Shanghai congestion: it’s crunch time

Well, I received two pieces of news regarding the port of Shanghai this morning. First, as expected, the port of Shanghai is experiencing a massive surge in export volumes as exporters rush to get cargo loaded before July 1st, the date that the export tax rebate changes. I am being told that terminal gate traffic is severe and one of the terminals was partially closed yesterday and today because they couldn’t handle the volumes. Empty container pick ups are taking an average of 4-5 hours.

As if that’s not bad enough, the Shanghai Shipping Exchange Center, which handles export customs clearance, is performing systems maintenance this weekend which means any clearances scheduled to take place this weekend won’t be happening. So if you have any cargo leaving Shanghai early next week, you better make sure your supplier in Shanghai gets their export clearance done on Friday.

I wonder if companies will start re-thinking their sourcing from Shanghai if this summer continues to be as rough as it looks like it will be.

Is your warehouse too hot?

I was visiting a potential client yesterday discussing their ocean import business and touring their warehouse operations. As we walked through the warehouse I remember thinking to myself how thankful I am that I do not have to work in a warehouse environment especially during the summer months. I was really thankful after walking into to a 40′ container at the dock and seeing the container floor loaded with countless boxes (the container was much hotter than the warehouse). I asked my client how long it would take his warehouse crew to unload and sort/segregate the boxes and he said, “approximately three hours”. Three hours breathing in forklift exhaust and lifting boxes in 100 degree weather does not sound like my idea of a good time.

This report from Logisticstoday.com mentions a proposed bill that would call for workplace monitoring to avoid exposing workers to extreme heat.

Discussions of the bill have frequently referred to a fatal incident at a Rite Aid distribution center in Lancaster, CA. Though the coroner determined the death was not heat related, conditions at the facility—specifically its lack of air conditioning—have been used repeatedly in the discussion of the need for the safety rules change. In a statement issued by the International Longshore and Warehouse Union, the union quotes a company spokesperson allowing that heat may have been a contributing factor. In a subsequent interview with an official spokesperson from Rite Aid, the spokesperson said no such statement was made by an authorized spokesperson. The company’s position has been and remains that the death was not heat related—as indicated by the coroner’s report.

The proposed bill calls for training in recognition and prevention of heat-related illness. It also calls for workplace monitoring, preventive rest and work breaks, and ready access to drinking water.

Delays and problems from Shanghai and other Chinese ports

For those who have been paying attention to news in China the past few days, a number of events have taken place that are putting a strain on ports in China, particularly in Shanghai. This has the potential to cause shipment delays and problems with availability, which was already becoming a problem due to heavy volumes. Here are the issues at stake that are causing problems in Shanghai and elsewhere:

1. China cut the export tax rebate – This is the big one. Effective July 1st, the Chinese government will scrap or greatly reduce the export tax rebate on roughly 3,000 export products. This means that exporters who used to enjoy huge VAT tax savings on a wide variety of products will now have to pony up the full or nearly full VAT tax on their exports. While this will have a huge overall affect on the China supply chain, how this contributes to the current port situation in Shanghai and elsewhere is two-fold:

a. Panicked exporters are rushing orders and goods out of the country in an effort to export as much as possible before July 1st, when the export tax rebate cut goes into effect. Hence, volumes, already high for this time of the year, just got higher.

b. Chinese customs has increased their inspection rate in order to counter the illegal practice of some exporters mis-declaring their commodity and volume to avoid paying the higher export tax. This means more shipments being inspected which means an overall slowdown in the processing of containers at the port as well as containers being held out of the system for a longer period of time = equipment shortages.

All Roads Lead to China was all over this, see here, here, here, and here.

2. High temperatures and the rainy season in Shanghai are affecting the pace of Shanghai customs inspectors. This means even more slowdowns in container and shipment movement.

3. While I haven’t been able to find any official news release on the subject, one of our consolidators reported that there was a serious traffic accident in the Shanghai port area involving a container truck that killed 6 people. Hundreds of angry farmers allegedly blocked the highway and terminal area, which caused massive traffic congestion in and around the port. While I would hope that the situation has been resolved, our consolidator has warned that empty container pick ups can take up to 4 hrs.

4. I have received unconfirmed reports that rising volumes have contributed to carriers being overbooked by at least 30%.

If you contract directly with the container lines, be sure you are providing them forecasts of expected equipment needs well in advance of shipment date, as accurate as possible. Hopefully you are valued enough or negotiated wisely to ensure that your carrier “protects” capacity on their vessels for your shipments. If not, or if you are a smaller player utilizing the services of a forwarder/NVOCC, make sure you communicate your space and service requirements frankly and take steps to work with them to secure space and equipment. Those who already have back up carriers and/or providers in place for just such instances will be better prepared to deal with any potential problems or delays. Those who don’t would be well advised to consider alternatives to primary carriers and providers in case delays and problems begin to occur. Urge your carriers and service providers to communicate the situation honestly so you can be sure to manage the turbulence that is sure to come.

Port/terminal congestion and BAF costs challenge carriers

That was the overall message received from the recent TSA (Transpacific Stabilization Agreement) roundtable meeting with shippers back on June 7th. For those who don’t know, the TSA consists of the following carriers: APL, CMA-CGM, Cosco, Evergreen, Hanjin, Hapag Lloyd, Hyunday, K Line, MOL, NYK, OOCL, and Yang Ming and concerns itself with Trans-Pacific containerized trade. I was lucky enough to be invited to the meeting along with other participants that included major retailers, importers, and several large NVOCCs. The purpose of the meeting was really to reach out the shippers in a friendly, relaxed setting and discuss some of the issues and challenges in the market and how we can all work together to improve the contracting process as well as understand the overall carrier situation.

There were a number of presentations that included market conditions and other cost factors that affected carrier costs and profitability, but the two that stuck out in my mind were the ones about port/terminal congestion and bunker fuel (BAF). I wish they had provided a copy of the presentation on port congestion, it was an excellent one, all I can share with you are some of the notes I took:

- Annual costs of congestion are $200 billion annually: and that’s before you factor in the impact to the total supply chain.

- Just to keep up with containerized trade, annual investment in port infrastructure is in the billions. The U.S. as a whole is not even sure how much investment is needed to keep up with trade.

- Bottom line: Infrastructure can’t keep up with the pace of growth in international trade.

- The biggest market for containerized cargo? Intra-Asia, with 44.3 million TEUs

- Since 1990 world container traffic has been growing at 3x world GDP

- The 3 big FDI markets? No real surprise: China, India, Vietnam. Of those 3, India and Vietnam are major chokepoints. Why? = Poor infrastructure

- The U.S. must improve port/terminal productivity. The U.S. has the worst throughput numbers compared to Europe and Asia.

- No matter what happens in west coast port development (Mexico, Canada, OR, WA, etc.) Los Angeles/Long Beach will continue to be a major factor in Trans-Pacific trade.

- Protectionist politics is preventing the private capitalization of port/terminal expansion.

There’s been a lot of talk the past couple of years about capacity outstripping demand, but I’ve been pessimistic, noting that analysts were wrong last year. While I have been wrong on more than one occasion, I think I am still right in believing that demand will meet or exceed any new capacity coming on line, and citing rising terminal costs – due to increased congestion – as a key issue. From the TSA official website:

Most credible industry analyst reports suggest 9-10% growth in cargo demand for 2007, against about 13% increase in nominal ship capacity. That capacity is moderated, however, by a number of operational factors – the mix of container sizes aboard ship; stowage and weight limitations; load and discharge sequence; berth and channel drafts at most U.S. ports, and so on. A recent Goldman-Sachs industry report forecasts actual effective vessel capacity within 1-2% of cargo demand in 2007-08. In 2009, the transpacific market is expected to see demand exceed available capacity.

Despite industry reports of 8,000-TEU, 10,000-TEU and larger ships being delivered to global carriers, ships of that size are not deployed in the transpacific market. The average vessel size deployed in transpacific service is 6,200-TEU, typically carrying fewer than 2,500 containers, due to port and terminal constraints. Average vessel size through the Panama Canal to the East Coast is even smaller – about 4,000-TEU, up to a maximum of width and draft limit of 4,600-TEU.

It will be another 3-5 years before U.S. port terminals raise their productivity from the current 5,000 TEU per acre per year capability to the 10,000+ needed to match current productivity levels at Asian ports and effectively handle import cargo growth expected over time. The Panama Canal is currently operating at or near capacity and is on a container ship reservation system that also commands premium transit fee pricing. U.S. railroads are insisting that they will not fund costly new network improvements – double track, locomotives, switching, inland yard expansions – that cannot either pay for themselves through the pricing structure or for which they cannot receive public support such as investment tax credits.

At the meeting it was clear the carriers are also very concerned about rising bunker fuel prices. Some facts from their presentation:

- Weighted average bunker fuel prices doubled during 2005-2006, from $198-386 per ton.

- Bunker fuel makes up 40-60% of transpacific sailing costs.

- Because bunker fuel is a lower-end fuel, it is subject to limited distribution and production and receives a low priority when it comes to refiner capacity.

- Increasing equipment imbalance makes it difficult to recover costs on empty containers going back to Asia.

This proved to be a sticky subject, as the impression that many of the attendees got was that the carriers were complaining about BAF and wondering why U.S. shippers weren’t paying their fair share. They certainly didn’t intend it that way, but that was how most attendees took it.

My take is that no one is forcing the carriers to accept rates that don’t adequately cover their costs. Customers provide the carriers with the information they need to make a rate proposal. They let them know what traffic lanes they are interested in, the commodities the carriers can expect, and anticipated volume. The carriers in turn supply their customers with their proposed rates that are either accepted or rejected, with customers signing contracts with the carriers that give them the best prices at the level of service they require. Therefore, the carriers should be looking at themselves and asking why they are handing out pricing that doesn’t cover their costs. To paraphrase one attendee’s comments, if you don’t like the rates we are accepting, then don’t hand them out. The bottom line, of course, is that there is always at least one carrier who is willing to undercut his competition to gain new business – whether it’s cutting his base rate, or offering a fixed or reduced BAF, or making PSS and GRI all inclusive into the base rate. This in turn causes his competitors to react in kind and the whole cost structure goes out the window as carriers compete for business. That’s what we call the “free market”. And one day, as costs continue to rise, the carriers will have no choice but to raise rates or go out of business and then the pendulum will swing back in their favor. And the cycle will go on……

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