions with stakeholders, I found myself wondering, “What’s the next phase we need to prepare for?”

Before I get into that question, I would like to point out that in some cases, the carriers have been their own worst enemy. In April of this year, oil was trading in the $40-50-per-barrel range. (Look out, here comes that word again: sustainability!) Mr. Kemmsies, my esteemed colleague, who also contributes a monthly piece to Cargo Business News, is more qualified to speak to this specific issue; but industry experts were warning that oil would move back to more consistent, sustainable levels in the $70-80 during the summer months. Why would a carrier agree to lock the fuel through April 20, 2010, knowing this key cost component would increase as the year progressed?

In terms of discussing costs with customers, fuel is easy. Have you tried to tell your local gas station owner that you are only willing to pay $2.00 per gallon from April 30, 2009 thru May 1, 2010? You know what their response would be. Oil prices have stabilized; and based on what I’m reading, that should continue, as we learned a harsh lesson on what the impact to the global economy is when speculators drove oil to record levels in 2008.

Implementation of a Peak Season Surcharge when carriers continue to lay down capacity is extremely hard to explain and expect. If you visit Asia, you will see a massive graveyard of ships sitting in Singapore, begging for deployment. The wall of empties sitting in South China is as impressive as the Great Wall of China, and plans are underway now to lay down additional capacity in an aggressive slack season plan. In other words, there is no peak season!

What can we expect as 2010 quickly approaches? I have suggested to many industry leaders and customers that pricing structures in the trans-Pacific trade are going through a radical change that will essentially eliminate rates being fixed for a twelve-month
period during the life of the service contract. We have moved towards a structure very similar to what carriers utilize in the other head-haul trade, Asia to Europe. In this trade, which is larger than the trans-Pacific trade, rates essentially adjust each quarter.

Customers enjoy lower rates during periods in which demand is down, but when demand is high, the rates reflect this. How can
retailers in Europe manage these swings in rates while we can’t do the same in the United States? Look for a similar pricing pattern in the trans-Pacific trade for the foreseeable future because we have tremendous capacity sitting on the side lines, begging for
deployment. As demand increases for this capacity — and it will — you will see rates continue to fluctuate.

Other issues to prepare for are complex, and over time, we will discuss them. A few things to ponder as we approach 2010 include:

• Will the current ILA negotiations result in a potential work stoppage on the East Coast?
  
• Which carrier cannot survive in this environment and what will the impact be when we see a major steamship line go completely out of business?
  
• Have we forced independent owner-operators to seek a new profession as a result of policies and rate structures that no longer make the business attractive?
  
• What happens to the dray rates that have been forced to the floor when demand returns?
  

Have you noticed that volumes are gradually returning and the double-digit losses reported by the ports have been single-digit losses (in terms of cargo percentages) compared to last year?

Challenges are on the horizon and the next phase in this complex environment is going to be just as tough as that we encountered in 2009. In other words, look for continued volatility within the supply chain in the New Year!

In This Issue

Up Front

News, Trends & Analysis
New Items

U.S. employment environment promotes import uncertainty

Supply Chain
How are you planning for the rebound?

Trade compliance often has a broader scope

Features
Optimism characterizes inaugural Southeast Freight Conference

Gateway at a glance: Northern California

Ports & infrastructure
Prince Rupert looks towards Memphis

Canada tries to standardize port performance metrics

Global players jockey over Arctic shipping routes

Port Products
Terminal management systems

Commentary
Roll up your sleeves for the next phase

On the Horizon
The Internet of 2020

Casualties