Port/terminal congestion and BAF costs challenge carriers

June 19, 2007 by SwizStick  
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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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