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Issue #587

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Project Cargo / Heavy Lift Bi-Annial

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2014 Media Kit
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Pacific shipping lines gain ground on fuel costs

By: | at 07:00 PM | Channel(s): Liner Shipping  

Customer talks and emergency surcharges produce results as pre-Lunar New Year traffic begins to build.

Container shipping lines operating in the critical import trade lane from Asia to the US are reporting progress in their customer negotiations to more equitably share rising fuel costs. At the same time, the lines are operating at highly utilized levels, as pre-Lunar New Year shipments increase.

Internal TSA reporting for September-December shows vessel utilization among TSA members averaging 94% via the West Coast and 91% via East Coast all-water service, up from 2006 levels. December utilization up until the Christmas holidays exceeded 90% via all coasts. ‘The numbers are telling us that although transpacific growth did moderate during 2007, utilization has remained relatively high during the winter season,’ noted TSA chairman and APL Ltd. chief executive Ronald D. Widdows. He attributed the strong utilization levels to individual capacity reductions taken by transpacific carriers and consortia ’ whether to redeploy vessels in other trade lanes experiencing stronger growth; to undertake maintenance and repairs during a seasonally slow period; or to mitigate their exposure to dramatically escalating operating costs, in particular historically high fuel prices.

‘It can be a costly proposition for lines to shift vessel assets, or to modify routes and schedules,’ Widdows added, ‘but Asia-US carriers really have no option but to fine-tune or even scale back services absent significant improvement in the economics, and with fuel prices topping $500 a ton.’

Despite some softening in petroleum prices in recent weeks, Hanjin Shipping Co. Ltd. senior executive vice president J.S. Lee ’ who serves on the TSA executive committee ’ stressed that the oil market remains highly volatile, with prices over the coming months impossible to predict. ‘Rising global demand for oil, supply uncertainties in countries such as Brazil, Mexico, Nigeria and Saudi Arabia, and geopolitical risk have already pushed yearend 2008 oil futures prices into the $150-200 range,’ Lee said, referring to a recent article on the options market in Singapore’s Straits Times. ‘With many transpacific lines already operating at a loss and facing rising intermodal, equipment, environmental and other costs in addition to fuel, it is imperative that carriers achieve full-floating bunker charges in their contracts going forward.’

Lines say they are seeing widespread success in achieving needed fuel surcharge increases, through one-on-one negotiations with customers, imposition of emergency surcharges and other means. Widdows called this success ‘gratifying, as it indicates that customers understand the financial pressures affecting our industry and the need for carriers to make an adequate return in order to maintain levels of service the shipping community expects.’ He reiterated, however, that the latest fuel cost recovery gains are only partial (see figure 2), and that the ultimate objective in 2008-09 is still restoration of full bunker fuel surcharges, based on TSA’s calculation formula, which float with monthly price fluctuations.

Profitability concerns in light of rising fuel and other operating costs, Widdows added, will likely diminish the importance of the supply-demand balance as a key driver of price this year. TSA lines have outlined a revenue and cost recovery program for the 2008-09 contract season that includes:

  • Freight rate increases of US$400 per 40-foot container (FEU) for US West Coast port-to-port and door cargo, and US$600 per FEU for all other traffic, including intermodal and US East Coast all-water shipments.
  • Restoration of a floating bunker fuel surcharge in all contracts that have had bunker surcharges mitigated, capped or folded into base rates.
  • A US$400 per feu peak season surcharge in effect from June 1 through October 31, 2008.

Member carriers report strong forward bookings in the run-up to the Lunar New Year factory holidays in Asia, and say they are preparing