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Home » Blogs » Think Tank » The Price of Peace in the Pacific

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The Price of Peace in the Pacific

March 15, 2010
Robert J. Bowman, SupplyChainBrain

That smackdown between shippers and ocean carriers at the Journal of Commerce's 10th annual Trans-Pacific Maritime Conference in Long Beach earlier this month (http://www.joc.com/conferences) got even more heated than I described it in my last post. At one point, a carrier representative in the audience rose to announce that she was "offended" by shippers' remarks about the lines' recent actions on rates and capacity. "Obviously, you don't know anything about shipping," she told one long-time logistics executive, in a remark worthy of a comment thread on the internet. And Jimmy Crabbe, vice president of global ocean freight services with UPS, said that carriers' erratic pricing policies have done "a lot of damage" to relationships with shippers in the trade. "I've never seen an industry where the value of a contract means less," he said.

Fine. Can we damp down the rhetoric now?

For all the slinging of accusations, there were some attempts at conciliation. Carriers were willing to admit that the steep discounting that has brought them to the edge of insolvency has been largely of their own doing. (Even though APL's Robert Sappio, senior vice president of Pan-American Trade, asked rhetorically: "Was there not a single shipper that tried to leverage a carrier or send out an electronic bid to the lowest bidder?") And there did seem to be a few additional points on which shippers and carriers could agree.

William F. Rooney, president of Hanjin Shipping America, had some constructive suggestions for improving the dialogue around service contracts. He urged the greater use of scorecards to track carrier performance, bonuses for the accurate forecasting of supply and demand, longer duration of contracts, penalties for shippers that make "no-show" bookings (although shippers dispute the degree to which this occurs), and the tying of rate levels to "some kind of rationally agreed [upon] index."

It's a start. Both sides seem to want their contracts to have some real meaning. Bjorn Vang Jensen, vice president of global freight and logistics services with Electrolux, said shippers ought to be rewarded for committing to long-term agreements, and carriers are sympathetic to the argument. Why spend months hashing out the terms of a service contract, if one or both sides has no intention of honoring it? Is anyone really happy with the situation described by Crabbe, where a shipper can commit 50,000 containers to one carrier, only to be offered lower rates by another in an unsolicited phone call?

In the short run, peace in the Pacific will hinge on shippers' acceptance of reasonable rate increases, along with carriers' willingness to shake loose some of their laid-up capacity, so that the containers of loyal customers aren't left on the docks. Longer term, there's still what Barry Horowitz, president of CMS Consulting Services LLC, called "the elephant in the room: the last remaining remnant of the old ways." He was referring to the limited antitrust immunity still enjoyed by carriers in the U.S. ocean trades, to discuss rates and service collectively. Shippers are beginning to make noise about that little bit of protection, a vestige of the old steamship conference system, whereby carriers jointly dictated rates and brooked no protest from customers. More recently, discussion-only pacts such as the Transpacific Stabilization Agreement (www.tsacarriers.org) have done little to shield carriers from their worst cutthroat tendencies. Would they trade that freedom for the stability and profitability that they supposedly crave? Ultimately, they might have no choice.

*     *     *

So what's the key to lasting recovery in the trans-Pacific ocean trades? Why, it's you, of course. By which I mean, dear reader, the American consumer. Mario O. Moreno, an economist with PIERS Maritime Research, believes the reluctance of U.S. citizens to resume their mass-consuming tendencies is "the greatest threat to revival." Speaking at the TPM conference, he suggested that there might not be a return to those profligate spending habits this year. "Most consumers don't believe the recovery is real," he said, voicing a statement that falls neatly into the category of Things We Don't Need an Economist to Tell Us. Eight million jobs have vanished since the beginning of the Great Recession, and there's no clear sign of a reversal in that trend. American consumers are hugely overextended, still struggling to steady their finances, and the housing market remains fragile. Meanwhile, credit for individuals and small business is tight. Throw in the risk of inflation and the bursting of property bubbles in Asia, and you don't get a very rosy picture of the year to come.

There are a few positive signs, Moreno noted, such as a 4.6-percent rise in U.S. retail sales versus a year ago, a continuing low rate of inflation, and the "red-hot" pace of new orders for manufacturing. That last trend, combined with the traditional run-up to Chinese New Year, is what caused a surge of demand for ship space, the bumping of some containers, and the ire of shippers. Moreno also sees strong prospects for U.S. exports, assuming economic recovery in Asia and a further weakening of the dollar this year. But 2011 could bring another slump, he said, following the end of government stimulus programs and continued high levels of consumer debt. So don't get too comfortable.

Carriers, who had been madly building new and bigger ships over the past few years, suddenly found themselves struggling to manage overcapacity in a slumping economy. That's why somewhere between 500 and 600 containerships remain in layup off the coast of Singapore and elsewhere. "It's unprecedented to see such high numbers of idle capacity for such a duration of time," said Tan Hua Joo, executive consultant to Alphaliner. But carriers have managed to lessen the pain of that imbalance through a multifaceted strategy which includes the cancellation of some orders for new ships, deferred delivery of others, additional scrapping of existing tonnage, and the slowing down of ships already in service to save on fuel and other operating costs. That last move has especially rankled shippers, who have been forced to adjust order cycles and inventories accordingly. In a world where everything else seems to be speeding up, containerships are bucking the trend. Expect to see more of it; Hua Joo said shippers "need to accept longer transit times as a norm in the near future." Yet another reason why carriers should be looking for new ways to make their customers happy.

- Robert J. Bowman, SupplyChainBrain

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