Costs outweigh first-half market uncertainty in contract discussions; supply-demand expected to stay in balance; ship utilization remains strong, fuel surcharge talks yield results.Shipping lines that carry US import cargo from Asia are reporting early successes from their cost recovery efforts. While acknowledging short-term concerns due to the slower build up of post-Lunar New Year volumes, they are also reporting high utilization levels and, in some cases with some lines, insufficient capacity to carry all cargo tendered for certain sailings. Costs continue to dominate early discussions toward upcoming 2008-09 service contracts, which come up for renewal on May 1. The Transpacific Stabilization Agreement (TSA), a research and discussion forum of 15 major Asia-US container lines, reiterated this week that:
  • Freight traffic will continue to grow in 2008, on the order of 2-5% by most industry forecasts.
  • A combination of market forces – including increased demand and conditions favoring greater profitability in the Asia-Europe and other trade lanes, plus marine bunker fuel prices near $530 per ton – will likely limit some carriers’ transpacific ship capacity through redeployments, slow-steaming and other cost mitigation initiatives.
  • Negotiation of a new five-year West Coast longshore labor contract, effective July 1, raises chances for congestion delays and increased costs; rising customer demand for US East Coast all-water services – to diversify service options and manage risk – comes as many of those services, as well as the Panama Canal, are operating at or near capacity.
  • Southern California port environmental programs and federal government harbor security initiatives all are scheduled to take effect during 2008, creating the potential for shortages of trained longshore personnel, trucks and drivers, as well as raising regulatory compliance costs.
“Even with substantial cost recovery, the economics of serving the US market from Asia will still result in a challenging profitability picture for most lines”, said TSA chairman Ronald D. Widdows, chief executive of Singapore-based APL Ltd. A number of carriers in the trade have individually reduced their vessel capacity during the post-holiday winter season to meet demand in other markets, perform routine maintenance and repairs, and cut fuel and other operating costs as cargo demand slowed. Some of that capacity will be restored by mid-2008, in time for the peak shipping season, but net year-on-year TSA capacity growth for all of 2008 is expected to reach only a modest 3.3%. Recently announced vessel-sharing arrangements, involving both TSA and non-TSA lines, will actually produce additional redeployments and a net decline in transpacific vessel space, the Agreement pointed out. And according to a recent industry presentation by Clarkson Research Services, effective overall capacity growth in the trade – after allowing for vessel loading and infrastructure constraints, slower sailing speeds and other factors – will probably end 2008 in the 2% range, in balance with cargo demand growth. Widdows, explained that all transpacific lines have faced mounting fuel, inland transport and equipment positioning costs in the past year, and have responded in the post-holiday period to optimize their transpacific services. “Rail rates are up 30 percent, with fuel surcharges added on,” he said. “Marine fuel prices have risen more than 75 percent since January 2007. The costs of moving containers through port gateways and the Panama Canal are rising steadily. The result of operating a ship at less than full utilization in that environment – at rates that in many cases barely cover costs, if at all, is clearly not sustainable.” TSA members reported an average 90-95% utilization to the US West Coast in January-February 2008, and 95% or higher for all-water East Coast services. TSA carriers reported further progress in their negotiations with customers to recover a greater share of full accrued bunke