Executive Briefings

Trans-Pacific Trade Growth Tops Forecast

Few analysts predicted the surge of ocean containers that moved across the Pacific in 2006-or the surprising lack of congestion that accompanied it.

The trans-Pacific ocean trades in 2006 turned out to be a lot livelier than many experts predicted. Estimates of container growth for cargo moving from Asia to the U.S. were in the range of 4 percent to 10 percent. Once again, however, reality appears to have trumped the forecast.

According to figures released by the Transpacific Stabilization Agreement (TSA), the first half of 2006 saw a 13.2-percent increase in the amount of eastbound container cargoes, over the same period of 2005. Carriers moved approximately 3.1 million forty-foot equivalent units (FEUs), versus 2.7 million FEUs in the prior year. And that was before the trade's peak season got under way.

More recent figures suggest that the total numbers for the year will be even higher. The Port of Los Angeles recorded increases of nearly 15 percent in June 2006, and better than 17 percent in July. August registered a whopping 21-percent rise over the same month of 2005. Total volumes moving over port docks in August reached nearly 791,000 twenty-foot equivalent units (TEUs).

Not everyone got it seriously wrong. TSA had predicted increases of between 11 percent and 14 percent, according to executive director Albert A. Pierce. "We were certainly in the ballpark," he said.

TSA also appears to have been correct about this year's overcapacity situation-or, to put it more accurately, the lack of one. Some analysts had predicted that a slew of new tonnage entering the trans-Pacific trade would result in large amounts of unused space on vessels. In actuality, 2006's peak season turned out to look pretty much like past years, with ships sailing at close to 100-percent capacity.

In fact, some shippers who weren't named Wal-Mart once again found themselves shut out of ships on which they had booked space from Asia to the U.S. This "rolling" of certain cargoes to later voyages happens to some extent nearly every year, as retailers flood the pipeline with Asia-sourced goods earmarked for the Christmas shopping season. Pierce insisted, however, that there was "very little roll activity" during the 2006 peak period. Rejections that did occur were mostly on Pacific Southwest trade lanes, he said.

Clients of ICG Commerce, a consultant on global supply chain issues, have experienced some rolling of cargoes, but "it's no worse than in past years," according to Paul Svindland, senior director of the firm's Global Logistics Solutions Group.

Vessel Size Growing
Predictions of overcapacity for this year were tied to the trend of ever-larger containerships in the trade. Vessels able to carry between 8,000 and 10,000 TEUs are becoming increasingly common on major trade lanes. In August, Maersk Line launched the Emma Maersk, the largest containership ever built, with capacity of between 11,000 and 14,500 TEUs, depending on the ratio of loaded to empty containers. (Maersk itself favors the lower figure.) Few ports in the world have the water depth, terminal facilities and intermodal connections to handle a vessel of that size. Analysts worried that West Coast ports would experience gridlock with the advent of the newest mega-ships.

As it happened, most of the new tonnage slated for trans-Pacific deployment wasn't due until the second half of this year. "They're just hitting the marketplace now," Svindland said in early October. "Going into the fourth quarter is where people expected to see vessel utilization drop off."

"The infrastructure of the world we live in will always be behind. I don't envision people asking ports to adopt a 'build-it-and-they-will-come' approach. We're always going to see this reactive mentality."
- Paul Svindland of ICG Commerce

Pierce continues to insist that trade demand will soak up most, if not all, of the new tonnage. Speaking at a conference in Long Beach last March, he predicted that effective container capacity-allowing for constraints throughout the transportation pipeline-would exceed demand by no more than 3 to 4 percentage points in 2006. "Such a ratio is not likely to exert tremendous market-share pressure on carriers to fill ships," he said at the time. In any case, he pointed out more recently, the big new Maersk ship isn't being deployed in the trans-Pacific trade for now.

Svindland said the larger vessels could actually improve supply networks. Carriers have long argued that bigger ships are cheaper to operate on a per-slot basis. The result, they say, will be greater stability, if not reductions, in freight rates. On top of that, Svindland said, the scheduling of one large ship, instead of two or three smaller ones, can help shippers and cargo handlers do a better job of planning, boosting overall productivity.

More Congestion Coming?
Overcapacity isn't foremost on the minds of trans-Pacific shippers and carriers today. What scares them is the possible recurrence of severe congestion, such as that experienced at West Coast ports and inland terminals in 2002, and sporadically thereafter. Four years ago, the industry was caught off guard by a massive influx of new shipments from Asia, triggered by an increase in outsourcing by U.S. manufacturers, along with a greater reliance on offshore suppliers. Other disruptive factors included the 10-day West Coast port stoppage in October of 2002, a serious shortage of dockside labor in 2004, and the general inability of U.S. railroads to handle additional volumes to inland destinations.

Despite the dramatic growth of container volumes in 2006, however, there appears to have been little congestion at key points in the U.S. transportation network. Ports in particular handled the increase with relative ease. "Remarkably, things are going very smoothly here," said Port of Los Angeles spokeswoman Theresa Adams Lopez.

She noted the addition of some 5,000 union dockworkers at Southern California ports over the past two years. That has been accompanied by the introduction of new technologies for speeding the movement of containers and equipment through marine terminals. Operators have begun deploying optical character readers, barcode scanning and other techniques for automating key processes, such as the arrival and departure of trucks at the gate. Terminal workers spend less time searching for containers, chassis are managed more efficiently, and truckers are less likely to reject equipment due to damage or inadequate inspections.

Another major factor behind the lack of problems has been PierPASS, Southern California's program for handling inbound containers during off-peak hours. Carriers pay a premium to keep terminals open in the evenings and on Saturday; the result has been much less crowding at intermodal terminals and on local roads in the daytime. More than 40 percent of container traffic generated by the ports of Los Angeles and Long Beach is now reported to be moving off-peak. "PierPASS is kicking in very nicely," said Lopez.

Pierce noted, however, that PierPASS is of value primarily to shippers of goods with origin in the immediate area served by Southern California ports. Intermodal containers, which require lengthy rail hauls into the interior, are another matter. They continue to encounter backups at overtaxed rail ramps and intermodal transfer facilities. Said Pierce: "The biggest crunch we have is when you start leaving the terminal, going east. We can't move cargo as quickly and efficiently as we would like to."

Working on the Railroad
In recent years, railroads have invested substantial amounts of money in new equipment and terminal improvements, but shippers, ocean carriers and other partners in the network say they need to do more. Some snags have their origin deep in the interior, with an impact that extends all the way to West Coast docks. If complete trains are stalled anywhere along the line, intermodal facilities can't easily build and release smaller trains that are tied to the arrival of huge containerships, spilling thousands of containers onto the terminal at a time. In 2005, for example, a train derailment at Clovis, New Mexico backed up rail traffic all the way into the central plains states.

As of early October, 2006 hadn't seen any disruptions on that scale. Ships were continuing to come and go with relatively few delays. But the improvements haven't come without cost to shippers. In June, TSA carriers began assessing a "peak season surcharge" of $400 per FEU for all containers moving from Asia to the U.S. West Coast. (The amount was even higher, topping out at $600 per FEU, for all-water cargoes transiting the Panama and Suez Canals.) The $400 charge was supposed to end on Nov. 30, but TSA has extended it through the end of February. Member lines needed to account for high volumes of cargo moving in anticipation of the Japanese and Chinese new year holidays, Pierce said.

In fact, the whole notion of a peak season has come into question, thanks to changes in the way U.S.-bound cargo moves from Asia. The Christmas shipping season used to cover a short, defined period, usually during late summer and early fall. U.S. retailers altered that pattern when they began cutting down on standing inventories and bringing product into the country at a later date. Suddenly the traditional peak season was extending into October and even November. At the same time, other periods of high consumer sales, including summer, back-to-school and Halloween, began to take on added importance. The result was much higher first-half volumes, typified by this year's 11- to 14-percent rises during that period. Even the traditionally slow weeks following Christmas have begun showing unusual strength in recent years.

Such changes, few of them predictable by even the most far-seeing experts, make it nearly impossible for carriers, ports, truckers and railroads to supply exactly the right amount of capacity to meet demand. Service providers end up building new ships and terminals in response to events that have already occurred.

"The infrastructure of the world we live in will always be behind," said Svindland. "I don't envision people asking ports to adopt a 'build-it-and-they-will-come' approach. We're always going to see this reactive mentality."

The trans-Pacific ocean trades in 2006 turned out to be a lot livelier than many experts predicted. Estimates of container growth for cargo moving from Asia to the U.S. were in the range of 4 percent to 10 percent. Once again, however, reality appears to have trumped the forecast.

According to figures released by the Transpacific Stabilization Agreement (TSA), the first half of 2006 saw a 13.2-percent increase in the amount of eastbound container cargoes, over the same period of 2005. Carriers moved approximately 3.1 million forty-foot equivalent units (FEUs), versus 2.7 million FEUs in the prior year. And that was before the trade's peak season got under way.

More recent figures suggest that the total numbers for the year will be even higher. The Port of Los Angeles recorded increases of nearly 15 percent in June 2006, and better than 17 percent in July. August registered a whopping 21-percent rise over the same month of 2005. Total volumes moving over port docks in August reached nearly 791,000 twenty-foot equivalent units (TEUs).

Not everyone got it seriously wrong. TSA had predicted increases of between 11 percent and 14 percent, according to executive director Albert A. Pierce. "We were certainly in the ballpark," he said.

TSA also appears to have been correct about this year's overcapacity situation-or, to put it more accurately, the lack of one. Some analysts had predicted that a slew of new tonnage entering the trans-Pacific trade would result in large amounts of unused space on vessels. In actuality, 2006's peak season turned out to look pretty much like past years, with ships sailing at close to 100-percent capacity.

In fact, some shippers who weren't named Wal-Mart once again found themselves shut out of ships on which they had booked space from Asia to the U.S. This "rolling" of certain cargoes to later voyages happens to some extent nearly every year, as retailers flood the pipeline with Asia-sourced goods earmarked for the Christmas shopping season. Pierce insisted, however, that there was "very little roll activity" during the 2006 peak period. Rejections that did occur were mostly on Pacific Southwest trade lanes, he said.

Clients of ICG Commerce, a consultant on global supply chain issues, have experienced some rolling of cargoes, but "it's no worse than in past years," according to Paul Svindland, senior director of the firm's Global Logistics Solutions Group.

Vessel Size Growing
Predictions of overcapacity for this year were tied to the trend of ever-larger containerships in the trade. Vessels able to carry between 8,000 and 10,000 TEUs are becoming increasingly common on major trade lanes. In August, Maersk Line launched the Emma Maersk, the largest containership ever built, with capacity of between 11,000 and 14,500 TEUs, depending on the ratio of loaded to empty containers. (Maersk itself favors the lower figure.) Few ports in the world have the water depth, terminal facilities and intermodal connections to handle a vessel of that size. Analysts worried that West Coast ports would experience gridlock with the advent of the newest mega-ships.

As it happened, most of the new tonnage slated for trans-Pacific deployment wasn't due until the second half of this year. "They're just hitting the marketplace now," Svindland said in early October. "Going into the fourth quarter is where people expected to see vessel utilization drop off."

"The infrastructure of the world we live in will always be behind. I don't envision people asking ports to adopt a 'build-it-and-they-will-come' approach. We're always going to see this reactive mentality."
- Paul Svindland of ICG Commerce

Pierce continues to insist that trade demand will soak up most, if not all, of the new tonnage. Speaking at a conference in Long Beach last March, he predicted that effective container capacity-allowing for constraints throughout the transportation pipeline-would exceed demand by no more than 3 to 4 percentage points in 2006. "Such a ratio is not likely to exert tremendous market-share pressure on carriers to fill ships," he said at the time. In any case, he pointed out more recently, the big new Maersk ship isn't being deployed in the trans-Pacific trade for now.

Svindland said the larger vessels could actually improve supply networks. Carriers have long argued that bigger ships are cheaper to operate on a per-slot basis. The result, they say, will be greater stability, if not reductions, in freight rates. On top of that, Svindland said, the scheduling of one large ship, instead of two or three smaller ones, can help shippers and cargo handlers do a better job of planning, boosting overall productivity.

More Congestion Coming?
Overcapacity isn't foremost on the minds of trans-Pacific shippers and carriers today. What scares them is the possible recurrence of severe congestion, such as that experienced at West Coast ports and inland terminals in 2002, and sporadically thereafter. Four years ago, the industry was caught off guard by a massive influx of new shipments from Asia, triggered by an increase in outsourcing by U.S. manufacturers, along with a greater reliance on offshore suppliers. Other disruptive factors included the 10-day West Coast port stoppage in October of 2002, a serious shortage of dockside labor in 2004, and the general inability of U.S. railroads to handle additional volumes to inland destinations.

Despite the dramatic growth of container volumes in 2006, however, there appears to have been little congestion at key points in the U.S. transportation network. Ports in particular handled the increase with relative ease. "Remarkably, things are going very smoothly here," said Port of Los Angeles spokeswoman Theresa Adams Lopez.

She noted the addition of some 5,000 union dockworkers at Southern California ports over the past two years. That has been accompanied by the introduction of new technologies for speeding the movement of containers and equipment through marine terminals. Operators have begun deploying optical character readers, barcode scanning and other techniques for automating key processes, such as the arrival and departure of trucks at the gate. Terminal workers spend less time searching for containers, chassis are managed more efficiently, and truckers are less likely to reject equipment due to damage or inadequate inspections.

Another major factor behind the lack of problems has been PierPASS, Southern California's program for handling inbound containers during off-peak hours. Carriers pay a premium to keep terminals open in the evenings and on Saturday; the result has been much less crowding at intermodal terminals and on local roads in the daytime. More than 40 percent of container traffic generated by the ports of Los Angeles and Long Beach is now reported to be moving off-peak. "PierPASS is kicking in very nicely," said Lopez.

Pierce noted, however, that PierPASS is of value primarily to shippers of goods with origin in the immediate area served by Southern California ports. Intermodal containers, which require lengthy rail hauls into the interior, are another matter. They continue to encounter backups at overtaxed rail ramps and intermodal transfer facilities. Said Pierce: "The biggest crunch we have is when you start leaving the terminal, going east. We can't move cargo as quickly and efficiently as we would like to."

Working on the Railroad
In recent years, railroads have invested substantial amounts of money in new equipment and terminal improvements, but shippers, ocean carriers and other partners in the network say they need to do more. Some snags have their origin deep in the interior, with an impact that extends all the way to West Coast docks. If complete trains are stalled anywhere along the line, intermodal facilities can't easily build and release smaller trains that are tied to the arrival of huge containerships, spilling thousands of containers onto the terminal at a time. In 2005, for example, a train derailment at Clovis, New Mexico backed up rail traffic all the way into the central plains states.

As of early October, 2006 hadn't seen any disruptions on that scale. Ships were continuing to come and go with relatively few delays. But the improvements haven't come without cost to shippers. In June, TSA carriers began assessing a "peak season surcharge" of $400 per FEU for all containers moving from Asia to the U.S. West Coast. (The amount was even higher, topping out at $600 per FEU, for all-water cargoes transiting the Panama and Suez Canals.) The $400 charge was supposed to end on Nov. 30, but TSA has extended it through the end of February. Member lines needed to account for high volumes of cargo moving in anticipation of the Japanese and Chinese new year holidays, Pierce said.

In fact, the whole notion of a peak season has come into question, thanks to changes in the way U.S.-bound cargo moves from Asia. The Christmas shipping season used to cover a short, defined period, usually during late summer and early fall. U.S. retailers altered that pattern when they began cutting down on standing inventories and bringing product into the country at a later date. Suddenly the traditional peak season was extending into October and even November. At the same time, other periods of high consumer sales, including summer, back-to-school and Halloween, began to take on added importance. The result was much higher first-half volumes, typified by this year's 11- to 14-percent rises during that period. Even the traditionally slow weeks following Christmas have begun showing unusual strength in recent years.

Such changes, few of them predictable by even the most far-seeing experts, make it nearly impossible for carriers, ports, truckers and railroads to supply exactly the right amount of capacity to meet demand. Service providers end up building new ships and terminals in response to events that have already occurred.

"The infrastructure of the world we live in will always be behind," said Svindland. "I don't envision people asking ports to adopt a 'build-it-and-they-will-come' approach. We're always going to see this reactive mentality."