UNCERTAIN TIMES IN THE TRANS-PACIFIC

March 17, 2008
PETER T. LEACH

There are only two certainties this year in the trans-Pacific trades: U.S. import growth will be sluggish at best, and U.S. exports will continue to increase.

Nearly everything else involves questions: Will import volumes grow or contract? Will the liner companies deploy more capacity in the trade as their fleets increase in size, or will they keep it flat? Will they succeed in getting rate increases that cover their soaring costs? Will shippers agree to pay a fully floating bunker fuel surcharge?

It’s too early to answer these questions, but a look at the issues behind the questions helped to frame shippers’ and carriers’ positions as 8th Annual Trans-Pacific Maritime Conference sponsored by The Journal of Commerce, a sister publication of Florida Shipper, got under way in Long Beach recently. The actual shape of this year’s shipping season on the Pacific won’t emerge from the smoke that surrounds initial bargaining positions until carriers square off in negotiations with major shippers in April and May. Those talks promise to be heated because consumer demand is down, carriers’ global capacity deployment is up, and so are carrier costs.

“We think this year’s freight contract negotiations will probably be the most difficult in the past 10 years,” said Philip Damas, director of Drewry Shipping Consultants. “There are major complicating factors, including the contract renegotiation with the ILWU, the bunker adjustment factor — which is a major bone of contention between shippers and carriers — and the growth of capacity.”

Some carriers, however, are optimistic about the upcoming negotiations. “Carriers are digging in on bunker fuel because they have to,” said Robert Sappio, senior vice president of the trans-Pacific trade for APL Ltd. “It’s worth hundreds of millions of dollars to the industry, and there’s got to be a way of sharing in that risk with our customers. We see customers who have refused to pay a BAF recognize that they must pay something.”

If trans-Pacific carriers succeed in breaking the bunker adjustment factor out of the underlying freight rate as a fully floating rate, that leaves open the possibility that shippers who agree to pay the floating BAF may insist on paying a lower freight rate.

“If shippers are willing to pay (the floating BAF), it may be because there’s a concession on the base rate,” said Paul Bingham, a Global Insight economist who specializes in trade. “As far as the final return to carriers, it may not put them in any better position if the price for that is the concessions they have to make on the base rate are so significant that their bottom lines may actually deteriorate.”

Sappio said the base freight rate has to increase because it has to cover other costs. “We’re dealing with increases in terminal costs, inland drayage and rail costs,” he said. “Most, but not all,” carriers are losing money in the Pacific because they failed to recover the cost of fuel, he added. “The old adage that the market will be dictated by supply and demand of container capacity, and market growth will be thrown out the window because the ships won’t come back unless there can be a proper return for the carriers.”

The possibility of vessel overcapacity still looms large in the industry and is casting its shadow on the trans-Pacific again this year. “In some ways, an over-concentration on the BAF could distort the overall issue, which is an oversupply in the market,” Bingham said.

Container fleet capacity increased 14.9 percent last year and is expected to grow another 15 percent this year, according to AXS-Alphaliner. Carriers were able to absorb the additional capacity last year by deploying their large new ships in faster-growing trade lanes than the trans-Pacific, such as Asia-to-Europe and intra-Asia.

Capacity in the trans-Pacific trade was cut last year because of spiraling costs and slumping demand. Maersk Line, the world’s largest carrier, cut its trans-Pacific capacity by 30 percent, and the New World Alliance (APL, MOL and Hyundai Merchant Marine) announced it would cut capacity during these winter months by 15 to 25 percent.

“A number of shippers say they believe capacity will come back, because they say that it’s not possible for the Asia-Europe trade to absorb all the capacity of these large new container ships,” Damas said. “But we at Drewry think there’s likely to be a greater discipline this year in terms of carriers managing their capacity tightly because many are losing money.”

With global growth slowing, it remains to be seen whether the other trades will expand fast enough to absorb the expected increase in deliveries this year, Bingham said. “Given that there is still more tonnage coming out of the Asian shipyards, that means the supply won’t be contracted on the trans-Pacific in ’08 as it was in ’07, which would put even greater downward pressure on rates,” he said.

Sappio said 2008 would be an “atypical” year because of several factors, including the early Lunar New Year in Asia, which has skewed volume at the start of the year. “The first six weeks of the year were very strong, but now we’re seeing a softening in February in the post-Lunar New Year,” he said. The aftermath has been complicated by a severe winter in China that prevented many migrant workers from going home for the holidays. Sappio said that means the post-holiday recovery of container volumes would be later than expected.

Another atypical factor is the July 1 expiration of the International Longshore and Warehouse Union contract, which is causing shippers to move their shipments up and make more use of the more expensive all-water services to the East Coast.

A third unusual factor is the Summer Olympics in Beijing in August, which may bring more factory closings if China idles them in an effort to cut off pollution before and during the games. Sappio said this could cause an “artificial” surge as shippers rush to get export shipments out ahead of the factory closings.

The most important factor determining the outlook for the trans-Pacific trade this year is, of course, the growth, or lack of growth, of the U.S. economy. Economists differ on whether there will be a recession, but they all agree on one thing: The growth of import volumes in the trans-Pacific is dropping from the annual double-digit rates of the last 10 years into the low single-digits at best.

PIERS Global Intelligence Solutions, a sister company of Florida Shipper, has forecast that trans-Pacific import volumes will increase 5.1 percent in 2008, following a flat 2007. Under the PIERS forecast, trans-Pacific exports will increase 11.8 percent this year, down only slightly from 2007 growth.

Michael Andrews, PIERS’s chief economist, said the slowdown in exports is a result of the anticipated slower growth in the world economies. He said the trans-Pacific continues to increase its share of total U.S. import volumes, which he said actually declined in 2007. Andrews expects total U.S. imports will increase 3.5 percent in 2008.