Supply Chain Matters has brought previous attention to a significant trend occurring in global transportation. Large numbers of manufacturers and service providers have placed a greater focus on transportation cost efficiencies and/or flexibilities. That is good news for bottom line budgets but rather troubling news for global carriers or global logistics services providers who have invested in expensive capacity and infrastructure. Recent earnings report from FedEx, UPS, Ceva Logistics and other global transportation providers, to name just a few, reflect this building shift within the industry. More sophisticated planning has allowed global supply chains to not rely on priority shipping modes but rather rely on non-premium or multi-modal surface transportation options. Erosion in global transportation rates has in-turn provided global shippers’ added flexibilities in the modes they elect to move goods to consuming markets.
One of the most time-sensitive industries is that of fresh-cut flowers. The Wall Street Journal recently reported that even this $14 billion industry has responded to increased premium air freight costs. In essence, the floral industry is responding to cost conscious retailers who want to reduce the input costs for flowers. A spokesperson for Netherlands based FloraHolland, the world’s largest floral wholesaler predicts that upwards of 30 to 40 percent of floral shipments from Latin America, along with 20 percent of shipments from Africa to Europe could be routed by ocean container in the next five years. That is a rather significant shift emanating from a stalwart industry that had total reliance on global air freight.
According to the WSJ, improvements in chilling and container monitoring technologies have prompted this building shift toward ocean shipping modes, particularly for imports to Europe which is a rather large market. Industry sources were cited as indicating that certain roses, carnations and other floral varieties do not suffer ill effects from sea voyages provided temperature environment is consistently maintained.
Transportation professionals are fully aware that ocean container carriers are making big and rather expensive bets in bringing a new generation of larger, more efficient mega-ships into service during the next five years. Today, there is far too much ocean container capacity chasing lowered volumes. Industry leader Maersk has again downgraded its outlook for global trade while the industry itself endures its 15th consecutive week of declining market shipping rates. Maersk now forecasts global container demand to grow just 2-4 percent in 2013 vs. a prior forecast of 4-5 percent in February. While newer ships will address needs for more efficiency and flexibility, the industry itself is in a Darwinian struggle as to which players can financially survive the transition. The Financial Times recently reported that a fifth of global container capacity has now been idled worldwide.
Global multi-modal transportation and logistics providers are obviously noting the building momentums in this modal shift and will invariable adjust their business strategies in the coming months. However, the biggest question mark is how many existing ocean container carriers, suffering building economic loses from the current gross condition of excess capacity, will survive to serve a different global transportation landscape several years from today.
There are other industry shifts to cite as examples.
Today’s Wall Street Journal notes that the proposed $2 billion Freedom pipeline project that is proposed to ship refined oil products from the lucrative oil field of Texas to California based refiners has failed to gain the interest levels of the major oil refiners in that region. Instead, they are relying on existing tank car shipments via rail lines to feed fuel hungry west coast markets. According to the Association of American Railroads, rail carloads of oil nearly tripled from 2011 to 2012. A recent boom has also come from new sources of crude in the U. S. Northern Plains and Appalachian regions that now increasingly rely on rail tank car movements to core refining distribution points. According to WSJ’s reporting, refiners are relying on rail shipments because of the flexibilities it provides in allowing firms to access crude supplies from different geographic regions at different prices, a flexibility not offered in a fixed pipeline.
This week, global 3PL CEVA Logistics, which provides logistics services to service sensitive consumer, healthcare, pharmaceutical and major high tech markets, reported a 6 percent decrease in earnings citing an overall soft global logistics markets, under performing contracts and impacts of business switching to ocean transport. CEVA , an asset light 3PL, has already taken steps to re-capitalize its balance sheet and raise new capital and has taken actions to offload some remaining fixed costs. At this week’s Smarter Commerce Summit, IBM announced a four year contract with CEVA to utilize the cloud-based IBM Sterling Commerce B2B platform and integration services for its customers. At the time of its re-capitalization efforts in April, L.M. Schlanger, CEVA CEO interviewed with Logistics Management and was quoted: “… customers are demanding more transparency and more visibility and more traceability and control of their supply chains at any given point in time.” He alsopointed to increased internal IT investments and applications to meet the increased needs of customers.
Thus, multiple shifting forces are impacting global transportation. The current economic crisis that has severely impacted Eurozone markets, and the building momentum toward nearshoring occurring in some industries are impacting current shipping volumes and rates. Longer term, more sophisticated shippers with better planning capabilities and leveraged use of advanced technology have discovered means to rely on more economical or more flexible modes of transport. That is the long-term trend.
Insightful industry officials are now or should be connecting the dots. Investing in appropriate technologies and services our beginning to yield savings in a cost area that has begged attention for many years. At the same time, carriers and logistics providers that have to invest in rather expensive assets and global transportation capacity are making their bets on where the long-term industry trends end up.
The takeaway for procurement, supply chain and product management teams are to not at all assume business-as-usual in short and longer-term transportation strategy and contracting. Do your homework, stay informed of continuing industry shifts and implications. Select your partners wisely, those that can fulfill both today’s and tomorrow’s business needs. Teams should also be evaluating investments in more synchronized fulfillment execution across the end-to-end supply chain including the journey toward supply chain control tower.
We are here to help you sort out these trends and implications.
Supply Chain Matters provides an update to our previous alert regarding a labor strike that occurring in the port of Hong Kong, the third busiest ocean container port in the world. Last week we alerted procurement and supply chain teams to exercise their disruption scenario plans regarding the real threat of additional delays for inventories that are scheduled for transit utilizing the port.
Media reports this week indicate that the nearly 500 striking dock workers continue to disrupt port operations. Talks were supposed to resume yesterday. A published report by Reuters quotes the Hong Kong Association of Freight Forwarding and Logistics as estimating that 120,000 twenty-foot equivalent (TEU) containers are now stacked up as the strike enters its 14th day. Reports from local media continue to indicate port delays of up to 60 hours. Container shipping lines such as Evergreen Marine and Mitsui OSK Lines are either diverting vessels or skipping the port of Hong Kong altogether.
Readers within Hong Kong or directly managing Asian based ocean shipping can perhaps update the on-the-ground situation in the Comments section below this posting.
This strike has taken on social labor rights implications. Hong Kong’s richest man, billionaire Li Ka-shing controls the majority of the Port of Hong Kong through the entity of Hongkong International Terminals Ltd., along with other global port facilities through the broader Hutchison Whampoa Ltd. name. Terminals backed by Hutchinson have a reported 46 percent share in the Port of Shenzhen, helping to recoup any operating losses incurred in Hong Kong. Thus, according to shipping analysts, Li has little to lose in the ongoing disruption. Some are speculating as to whether this is a one-time disruption or an overall structural change in shipping movements in the months to come.
The roughly 500 striking dock workers, who are seeking a 20 percent hike in wages, claim that they have not had a pay raise in 10 years as the cost of living has soared within Hong Kong. They further claim difficult working conditions that do not include any bathroom breaks. The strike is reported as hitting a nerve in the city state, where the growing wealth gap has caused turmoil in the local government.
By our view, one thing seems to clear, and that is that supply chain teams should anticipate additional shipping delays involving ocean containers out of China’s coastal regions. That will more than likely have inventory impacts, and teams need to assess their fulfillment plans for the early and late summer periods. Since some goods route through Hong Kong for certain tax purposes, there may be additional financial implications as well.
Throughout 2012, we posted multiple rants concerning the ocean container shipping industry, its arrogance in taking a one-sided parochial view of customer value, and on its general abuse of the tenets of industry capacity vs. demand. Readers can track our rants by accessing this previous posting in August of 2012.
To validate how visible this situation has become for global supply chain teams, and that we are not the only outlet to call it for what it is, readers should reference this week’s posting by Robert Bowman on SupplyChain Brain, Economics 101: Did Ocean Carriers Miss the Lecture?.
The opening paragraph of this commentary clearly states the obvious:
“Judging from their actions, ocean carriers would love to toss out those irritating economics textbooks, with their tedious lessons about supply and demand. Too much capacity? No pricing discipline? Sluggish volume growth? Forget about it. Why should any of that prevent them from raising freight rates?”
Bowman highlights how ocean container carriers continue to defy market dynamics on a short-term basis by artificially removing capacity, slowing down vessels, and then raising rates to trump-up hemorrhaging balance sheets. The commentary also poses the question as to whether these same carriers can carry their parochial sense of urgency into 2013., especially with new and larger capacity mega-ships scheduled to continue to assume service later this year and next year as well. This commentary also brings out a stark reality, in spite of the most optimistic forecasts of Trans-Pacific shipment volumes for 2012, the actual volume increase was a mere 0.3 percent. That is the clear sign that continued economic challenges in the global economy, a battered consumer and the resurgence of near-shoring of manufacturing are making their mark in global trade.
This month, a series of ocean container rate increases is scheduled to go into effect to continue to compensate for overcapacity. According to Bloomberg, industry leader Maersk Line alone cut overall capacity on its Asia to Europe route by roughly 21 percent in 2012. It was also disappointing to also notice another article this week, indicating that Maersk Line will now stop Asia to U.S. east coast service via the Panama Canal in favor of routing its larger ships through the Suez Canal to reach the U.S. east coast from Asia.
What’s a couple of extra transit days, anyway? Surely you have enough built-up safety stocks!
Thus despite industry attempts to trump-up rates, the realities of a slowdown in global shipping and continued overcapacity are stark, and as the expression goes, “the emperor has little clothes”. Something has to give, eventually.
These conditions are further motivating small and medium sized suppliers and product producers to rely more on third party logistics and service providers for consolidating shipment volumes and to broker their buying power for more reasonable rates, causing yet another set of market dynamics.
Larger independent global shippers may well garner better rates by camping out in the short-term spot market vs. longer-term contracts. And to add more spice, air freight carriers have also reduced global airlift capacity.
Ocean container lines tout their presence as the facilitators of global commerce. If these carriers do not soon deal with the realities of global supply chains they may well find themselves as once again, facilitating major asset disposal sales.
The voices are growing.
Just as industry supply chains continue to recover from an eight day work stoppage involving the west coast ports of Los Angeles and Long Beach, the threat of a work stoppage impacting multiple U.S. Atlantic and Gulf coast ports looms closer.
Talks among the International Longshoremen’s Association (ILA) and the U.S. Maritime Alliance (USMX), representing multiple port owners, broke down on Tuesday. If a work stoppage were to occur, it would present far more supply chain wide physical and economic disruption consequences. Some industry sources note that over 90 percent of containerized shipments destined for the U.S. eastern seaboard would be impacted. The threat of a work stoppage involves 36 major ports including the major container facilities of Charleston / Savannah, New York / New Jersey, Hampton Roads, Baltimore, Miami, Port Everglades, New Orleans and Houston. Multiple industry supply chains would be impacted, not the least of which would be those involving petroleum, agriculture, automotive, retail, industrial equipment, construction and other commodities.
Similar to what occurred with the threat of a west coast port disruption earlier, the National Retail Federation (NRF) issued a letter to President Obama on Monday outlining the retail industry concerns for a work stoppage impact, calling on the President to use all means necessary including invoking the Taft Hartley Act, to keep both sides negotiating. Both sides are currently ad-odds over the issues of container royalties which the union receives at the end of every year, which is applied to benefits. The talks broke down in September, and an agreement was made to extend the current contract until December 29. Both sides have since been negotiating with the assistance of the Federal Mediation and Conciliation Service.
Many industry supply chains have no doubt, initiated some forms of contingency planning. As we inch closer to the deadline date, contingency and response planning efforts will have to be further operationalized with the decisions and actions of designated contingency planning teams that involve procurement, planning, logistics and transportation, suppliers and customers.
By our view, because of the scope and sheer impact of a potential work stoppage involving 34 east and Gulf ports, the likelihood of a total stoppage scenario is not as high as scenarios involving isolated work stoppages or labor slowdowns as governmental influence is brought to bear, forcing continued negotiations. However, supply chain teams need to be prepared for all contingencies at this point, including adequate safety stock levels, contracting capacity for alternative air freight usage, or multi-mode sea/rail/surface routings involving Canadian, Latin American or offshore ports. Consideration should also be made for work slowdowns among U.S. west coast ports as union members demonstrate solidarity with their east coast members.
Unfortunately, some procurement and supply chain teams may not be able to take extended time to totally enjoy the upcoming Christmas and New Year’s holidays. Then again, that has been the case of continuous supply chain disruption that teams have dealt with for the past two years.
For our part, Supply Chain Matters will continue to monitor this situation and provide important updates for readers.
Today’s edition of the Financial Times reports that two of Germany’s largest ocean container shipping companies, Hapag-Lloyd and Hamburg Sud, are engaged in talks over a possible merger of the two lines. Both companies issued statements indicating: “if, and under what conditions, a merger of both companies would be of interest.” FT notes that if this merger comes to pass, it would represent the world’s fourth largest container shipping line with a capacity of more than one million TEU’s, a combined fleet of 250 vessels and over €11 billion in revenues. The deal, if consummated, would represent a stronger challenge to industry dominants Maersk Line and Mediterranean Shipping Company. FT further notes that the last time consolidation occurred in the ocean container transport sector was six years ago.
Supply Chain Matters has been continually reinforcing our belief that the ocean container industry is currently anchored in way too much capacity and arrogance toward shipper needs. Current business and rate setting decisions are geared more toward justifying a level of profitability in spite of customer needs for reliable and cost efficient rates. As more and more overseas shippers elect modes for surface transportation, ocean container lines respond by slowing down steaming times to lower fuel consumption costs while imposing multiple interim container shipping rate increases, all with a global economic environment of declining shipping volumes.
There is also another linking part of this ongoing problem for the global ocean container industry. Business news channel CNBC featured a recent New York Times story, that certain German banks have a problem of titanic proportions. According to Moody’s Investors Services, 10 of Germany’s largest banks hold an estimated $128 billion in outstanding credit and other risks related to the global shipping industry. That amounts to double the debt held from countries such as Greece, Ireland, Portugal, Spain and Italy. It turns out that financing ship purchases is a popular German tax shelter and thus these banks helped to fuel the glut in purchases of more and larger container ships. We would add that these efforts also provided a boom for Germany’s shipbuilding industry. One German banking executive is quoted as indicating that grave mistakes were made in the years prior to 2009. Certain German banks are now making provisions for potential losses on industry loans. Meanwhile, some estimates indicate that some 300 container ships continue to lie idle around the world while other lines can literally acquire an older excess vessel for the mere cost of its scrap metal. Great bargains abound for any existing shipping line or governmental agency in the market for a container ship.
The good news from this latest development is that finally, the ocean container industry may be moving towards efforts of consolidation which in our view, is good for shippers and the industry as a whole. The status quo is obviously not sustainable and neither is targeting shippers to compensate for both container and banking industry missteps.
Supply Chain Matters continues our ongoing stream of commentary directed at the ocean container shipping operators and their track record of disregard for shipper needs for cost efficient and reliable transport of ocean container freight from Asia based ports. This collection of carriers represents an industry with a one-dimensional
mindset, profitability for carriers, in spite of major strategic blunders in fostering a situation of over capacity, and in spite of shipper needs for lower costs in transportation of goods from Asia. We continue these commentaries because in our view, shipping industry media seems to want to focus on parroting industry news vs. an editorial on the implications.
After a noteworthy attempt a year ago to increase the reliability and frequency of service, carriers have withdrawn capacity and slowed transit speeds in order to conserve fuel and raise profitability. In our previous commentary in late March, we noted how the arrogance toward customers keeps on giving. Industry leader Maersk Line, in the wake of a $537 million loss in net profits, announced it would cut Asia to Europe vessel capacity by 9 percent. In a Financial Times interview in late February, Maersk CEO, Soren Skou declared that the industry margins of 2 per cent over the last seven years had to change, and that 12 percent was a more acceptable range. Later he declared that unless industry returns do not reach 8 or 9 percent, the industry is destroying shareholder value. Supply Chain Matters can certainly state up-front that any carrier should deliver shareholder value, but the issue is the manner and aggressiveness of how that strategy is carried out. While the industry might have viewed bigger and more efficient ships as the answer to increased profitability, too many of these ships have exceeded any conceivable notion of container shipment growth, and the carriers now want to extract profitability goals from previous capacity oversteps with large debt overhangs.
Our latest commentary is triggered by a cover story within the August edition of Cargo Business News which is titled, The Cost of a Container. This article provides industry readers sobering realities of what has occurred thus far in 2012, and has special significance since the months of August through September are the peak shipping months in Asia outbound activity. According to the article, spot market container shipping costs from Asia to the U.S. have risen more than 77 percent since December 2011, and about 50 percent higher than August of last year. According to Drewry’s, shipping costs from Asia to Europe are up a whopping 177 percent since the beginning of the year. Carriers withdrew 10 percent of existing Asia to Europe ship capacity and thus far in 2012, while reported shipping volumes have been tracking to zero growth. In the Asia to U.S. segment, carriers have reduced second-half ship capacity by 5 percent while shipping volumes have grown a mere 2.3 percent.
While large volume shippers holding annual shipping contracts have been largely protected from these stunning increases, the termed non-vessel-operating-carriers (NVOs), representing an estimated 40 percent of current annual shipping volume, are bearing the full blow of the 2012 aggressive rate increase strategy. One mid-sized NVO industry representative is quoted as indicating that the current trends are going to put many smaller and midsized NVO’s out of business. We would add that this prediction reminded us of what occurred in the U.S. trucking sector during the last severe U.S. recession in 2008-2009, when many smaller independent truckers, who provided services to smaller volume shippers were forced into bankruptcy by the spiraling costs of fuel and new equipment.
The Cargo Business News article points out that current rising spot market rate, if continued through the remainder of the year, will become the basis of negotiations for next year’s annual contracts with volume shippers.
Scanning the latest earnings announcements of various carriers provides more ample evidence of a one-sided perspective. Industry leader A.P. Moller-Maersk swung from a $600 million loss in the first quarter, to a net profit of $965 million in its latest quarter, while (to no surprise) raising its earnings outlook for the remainder of 2012. Maersk Line indicated its rates increased on average 4.2 percent in the second quarter, on top of a 14 percent increase in the first quarter. German based Hapag-Lloyd posted a narrower second quarter loss of $9 million while operating profit rose 18 percent. It reported an average freight rate increase of 7.4 percent in the latest quarter. Hong Kong based Orient Overseas reported a a 33 percent plunge in operating profits, despite a 6.1 percent increase in first-half volume from a year earlier. Both Hapag and Orient Overseas pointed to higher fuel costs, on the order of 14-16 percent, as prime reasons for concern. Giving carriers their due, there are certainly other increased costs related to security protections against ongoing incidents of piracy in the Somalia region. That stated, do these costs equate to rate increases of the magnitude seen in 2012, with shipping volumes relatively flat? Air cargo carriers such as FedEx and UPS were forced to reduce capacity twice this year indicating that volumes are declining or shippers have turned to less expensive surface transit options. Shippers seek more cost sensitive options and the industry moves opposite to these needs.
Thus, as the current single purpose strategy of carrier profitability continues to unfold, manufacturers, retailers, raw material and food related commodity producers need to take note of the implications. First and foremost, the continuing bad economic news spreading throughout the Eurozone countries, coupled with a more noticeable overall slowdown in China’s export activity, have strong implications for reduced ocean container shipping volumes in 2013. Cargo Business News points to a published Bloomberg report indicating that the ongoing U.S. drought and global heatwave is presenting increased bad news for the shipping industry as commodity export volumes are reduced because of significant declining harvests. Similarly, unusually severe monsoon rains have impacted Japan, the Philippines, China, Vietnam and North Korea, impacting existing acreage and harvest expectations. Finally, outbound Asia container rate increases of the current magnitude, if incorporated in new annual contracts, could well tip the landed cost analysis of inbound goods to favor more domestic manufacturing, and carriers will have a more acute excess capacity and profitability problem to solve. Suffice to state, services procurement teams can expect more lively discussions at contract renewal time.
Global supply chains need to count on major global transportation carriers, like any other key supplier, as a collaborative partner for two-way goal fulfillment. Shippers need reliable, consistent transportation services that help in lowering overall transportation and inventory in-transit costs. They should expect a consistent rate structure vs. a peppering of see-saw opportunistic rate increases or retracted announcements.
Ocean container shipping is often characterized as the engine that drives global trade, but multiple years of significant cost increases can only drive a re-visit of the original economics in overall production sourcing decisions involving Asia. Just like the U.S. trucking sector, smaller sized shippers may pay the ultimate price in current and future rate increases, which stymies industry innovation. The ocean container industry needs to stop seeding its own destruction, in an unfolding strategy of too many mega-ships and gross excess capacity to fund, with shippers expected to finance profitability gaps.
The analogy of the chain is only as strong as its weakest link applies, and the weakest link in our view, is this industry’s current path. In the end, both carriers and shippers pay the price.
©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.