Montreal Port Lockout Set to End; Expected to re-open on Saturday

The port of Montreal will re-open on Saturday morning after workers and employers reached a tentative agreement on pay and conditions.

The port was shut on Monday when the Maritime Employers Association (MEA) locked out 850 workers after talks broke down. The longshoremen’s union is expected to vote on the deal on Friday.

The MEA claimed the union was using pressure tactics like work slowdowns and refusing overtime to protest anticipated cuts in pay in their new contract. The longshoremen have been without a contract since December 31, 2008.

Details of the proposed agreement were not available. However, longshoremen’s union president Daniel Tremblay said the workers had “obtained very good conditions” and urged members to ratify the deal. The union agreed to end pressure tactics. The two sides will resume negotiations in October.

Container ships were diverted to Halifax this week causing delays moving freight to Central Canada and the U.S. CN Rail reported it was doing what it could to cope with the influx of containers in Halifax by moving in additional capacity. However, importers can expect delays as the port could not be prepared in time for the additional tonnage.

The port of Montreal moves over 1.2 million twenty foot equivalent units of cargo per year while Halifax handles just over 350,000.

No Solidarity Between Port Unions: Halifax takes Montreal lockout ships

It appears the Montreal Longshoremen’s Union appeal to their brethren in Halifax has fallen on deaf ears. Containerisation International reported today that what began as a trickle of ships diverted to Halifax “is approaching a flood.”

The 2400 TEU Maersk Patras was being unloaded in Halifax on Wednesday. According to Michele Peveril, spokesperson for the Halifax Port Authority, one ship was handled on Tuesday with two on Wednesday.

Ships currently being diverted to Halifax from Montreal include the OOCL Montreal, Hapag Lloyd’s Valencia Express, the Hanjin Montreal and four MSC ships. Canadian domestic carrier Oceanex is also diverting ships to Halifax.

Halifax facilities under normal conditions work at only one third capacity, so the additional ships can be easily accommodated.

The key issue in the Port of Montreal lockout is revenue guarantees. Compared to other North American ports, Montreal has had relative labour peace in recent years with the current dispute the first since 1995.

Both parties are scheduled to resume talks with a federal mediator present Thursday and Friday.

In the meantime, the Port of Halifax gets a much needed boost.

Has the Transpacific Import Trade run out of steam?

This week the Journal of Commerce reported that MSC announced the Peak Season Surcharge would not be implemented until August 15. In the same report, the JOC said that Maersk line has postponed the PSS, however, in speaking to an anonymous source at Maersk Line, they report that the PSS will be implemented in full.

As Container Shipping Canada reported on our last post, there are many reasons the PSS would not be implemented in full. Now AXS Alphaliner in their weekly newsletter that the new capacity coming into the trade is a threat to freight rate recovery. (See attached below)

There are reasons to believe the market is beginning to soften. The tide is beginning to turn. It is now a matter of now much rates will fall before carriers will pull back capacity. For now most carriers are full and boxes continue to be in short supply.

However as we reported last week, this is expected to be short lived.

AXS-Alphaliner Newsletter Summary Issue 29[1]

Party winding down on Transpacific Eastbound trade

With freight rates at or close to historical highs evidence is mounting the party is beginning to wind down on the Transpacific Eastbound trade. For over one month now the Canadian Transpacific Benchmark rate (i.e. 40’ standard from Port Hong Kong to Rail Ramp Toronto or Montreal) has ranged from US $4600 – 4800. This represents an increase over 250% from the same period last year.

Granted last year’s market offered what were the worst rates in anyone’s memory on all major trades. However, current rates are higher than any of the past five years on the trade. This includes the pre-crisis years of 2007 and 2008 when demand was soaring. Obviously, the carriers’ need to recover all of last year’s losses drove them to push forward any rate increases and surcharges. However, the way forward is not so clear.

The Peak Season Surcharge (PSS) of USD 400/40’ will take effect August 1. Carriers, of course, are publicly saying that they will collect the entire surcharge. However, despite a continuing container and capacity shortage in Asia, the full PSS will likely not be assessed strictly across the trade. There are many reasons why.

  • Rates at these levels will yield about $2000 per container for most carriers. This level of profit is often more than acceptable for most trade managers. Customers with long term relationships and even moderate volume with a carrier will be able to mitigate the PSS on this basis alone.
  • Recent economic data out of the USA is pointing to a much slower recovery. Furniture imports (a significant import commodity class) are expected to ease simply due to the fact that the U.S. housing market continues to be weak. U.S. consumer confidence was down considerably in June. All of this points to slower imports to the U.S. in the coming months.
  • As cargo to the U.S. slows down, capacity for Canadian cargo goes up, as the trade tends to call multiple North American ports with monitored allocations to each destination port. The Canadian economy is in much better shape than the U.S. This should open up more space to Canadian importers.
  • Services have been reactivated and more tonnage has been put into the trade since May 1. 
  • The pace of empty containers returning to China is accelerating as carriers push for empties loading out of all North American ports returning to China. This tends to have the effect of floodgates opening once the initial flow of empties begins to arrive.

 

Coming off a year of soaring rate increases and giving the restricted capacity available, it is somewhat counter intuitive to suggest that shippers would be in any position to negotiate the PSS. However, the first half of 2010 was an aberration and the carriers know it. Container shipping growth should normalize in the second half of 2010 and 2011.

With the top 20 carriers due to increase their standing slots by 20% (see table below), global trade growth is not expected to keep up. Rates should ease.

Shippers ought to take this into account when discussing the PSS or any other increases with carriers. The shoe is about to be put firmly on the other foot.

Top 20 by order book 2010 to 2012 revised[1]

Shipping Lines and Cartels: Where is the free market?

A cartel is defined as an organization of producers designed to eliminate competition amongst its members, usually by restricting output.*

In an article by International Freighting Weekly, John Lu, Chairman of Asian Shippers Council said, “…the shipping lines have started to work more closely and, in my view, this is the action of a cartel which has pushed shipping rates and surcharges artificially high.” Mr. Lu has a point. Profits in the shipping industry have turned 180 degrees over last year.

This week A.P.Moller-Maersk announced that profits would be much better than expected earlier this year. The company expects to book a profit of over $2 billion against a loss of over $1billion last year. Most of the profit will come from the container shipping sector. Other carriers are expected to follow suit. CMA-CGM’s declared a profit of $380 million in the first quarter of 2010; a $640 million turnaround from the same period last year. But how much of these profits are simply being at the right end of the market? Was the bounce back in the first half of 2010 so good that no one predicted, or could have planned for the additional capacity necessary? How much of the behaviour was actually “cartel-like”?

Conferences and talking agreements are common in the box shipping industry. In fact, one could make a fairly reasonable argument that the dismantling of conferences by the European Union made a significant contribution to the liner losses in 2009. At the very least, it didn’t help that lines could not publicly discuss capacity issues. But did that stop them?

There are certain industries where the formation of cartels (or cartel like behaviour) is rewarded. OPEC of course is the most famous cartel. OPEC tightly controls the supply of oil produced, and by doing so most of us are paying much more today for a litre of gas than we were even five years ago. Economics Explained* discusses the conditions necessary for cartels to thrive.

1) In a perfectly competitive industry, profits will increase if producers enter into an effective agreement to restrict output.

Carriers have successfully restricted output by first idling ships and, then slowing them down. In the aftermath of the 2009 bloodbath, and the abolition of conferences in the Asia – Europe trade, the industry had to do something to ensure the market was not over supplied. While there is no evidence of collusion, many long time industry observers mentioned that the collective laying up of ships was the closest the industry had ever worked together. There is a plausible argument to be made that carriers would have had an agreement to reduce capacity as so many would benefit from the reduced supply.

2) To achieve and retain the benefits of monopolization requires more than just agreeing to restrict output. An effective cartel must be able to police and enforce its output quotas because it is in any one producer’s interest to cheat.

While the carrier’s may have worked suspiciously tightly together to restrict supply, there is no evidence whatsoever that they had anything that related to a policing or enforcement mechanism.

3) An effective cartel must be able to control entry into the trade.

Due to the high cost of capital, there are numerous barriers to entry in container shipping. In fact, global carriers have all of the major and medium sized trades covered. New entrants are rare. The newest The Containership Company started a transpacific service this year with four ships serving only one port in China and one on the U.S. West Coast. Globalization has forced carriers to expand or get bought out. The dozen or so truly global carriers can effectively keep new companies out of the market by swapping slots, covering multiple ports and taking up ship building capacity by constantly ordering new ships.

4) In the short run, the demand curve must be fairly inelastic for the cartel to be successful.

The only real demand elasticity in container shipping is that of commodities that can be switched from break bulk to containers and back. In this case, the price point for container shipping against break bulk is relevant. However, in the merchandise trade a 5% drop in price does not result in a 5% increase in aggregate volume. Despite the wild fluctuation of shipping prices, volumes have risen steadily (2009 the exception) for decades. Most retailers’ supply chains are in one way or another entrenched in globalization. Even if importers wanted to change their sourcing due to higher shipping rates, they might be hard pressed to find adequate suppliers close to their markets. And they will likely find that many of their old local suppliers are also outsourcing. This is certainly the case in North America.

The top 10 carriers in the world control half the global fleet. Moreover, they also control half of the new buildings on order in the next three years. This group alone could keep prices high for many years to come despite fluctuations in the economy. But the test whether this group is running in a cartel-like way appears to be coming.

This year and next shipping lines will add about 20% to the fleets of the top 20 carriers (see table on link below). Uncertainty in the American economy continues with sluggish employment growth and a depressed housing market. While Europe’s difficulties with Greece appear to have subsided (resistance to reforms over the $134 billion dollar payout is losing steam), growth is still expected to be anaemic in 2011. If box shipping supply suddenly outstripped demand, as could plausibly happen, in the last quarter of 2010 and first quarter of 2011, how will the carriers react?

The real lesson for the shipping lines in 2009 is that they are able to effectively control supply. The mechanisms to manipulate the market by choosing to keep ships out of service or slow steaming are now firmly in place. The question is not whether they will do it again, rather how quickly will they react to the downturn next time?

* Economics Explained fourth edition, Linsday/Pervis/Sparkes/Steiner  pp 314-320 (Harper & Row, copyright 1982)

Top 20 Liner Carriers and their Order Book (OB) 2010 to 2012

The latest container shipping news on audio

Container Shipping Canada News

Here is our first audio cast of the latest container shipping news. This will be a weekly feature. Why read when you can listen to the latest news!

I hope you like the format. If you have any suggestions, please do not hesitate to let us know.

Why Evergreen and OOCL are a cut above the rest: One Man’s Theory

While it may be difficult to find a silver lining amongst the clouds that hung over container shipping in 2009, Evergreen Line and OOCL may have found it as reported American Shipper reported in July 2010. In its annual edition Who’s Making Money (aptly titled Who’s Not Making Money this year), American Shipper reported 15 carriers taking sharp operating losses in 2009. (To See Table Click Here)

While this comes as a surprise only to those living in a cave the past 18 months, upon further examination of the financials, Evergreen Line and OOCL come out as clear winners. (World #2 MSC and #3 CMA-CGM do not release financials, although arguably they would not have fared as well.)

A key indicator of a carrier’s financial success is their profit or loss per TEU measured against the competition. (See table) This simple indicator gives a clear picture of the carrier’s ability to select the most profitable cargo and trade lanes, and in more difficult times, de-select money losing freight.  Evergreen and OOCL booked a loss per TEU of $75 and $78 in 2009. The two closest were China Shipping and Maersk who recorded a loss of $138 and $151 respectively.  Bringing up the rear was troubled Zim Line which lost $375/TEU on against a relatively low volume of 1.8 million TEU.

Information technology could give them the edge

So what sets Evergreen and OOCL apart? One likely possibility is systems. It has long been known in industry circles that OOCL has one of the best IT systems and processes.  This critical side of the box shipping often goes unnoticed and unreported in the industry media. It is much more exciting to report multi-million dollar ship orders and discuss container shortages than compare carrier IT.

However, good data is paramount in making key decisions on cargo. This is especially critical in difficult times when a carrier is forced to decide which cargo to de-select.  Accurate up-to-date cost accounting systems allow trade managers to easily evaluate a particular piece of business on the basis of whether it makes a contribution to fixed costs. This not only depends on good data entry, but also requires an integrated global system.  A decision can be made by the carrier, then, whether to continue to carry money losing business for the commercial aspects of the account, or drop it altogether. Poor decisions today are a result for the most part of inaccurate, incomplete data on reports rather than incompetent management.

Good IT systems also allow for a smooth running documentation department as all the elements to create the bill of lading are updated in the system and fewer bills require manual re-work. Of course, the fewer b/ls requiring manual re-work, the fewer people need to be employed. Some carriers struggle with incomplete EDI, inaccurate tariff rate filing and out of sync equipment data which require manual work-around to create the final documents and of course make it difficult to satisfy customers.

Good IT systems and sensible standardized processes allow management the accurate reports necessary to properly assess client, service and trade profitability at a glance. Evergreen Line and OOCL are clearly industry leaders in this area.

Comments positive and negative are most welcome.

The Time is Now for Greener Supply Chains

The White House Group on Linkedin’s professional social networking site contains a thread called Anti-Climate Change Emails that to date has 6,739 posts. It was created six months ago in response to the news that some of the scientists at the University of East Anglia admitted discarding some relevant raw data on which predictions of global warming were based. Participants in the thread range from accomplished scientists to lay people. Opinions, and real scientific data, are posted on both sides of the man-made global warming debate.

Some posts are filled with complex scientific data (miles over the head of this writer) providing convincing arguments on both sides.  The points and counterpoints fly back and forth. Is the Arctic ice actually shrinking? Is CO2 really a pollutant? When will we reach the tipping point? Does anyone believe Al Gore? Conspiracy theories run rampant.

The debate casts doubt on the accuracy of the conclusions in the UN Intergovernmental Panel on Climate Change Report. Such scepticism is prevalent in much of the mass and internet media.   It should come as no surprise, then, that few shippers and 3PLs choose green carriers above all other criteria according to the Supply Chain Sustainability survey conducted by Logistics News leader, eyefortransport, in preparation for the upcoming Supply Chain Sustainability Conference in San Francisco October 28-29, 2010.

Over 600 Shippers (48%), 3PLs (29%) and supply chain service providers (23%) responded to the survey. Questions ranged from their understanding of the various Green House Gas protocols to their importance of it in their supply chain and their future implementation plans.  While the majority of shippers and 3PLs ranked the importance of environmental issues to supply chain strategy as a priority, less than 10% said that they rely on sustainability reports when selecting a service provider.

In other words, while companies might have internal green supply chain initiatives, they do not rely solely on that when choosing a service provider. In fact, when shippers were asked what the Key Drivers were for Investigating Sustainable Supply Chain Initiatives, almost 80% chose Financial Return on Investment as being Important or Very Important. Only 50% ranked B2B Sustainability reports as being Important or Very Important.

When shippers were asked what the biggest barriers were in adopting Green Supply Chain initiatives, 75% reported that “Payback Period Too Long” as a big barrier, barrier, or somewhat of a barrier. When 3PLs were asked the same question, 90% responded that “Customers Do Not Want to Pay More” was a big barrier, barrier or somewhat of a barrier. The bottom line is that shippers will only be willing to go green if it helps the bottom line – and quickly.

On the marine side, where container carriers move 90% of international cargo, the introduction last year of slow and super slow steaming have significantly reduced GHG emissions. However, Containerisation International reported recently (June 2010, supplement issue on Germany) that “ocean carriers have camouflaged their requirement for slow-steaming behind the need to reduce CO2 emissions. Anyone arguing against them can therefore be accused of not being ‘environmentally-friendly’.”

On the subject of the choice between road and rail transport, the same article goes on to say that “Despite much talk about the need to save the planet, shippers actually increased their use of road transport last year to/from Hamburg, from 64.5 to 65.5%.”  Clearly, the industry has a long way to go in measuring and subsequently reducing emissions from Supply Chains.

In fact, when shippers were asked about their awareness of Green Programs, in the eyefortransport survey, less than 40% were familiar with or using the Green House Gas Protocol . The GHG Protocol is the global standard to measure scope 1, 2 and 3 CO2 equivalents set by the World Resources Institute.  Obviously, shippers have to measure emissions before they can reduce them.  Education of the measurement protocol and methodology is a critical step forward.

Whether you believe that global warming is man-made or not, the catastrophic oil spill in the Gulf of Mexico demonstrates the level of damage our dependence on fossil fuels is capable of inflicting on the environment.  As stewards of the earth, we have a responsibility to our children to pass it on in pretty much the same condition as it was when we inherited it.

Out sourcing and globalization have not only added to the complexity of modern business, but have also increased the size of its carbon footprint. The challenge for shippers is in reducing that footprint without disrupting normal business operations or increasing costs. The 4th annual conference on Sustainable Supply Chains takes on the task to show them how.

For further details about the 4th Sustainable Supply Chain Summit please click on this link.

Box Shipping Industry Will Never Be the Same

Pity the poor shipper. His super star status has been turned upside down. That line of carriers beating a path to his door for a whiff of freight has evaporated. A seemingly endless supply of containers and space is a distant memory. And, as the ultimate insult to injury, our poor shipper is paying more than twice to move a container this year over last. Whoever said you get what you pay for could not possibly have experienced the container shipping industry. 

The market rewards scarcity; even industry-made scarcity. The reduced supply of capacity through idled tonnage and slow steaming initiatives has perhaps worked too well. As carriers scramble to put more tonnage back into service in time for Peak Season, other unexpected by-products of slow steaming have come to light.

In a recent article in International Freighting Weekly, CMA CGM Senior VP, Nicolas Sartini said, “In terms of container availability, we are starting to see the impact of slow steaming. It takes more time to bring back equipment to Asia from Europe and the U.S., on any trade.” Back hauls are primarily used for equipment repositioning. Asia-Europe and the Transpacific are no different. Many carriers would prefer to haul empty containers back to Asia from Europe and the U.S. than have freight for the very simple reason that an empty container is ready for loading immediately and does not have to be emptied and returned to the depot before being available for the high paying head haul trade. A 20-30% increase in transit time significantly adds to the inventory turnover ratio and cuts into equipment availability.

Out of recessions come growth; more often unbridled growth from pent-up demand. Financial crises and industry meltdowns, on the other hand, breed unintended consequences. Last year, for example, in the midst of what was historically the worst year in container shipping, many container manufacturers stopped production.

As the May 2010 edition of Containerisation International explains, “…the box building industry ended 2008 with an installed (twin-shift) annual capability exceeding 5.5 million TEU. This was then matched by output which had topped 1 million TEU per quarter throughout the two years up to late 2008. By contrast, global production slumped by 90% in 2009, to just 430,000 TEU, less than half of which was of ISO standard build.”

Put simply, the demand (read price) for containers fell so far, so fast that it stopped making sense to manufacture them. Carriers were not the only ones in the industry to “idle” capacity. Global container manufacturer capacity stands today at around 2.5 million TEU with prices on the upswing; a far cry from the peak of 2008.

 There are clear consequences when carriers participate in a rate war “race to the bottom”. The impact on Non-owning Operators, German KG companies has still not worked its way through the markets. Containerisation International on June 2 reported, “The credit crunch has given most ship-owners a major financial headache, and no more so than in Germany. Several will not survive. ..Over half of the capacity of the container vessel armada due for delivery by the end of 2014 was ordered by tramp vessel operators, most of which are based in Germany. In January of 2010, this armada stood at 810 vessels averaging 5800 TEU, or 36.3% of the existing world fleet.

“The companies most at risk are those that ordered vessels using funds obtained by banks to pay the initial deposit to the shipyard. Their expectation was that they would be able to raise cash afterwards from investors, but that is no longer achievable due to investor disenchantment with an industry that is expected to have lost over $20 billion in 2009…The end result is that orders will either have to be postponed or cancelled.”

The impact of the near financial collapse of the industry has changed it, likely for good. Carriers must be profitable. Vessel capacity and equipment supply cannot excessively outstrip demand like it did in 2009 again. The banks and financial companies will not tolerate it.

Yes, pity the poor shipper.  His world will never be the same.

Next:  What shippers should be doing to keep costs down and service levels up in the next two years.

Extra Slow Steaming absorbs 554,000 TEU in capacity-Alphaliner

Alphaliner reports that ESS (Extra Slow Steaming) has absorbed 554,000 TEU in additional capacity in the past year. The absorbed capacity represents 4.1% of the global fleet and has contributed to bring the supply/demand balance in favour of carriers.

Alphaliner Weekly Newsletter Summary Issue 22[1]

The weekly newsletter goes on to report that 78%  and 53% of the Asia-Europe and Transpacific trades respectively are currently on slow steaming.