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There’s no doubt about it-the global recession has resulted in historic losses for the world trade community. In fact, ocean container carriers suffered a whopping $15 billion in losses in 2009, reports Paul Bingham, managing director of global commerce and trade for IHS Global Insight in Lexington, Massachusetts. “This is unprecedented for the industry in terms of percentage losses of total gross revenues,” says Bingham. “But the industry also never faced a contracting world economy either and even in the deepest of previous global recessions, the world economy still had been able to grow slowly. But this recent recession produced significant and historic losses of double-digit declines in volume in 2009.”
Now in the midst of the 2010 peak season with its encouraging volumes, the industry is navigating a path toward a destination it hopes will bring it close to pre-recession levels of volume. As ocean carriers and ports journey to that safe harbor they must continue to navigate numerous phenomena including container shortages, idled ships, vessel capacity, rate fluctuations, slow steaming, an unsteady economy, hesitant consumers, and even survival itself.
So with the stark specter of the recession hovering over this current peak season, how are carriers and ports responding to the overwhelming challenges facing them?
Picking up the pieces
First of all, let’s define the so-called peak season. Historic patterns indicate that the season begins around May or June and continues through to September or October. As of late June, port and carrier executives reported dramatic volume increases over 2009 volumes. But, this strong activity must be considered in the proper perspective. “The drop in volumes in 2009 was extreme,” notes Frankie Lau, director of media and regulatory affairs for OOCL (Overseas Orient Container Line) based in San Ramon, California. “Import markets through the first quarter of this year grew by 13 percent. Although that might sound impressive, you have to consider that this is measured against the first quarter of last year, which was so bad.”
Bingham says Global Insight forecasts growth close to 12 percent this year measured against a very low level of trade last year. “So, this growth will get us close to the levels reached in the industry in 2007 before the recession hit at the end of 2008.” He reports that some carriers are forecasting they will be profitable in 2010. “But, this doesn’t mean they will offset the losses they incurred in 2009,” he cautions.
This is an unusual year, confirms Lamont Petersen, vice president of marketing for Dallas-based Hyundai Merchant Marine. “Normally we wouldn’t see our ships filling up until after July. At this time of year (early July) we should be experiencing capacity utilization in the ninety-percentile range entering the peak import season, which traditionally lasts from August through October. But currently, we are sailing at 100 percent capacity out of Asia already (as of the end of June) and we have been full since import volumes began to increase in the last quarter of 2009.”
Petersen attributes these dramatic increases to the decision of retailers and importers to restock their inventories, which had been significantly low coming into the first quarter of 2010. “When consumers brought out their wallets early this year, we were all caught unaware and retailers quickly tried to replenish their stock to capitalize on selling opportunities,” she explains. “Restocking that early in the year is highly unusual because usually the first quarter is the slack season for imports. When ships began to fill up quickly, this caused carriers to begin to add capacity in the second and third quarters of this year. I have been in this industry for 30 years and I have never seen a year like this where ships fill up so quickly and remain full this early in the year. The demand is unbelievably strong in Asia for space and equipment.”
Hyundai’s customers are advising that their volumes will continue to maintain levels achieved over the past few months, says Petersen. “So, we expect our ships to remain very full for the foreseeable future. If demand were to increase in the next few months, it would require extra efforts to cater to those additional requirements since our capacity is already well utilized.”
But it’s not all doom and gloom, she continues. “Some carriers are planning to have extra loaders, or unscheduled vessels, slip into rotations at origin ports with extremely high demand. This will help eliminate the backlog of cargo in Asia and help retailers get their goods to market in a timely fashion.”
Regardless of the booming activity, carriers admit they are haunted by a nagging question whether this represents sustainable growth. “There is still a lot of uncertainty over the health of the economy with high unemployment rates and a decrease in housing construction once the tax credits ran out,” Petersen says. “We are hoping this activity is not just a flash in the pan. Carriers wonder whether they should ante up and fully get back into the game again. We carriers face a very big gamble in making these decisions because the ante is extremely high.”
Lau perceives current conditions as a recovery and reports OOCL is confident at this point (late June) that volumes will remain strong through the end of the third quarter. “But as we approach the fourth quarter in October, we expect the market to slow down.”
At the Port Authority of New York & New Jersey, Peter Zantal reports decreases of 13 percent in volume last year. “If you had asked us at the end of last year or at the beginning of this year if we would almost be on track to recoup that 13 percent, we would have said absolutely not,” says Zantal, general manager, analysis and industry relations. “But so far it seems that we are on track to recoup almost all, if not all, of that loss.” If consumer confidence remains strong and if there are no financial catastrophes, the Port Authority could get back to peak levels achieved prior to the recession, he says.
The increases are encouraging, even against the stark reality of the deep nadir from which these volumes are rising. “I think most ports are experiencing similar increases,” continues Zantal. “Toward the end of 2008, things just fell off the cliff because we were at the height of financial uncertainty and people were hunkering down and not buying anything. I think people who still had jobs cut back on spending last year and now they are beginning to spend again.”
Zantal points out that companies were conservative in placing smaller orders last year. “They were not buying large quantities of goods because they didn’t want to be stuck with excess inventory.” He reports a rise in volumes at the port across all trade lanes. “Our port is the favorite gateway for Southeast Asia and we have had significant increases in furniture imports from Vietnam.”
Further south, Robert Morris, director of external affairs for the Port of Savannah, reports ‘exponential’ growth. “We had over 20 percent growth each month over the past six months, which is quite dramatic during a recession.” And during March, the port enjoyed a 33 percent growth in volume. “We believe we are in a recovery mode now, after the 10 percent cumulative loss in cargo we experienced last year.”
Morris notes that when the recession hit, carriers, retailers, and shippers were looking for locations for their load centers so they wouldn’t have as many calls. “They were also looking for highly efficient and cost effective ports and this is exactly what the Port of Savannah offers. So when shipping lines were consolidating their services, many of those services came here. While we weren’t adding cargo, we actually added services and additional vessel calls during the recession. When the recession eased, we had the capacity carriers and shippers required.”
Another factor playing into the port’s strength, says Morris, is the strong balance of imports (45 percent) to exports (55 percent). “This is very important because carriers can move out full containers, which means revenues for them.” Exports from the port include clay products, paper products, wood and forest products, poultry, chemicals, and tires. “This kind of import-export balance attracts more services to Savannah.”
On the West Coast, the Port of Seattle reports ‘surging’ volumes. “Our numbers this year relative to last year show double-digit growth,” says Linda Styrk, managing director of the seaport division. “We are not up to our levels of 2 million TEUs annually for 2006 and 2007, which were our strong years, but I think we are trending very strongly now. Originally, we estimated 1.7 million TEUs would be our target total volume for this year. But if this surge in volume continues throughout the remainder of the year, we could be closer to 1.9 million TEUs this year, which will have exceeded our forecasts.”
Overseas bookings are strong and in some instances, shipments are being deferred to future vessels because capacity is below demand in Asia for imports into the U.S., continues Styrk. “But the concern in the industry is whether this kind of growth will be sustainable.” She adds that a good portion of growth for the Port of Seattle is attributed to a new service launched mid-2009, which is a joint service between Maersk and CMA CGM. “This new service helped our volumes bubble up into double-digit increases because of the significant amount of 20,000 TEUs (on average) monthly the service contributes to our volumes.” She reports overall increases at the port of over 12 percent, and these increases could possibly approach 20 percent.
Styrk attributes this robust growth to the new service, to upsized vessels bringing in more volume, and to the fact that the Port of Seattle enjoys a very strong export market to balance imports. “We can fill ships to export capacity,” she says. Usually ships will weigh out before reaching full capacity because of the heavier nature of exports, which include wood products, metal scrap, hay and grain, frozen French fries, seafood, and stone fruits.
Recovery dynamics
Once carriers realized volumes were recovering, they began implementing actions to enable them to handle these volumes, including scrambling for container capacity, bringing idled ships back into service, instituting slow steaming, and negotiating for fair rates that had dropped precipitously during the depths of the recession.
Rebuilding Container Capacity
With trade volumes struggling to reach pre-recession levels, it might seem not to make sense that the industry experienced significant container shortages. “People might ask how there could be a shortage when we have not reached the trade volumes we were handling before the recession,” says Bingham. Several dynamics played into this situation. First, container manufacturers in China were not getting the usual annual orders for replacing old containers. So, the majority of these manufacturers simply downsized or closed their doors. “These boxes only last for about eight years, so there is attrition every year,” explains Bingham. “In one year then, the industry lost a substantial percentage of the global container pool.”
Another factor contributing to the shortage resulted from owners of containers who, in response to rising prices for scrap steel in China (relative to the demand for steel to build the country’s infrastructure), were selling their older containers to take advantage of the higher prices for steel scrap. “So we have strong reason to believe that the pool of boxes available for shippers globally actually shrunk during this time,” reports Bingham. Most carriers own a large percent of the containers they require, leasing a small portion from container leasing companies.
As far as equipment in Asia, the situation for OOCL was ‘tight’ and did not qualify as a shortage, says Lau. “We own most of our containers and with a pool of over 600,000 containers, we continue to meet the demand from shippers.”
A good portion of containers was also sitting unused on ships that had been idled during the recession. “But it just wasn’t efficient to move a mobile crane out to anchor to remove the boxes and transfer them to another ship just to make them available to the pool,” notes Bingham.
Recalling Idled Ships to Service
During 2009, carriers laid up a significant number of ships in an attempt to cut costs. “There was no need to have that extra capacity because the demand was so poor,” says Lau. “Unlike airlines that can reduce airfares to generate more demand, for us if there is no cargo, there is no cargo, no matter how far we drop rates. So, carriers decided to lay up some of their ships rather than waste excess capacity.”
Carriers were cautious in deciding to bring back all their vessels to service because of what that entails, including hiring crews, buying fuel, and the cost of operating the ships, explains Bingham. “Carriers wanted to assure that volumes were going to be sustainable before they incurred the expense of returning ships to service.”
Slow Steaming
In an attempt to cut costs, many carriers implemented slow steaming, which operates vessel engines slower and reduces the speed from about 24 knots to about 19 knots. “This practice consumes less fuel,” notes Bingham. The downside is the practice adds an extra day or two to ocean transit. “But, it also has a beneficial impact on the shipping industry in that it soaks up the excess capacity of idled ships because carriers need to add another ship to a trading lane in order to maintain weekly service schedules.” This has an indirect effect on the container fleet because the longer transit time means boxes are tied up for a longer period.
OOCL, for instance, added another ship to its trans-Pacific service. “We usually run five ships from Asia to the West Coast to provide weekly sailing on a 35-day cycle,” explains Lau. “But with slow steaming, we had to add another ship to stabilize reliability. So the drop in idled ships went from 11 percent last year to 3 percent this year, which is attributed to a combination of a slowly recovering market as well as carriers putting idled ships back into this kind of service.”
Lau reports that slow steaming first began to be deployed in late 2008 to contain fuel costs that were at historic high levels. He says the practice will likely continue until fuel prices drop to an acceptable level.
Negotiating Fair Rates
Carriers suffered severe rate declines once the recession bottomed out following the collapse of the financial market, says Bingham. “Rates were as low as basically paying only for the fuel, which meant the transit portion was next to free,” he remarks. Rates increased about 40 percent over what they had been at their nadir. “There are trade routes today where the rates are already 80 to 90 percent of what they were before the recession hit. There is a debate among shippers, who believe they are paying significantly higher rates. But carriers argue that from an operating perspective of being in the industry for the long term, they are not back to the rates shippers were willing to pay during the boom. Many carriers report rate increases are only getting them back to breaking even and not yet to the point of profitability.”
Bingham says he can understand the frustration of shippers paying higher rates and several surcharges while they also face inadequate available capacity. “Given that this situation is happening at the same time that some existing ocean vessel and container capacity has not been brought back into service means that statements from shippers relative to carriers is not unexpected,” he says.
Rates will likely increase throughout the industry, believes Lau. “This will be necessary for 2010 because of the huge loss the industry suffered last year. But, even raising rates will not bring us back to the levels we were at prior to the recession. What shippers need to recognize is carriers need to generate profits to support future investments in our business. This industry is so capital intensive and without profits, carriers cannot invest to improve their fleets to meet the increasing demands of customers.”
Competing for Resources against Other Trades
Another dynamic affecting the flow of global trade is the fact that each trade within a steamship company vies for the same resources-whether ships, containers, or other resources, explains Petersen. Each trade within a carrier operates like a business within a business. “Currently, rates in the trans-Pacific trade even now (late June) are still the least profitable of all the trades served by our company even though rates have risen this year.” She adds that while some customers are concerned by rate increases, from the carrier perspective current rates are not at a profitable level comparable to other trades.
Portside initiatives
Ports continue to invest in long-term infrastructure improvements that include port roadway networks and intermodal terminals. East Coast ports are readying for the increased volumes that the widening of the Panama Canal will facilitate beginning in 2014. Here are some major projects:
Port Authority of NY & NJ
The Port Authority is currently deepening the harbor in Port Newark to 50 feet by 2013. It is also building a fourth intermodal rail facility in Jersey City to add to the existing intermodal facilities in Port Elizabeth, Port Newark, and Staten Island. “The expansion of our intermodal rail capacity is indicative of how competitive the Port of NY/NJ is in our capability to handle large volumes of cargo,” says Zantal. “We envision 2014 and 2015 being very good years for us because we will be ready to handle larger ships coming from the Panama Canal.” The Port Authority is also involved with four major projects in Port Newark to expand roadway capacity and improve road safety.
Recently announced is the Port Authority’s acquisition of the only privately owned container terminal in the port network, which is the 100-acre Global Terminal in Jersey City. Zantal reports that Global Terminal will develop the adjacent 70 acres into a high-density container facility. The Port Authority also recently acquired 130 acres on the site of the former Military Ocean Terminal Bayonne in Bayonne, New Jersey, that will be used for future port development.
The Port Authority continues to believe that communication among all of the stakeholders is paramount to the successful operation of the ports, says Zantal. “We keep the dialogue going between all participants in order to mitigate any operational issues. This is a very complex logistics chain we have to maintain. In order to have as few hiccups as possible, we hold forums throughout the year so everyone understands how we can all work together to improve the operation of the port.”
Port of Savannah
The No. 1 infrastructure project here is the $550 million Savannah Harbor Expansion Project to deepen the harbor from 42 feet to 48 feet. “We have the funding in place to complete this project by 2014 when the Canal is ready for larger vessels, which we expect to call here,” says Morris. This project is part of a $1 billion, 10-year capital improvement plan that will increase the terminal’s container capacity from the current 2.9 million TEUs annually to 6.5 million TEUs annually. “We have been involved in converting our 1,200-acre footprint into a dense and tightly configured terminal that will more than double the volume of cargo we can handle now. This is the largest single container facility in all of North America.”
The port’s two on-dock intermodal container transfer facilities feed into the CSX and NS railroads. “We have two interstates four miles from here and tens of millions of square feet of available distribution center space nearby,” Morris says. “So we have a great logistics hub in a good location close to the large Southeast population, which is one of the fastest-growing regions in the country.”
In June, the port began receiving twenty-five new rubber-tire gantry cranes (RTG) worth about $45 million. This will bring the port’s RTG fleet to 96. “This represents a major conversion for us from a top-lift operation that used forklifts and top lifts to RTG cranes that allow us to stack containers higher and deeper,” reports Morris.
Port of Seattle
Several construction projects underway will facilitate capacity. “Our terminals can now handle double the capacity we have currently, so we could handle up to 4 million TEUs without doing anything differently,” reports Styrk. The current construction will improve the port’s road network. “We are creating an overpass that will facilitate moving cargo from several of our terminals to our warehouse district.”
During capacity constraints at Los Angeles and Long Beach ports several years ago, vessels called the Port of Seattle to help relieve congestion at these other two ports, reports Styrk. “We will always be a buffer for those kinds of conditions when Los Angeles and Long Beach have capacity problems.”
Styrk notes the industry is focusing on the National Export Initiative, which will help facilitate more export from national ports, thereby helping carriers achieve more of an import-export balance.
2011 expectations
So with all of these dynamics and initiatives evolving in the industry, many wonder what lies ahead for next year. Will it be possible for the industry to maintain these levels of volume and approach pre-recession levels? Bingham believes there will be a slowdown in the rate of growth, but there will still be growth, he says. “When we get back to normal levels of stock-keeping in the warehouses, companies will still continue to order and transport commodities that meet consumption demand. So we are expecting to see a maturation of these conditions.”
Lau notes OOCL is “moving in a cautiously optimistic mode right now, while still investing in the business. But, it is premature to project what 2011 will bring because the economic data available is so uncertain. One thing we would like to do is to work a lot more closely with our customers to understand their needs and expectations. Knowing what their peaks are and what their main origins are can help us plan our service network accordingly. Closer communication therefore is very important.”
Petersen, meanwhile, cautions that this will be a tough season. “Shippers and carriers need to understand each other’s needs and limitations. Demand will be strong and stretch current supply and this will cause a lot of tension for all parties. So the best way to manage this is to work closely with each other and be flexible so we can all get through this together.”
PIERS’ Trade Horizons industry forecast is calling for additional trade growth for 2011, adds Petersen. “But, they expect a more temperate rate than we have experienced this year. Hyundai expects more normal growth patterns for 2011 as well, and normal sounds very good at this point.” wt
Sidebar: The Next Generation of Green Vessels
In late June, the CMA CGM Figaro made its maiden call at the Port of Los Angeles. With a capacity of 8,500 TEUs, the vessel is not only the largest of the company’s containerships to call the port, it’s also one of the most environmentally-friendly.
One key feature of the Figaro is the Fast Oil Recovery System, which would significantly reduce the leakage of bunker fuel from the ship’s tanks if there was ever an accidental sinking or grounding. The system relies on a strategic network of pipes that facilitates the fast recovery of the fuel and oil contained in the ship’s tanks without having to open a hole in the hull. Initially designed for oil tankers, the Fast Oil Recovery System was adapted to containerships due to the joint efforts of CMA CGM’s New Building Department and the French company JLMD Ecologic Group.
In addition, like all new CMA CGM vessels, the Figaro is equipped with a new generation compactor for extensive waste management, thereby eliminating the need for incinerators.
The CMA CGM Figaro is also a miser when it comes to fuel, which is a good thing when you consider that the cost of fuel makes up roughly half of a vessel’s operating costs. An electronic injection engine reduces fuel and oil consumption (by 3 percent and 25 percent respectively) while simultaneously making the vessel better able to adjust to the company’s slow steaming policy. Meanwhile, the vessel’s twisted leading edge rudder optimizes the flow of water, considerably reducing energy consumption and CO2 emissions.
“Protection of the environment is an integral part of the company’s strategy, and is highlighted by the actions taken to minimize the impact of the Group’s activities and to support the development of new, more economic and ecologically sound solutions,” stated Frank J. Baragona, President of CMA CGM America.
The Figaro will be active in the company’s Bohai Rim Service, which calls the Chinese ports of Dalian, Tianjin Xingang, Shanghai WGQ, Shanghai Yangshan, and Ningbo, as well as the U.S. West Coast ports of Los Angeles and Oakland. - Lara L. Sowinski
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