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Maersk Line’s Mid-Year Report Reflects Positive Results but with Broader Industry Implications

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The adage: “where there is a will, there is way” is the headline for this week’s news coming from the leader of ocean container shipping. A combination of factors has led to an improved financial outlook for the industry leader in ocean container shipping.   389

This week, A.P. Moeller-Maersk, the parent of Maersk Line reported its Interim Report Q2-2014 reflecting current and expected financial results. That report indicates that Maersk Line made a profit of $547 million compared to $439 million a year earlier. These results were reportedly achieved by a 4.4 percent reduction in overall costs and a volume increase of 6.6 percent. At the half-year mark, average freight rate was reported as $2631 in the first six months compared with $2691 at the same point in 2013. Cash generated from operating activities in Q2 was $870 million. 

The practice of slow steaming coupled with continued deliveries of larger, more fuel-efficient container vessels contributed to cost reductions. The average bunker fuel cost was noted as $580 at the half-way point, compared with $608 in 2013, a decrease of 4.6 percent. During Q2, Maersk Line took delivery of three new Triple E (54,000 TEU) container vessels. Idle capacity in Q2 was reported as the equivalent of 19,000 TEU (four vessels).

Some good news for the ocean container segment are indications from Maersk that the Asia to Europe traffic segment is showing some signs of positive uplift.

The parent group expects Maersk Line to earn “significantly” above 2013 results for the full fiscal year. There are also high expectations for the pending ten year 2M alliance with Mediterranean Shipping Company (MSC) which is expected to carry upwards of 35 percent of all goods moving from Asia to Europe. In reporting of parent results, the Wall Street Journal quotes Maersk CEO as indicating that he fully expects industry competitors to further seek inter-line capacity agreements similar to the 2M alliance. That remains consistent with our Supply Chain Matters 2014 prediction and we continue to believe that industry supply chain teams should anticipate continued consolidation activity for the industry in the coming months.

With Maersk’s Line’s latest results, the gap is starting to widen among the industry leader and other lower-tier industry players, and events should be even more dynamic in the coming months. Maersk Line’s Q2 report provides other interesting statistics on the state of overall capacity in the industry. It indicates that the global container fleet has grown 5 percent since Q2-2013 to a level of 17,794 million TEU’s.  Scrapping’s were the equivalent of 49 vessels while 59 far larger newer vessels entered the global fleet. Competitiveness and profitability is now governed by the existence of more efficient vessels or increased shipping volumes.

Bob Ferrari

 


Fears Grow Over Earthquake and Volcanic Activity in Iceland- Implications to Air Traffic

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Just over four years ago, air traffic across the continent of Europe was disrupted by a volcanic eruption that occurred within Iceland that spewed concentrations of volcanic ash at high altitudes and across European and Atlantic skies.  Many industry supply chains were impacted as time and value sensitive shipments of agricultural and food products, pharmaceutical, medical products, high technology and telecommunications components were impacted, to name a few.  Air travel was a mess as thousands of air travelers suffered through flight cancellations and so were ground logistics and transportation networks as supply chain logistics professionals scrambled to seek alternative means to move products to customers. 

Much was hopefully learned from that disruption event.

All of this week, media has been reporting a high concentration of volcanic occurrences within a specific region of Iceland. This intense earthquake swarm involves thousands of small earthquakes within the area of the Bárðarbunga volcano.  The intense clusters of earthquakes were moving towards the north and the east of the volcano. The Icelandic Meteorological Office raised the aviation threat level around the volcano to “orange” — or a 4 out of 5 on the agency’s risk scale — indicating that the “volcano shows heightened or escalating unrest with increased potential of eruption.” The last confirmed eruption of this volcano took place in June of 1910. This specific volcanic area has a history for massive eruption many hundreds of years ago. The area sits beneath one of the largest glacier areas in Iceland which in itself could itself explode if and when it comes in contact with hot molten magma.

Some reports indicate that any potential ash would likely travel south towards the Bay of Biscay, then head east over Western Europe, which raises heightened concerns for air travel across the continent.  After the previous air disruption incident, there was heightened debate as to whether European air safety officials overreacted with mass groundings of aircraft.  Then again, which airline or air cargo carrier wants to risk lives and aircraft costing hundreds of millions by flying through or adjacent to volcanic ash and debris clouds?

As noted, the 2010 European air traffic disruption incident was a reminder to the unplanned occurrence of significant supply chain disruption.  Let us all hope that there will not be any occurrence.

Supply chain logistics and customer fulfillment teams need to remain diligent in the coming days.


More Railcar Shortages Loom for U.S. Midwest- Grain Shipments Remain Impacted

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Earlier this year, severe winter conditions across North America coupled with the continued boom of bulk crude oil shipments originating from the Bakken region of North Dakota led to significant railcar bottlenecks and shortages. Business media was quick to note that the rail car shortage problems stemmed from pileups at the BNSF Railway, which was one of other railroads heavily burdened by surging demand for crude oil transport.  The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into the year.  BNSF Locomotive unsized

A recent published report from Bloomberg now indicates that grain farmers in the upper Mid-West region of the United States now have a compounding problem.  The article quotes grain industry sources indicating that 10 to 15 percent of last year’s grain crop still remains stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled.

This problem is expected to now compound further because the harvest of spring wheat is about to take place.  Grain elevators still contain storage of the prior harvest while an expected large harvest needs to be stored and transported to designated domestic and export markets. According to the U.S. Department of Agriculture, the U.S. spring wheat crop will rise to a four year high in the coming weeks, the bulk of which coming from the Dakotas, Minnesota and Montana. The president of the North Dakota Grain Growers Association is quoted as indicating: “With the railroad situation the way it is, it almost looks hopeless as far as catching up.”

From our Supply Chain Matters lens, the key railroad carriers, BNSF and Canadian Pacific seem to be taking the classic rear-view mirror approach to the problem.  A BNSF group vice president reports to Bloomberg that the backlog is expected to be down to less than 2000 past-due railcars by the middle of September.  Bloomberg further reports that as of the end of July, the Canadian Pacific reported in excess of 22,000 requests for grain cars in North Dakota being an average 11.7 weeks late while over 7000 rail cars are over 12 weeks late in Minnesota.

We strongly suspect that farmers, agricultural distributors and consumer goods companies are more interested in the plans that railroads will put in-place to avoid both the past and expected upcoming railcar backlogs.   What are these railroads specifically addressing to get in front of the problem? More than likely the resolution involves broader considerations including crude-oil shipments taking up the bulk of line capacities, along with compounding specialty rail car supply and demand imbalances.

Last winter, rail bottlenecks and delays rippled not only to grain and crude oil, but to other bulk commodities such as sugar and fertilizer, and to the shipment of automobiles and steel. According to this latest Bloomberg report, rail lines anticipate the backlog of grain rail shipments could extend through the October-November period, which overlaps with other agricultural harvests. Some railroads may not recover at all, which will present additional shipping challenges for farmers, grain operators, and indeed other industry supply chains in the coming months. As noted in previous commentaries, ongoing capacity and driver shortages among U.S. trucking companies cannot be relied on to solve this problem, nor is it economical for shippers and producers.

U.S. rail transportation infrastructure remains challenged and there needs to be concerted efforts to address both short and longer-term resolution of consistent reliability in rail shipping networks.

To our readers directly involved in the impacts of these bottlenecks, let us know what you are observing. How can  and should railroads resolve these bottlenecks?

Bob Ferrari


Supply Chain Matters News Capsule: August 8; APICS, Hapag-Lloyd, Resilinc

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following topics: APICS Finalizes Merger with Supply Chain Council (SCC); U.S. Manufacturing Growth Continues at a Scorching Pace; U.S. Regulators Approve Hapag-Lloyd and CSAV Merger But Additional Hurdles Remain; Resilinc Announces Release of Conflict Minerals Reporting Module

APICS Finalizes Merger with Supply Chain Council (SCC)

The merger of APICS and the Supply Chain Council  announced in April is now finalized. An APICS press release notes that the merger “was ratified by a near-unanimous majority of SCC voting members.APICS SCC is the new entity that reflects the combining of SCC and APICS Foundation research and development programs.

According to the announcement, APICS and APICS SCC will share more details about the benefits of the merger early next year.  The completion announcement does make note of broader training curriculum, capturing additional operational efficiencies in back-office support through the sharing of technology platforms.  The latest announcement does not include mention of prior SCC executives and staff.

 

U.S. Manufacturing Growth Continues at a Scorching Pace

U.S. manufacturing and supply chain activity in July was reported to have expanded for the 14th consecutive month and reached a new high. The ISM PMI index rose to 57.1 in July from the 55.3 recoded in July.  The new orders and employment indexes registered healthy gains, an indication of continued momentum as manufacturers move to the second-half of 2014. The New Orders index grew by 4.5 points while the Employment index grew a phenomenal 5.4 points from June. Industry growth was broad, with 17 of the 18 industries tracked reporting increased activity. An economist for Markit noted: “U.S. manufacturers are enjoying a summer of scorching growth.”

 

U.S. Regulators Approve Hapag-Lloyd and CSAV Merger- Additional Hurdles Remain

Also in April, two high profile ocean container shipping lines, German based Hapag-Lloyd and Chile based CSAV announced a merger deal. The combination of these two shipping lines is expected to create the fourth-largest global shipping company in terms of capacity.

This week, U.S. regulators gave the green light to the proposed merger. Chinese and European Commission regulators have yet to weigh in but business media is reporting that approval is expected.  That was the same expectation regarding approval of the proposed P3 Network involving the top three container lines, but China’s maritime regulators balked at approval.

Resilinc Announces Release of Conflict Minerals Reporting Module

Supply chain resiliency technology provider Resilinc announced a new release of the provider’s Conflict Minerals Module, designed to simplify compliance reporting, and align with the provider’s supply chain mapping software. The module is described as providing a network-based approach to enable suppliers to publish conformance information relative to the Dodd-Frank ACT utilizing a singular template. The module is offered at no-cost to the supplier, incorporates multi-language and time-zone report needs while supporting automated assessment tests to categorize incorrect responses and assist suppliers with accurate reporting.


Supply Chain Matters News Capsule- August 1; Apple, Amazon, West Coast Ports, D&B

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following topics: Apple iTime Parent Approval; Amazon Introduces 3D Printing On-Demand Store; No Progress for West Coast Ports Labor Negotiations; Dun and Bradstreet Launches Supplier Risk Manager 2.0

 

Apple iTime Patent Approved

This week a posting on Seeking on Seeking Alpha indicates that the United States Patent and Trademark Office (PTO) revealed details of an Apple submitted device referred to as “iTime”.  According to the filing, this device is capable of integrating GPS, a heart rate monitor, accelerometer and haptic feedback along with a mini-smartphone with audio, touchscreen, video and calling capabilities.

 

Amazon Introduces 3D Printing On-Demand Store

A recent posting on Mashable indicates that Amazon is taking “on-demand’ to a new dimension with its inaugural 3D printing marketplace. The 3D Printing Store will supposedly allow customers to select and customize products that are printed and delivered to the consumer. The store features items such trinkets, accessories, toys and art pieces. According to the posting, Amazon is fronting a handful of 3D printing firms including Sculpteo, MixeeLabs and 3DLT for delivery of these services and products.

 

No Progress for West Coast Ports Labor Negotiations

A report this week on Supply Chain Management Review indicates that labor negotiations among The International Longshore and Warehouse Union and the Pacific Maritime Association involving operations of 29 U.S. west coast ports have been reported as “productive” but without resolution. It has been a full month since the existing labor contract expired at the end of June with no formal contract extensions. The report indicates that both parties temporarily suspended negotiations on July 25 but will resume discussions next week.

The open question remains as to what extent industry supply chains will take alternative routing actions to alleviate any potential disruptions in the upcoming weeks of holiday related goods transit.

 

Dun and Bradstreet Launches Supplier Risk Manager 2.0

Dun and Bradstreet announced the launch of its second-generation Supplier Risk Manager software application. The technology leverages D&B’s proprietary database of 235 million businesses, and provides predictive indicators to enable customers to monitor and receive “red-flag” alerts to supplier events that signify critical risk.  The application now includes what is described as a faster and more intuitive user interface.

 


Supply Chain Matters News Capsule for July 25- Zara, Pratt & Whitney, Hershey, Mars

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following topics: Zara Implementing RFID Tagging System; Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs; Pratt and Whitney and IBM Embark on Predictive Analytics Initiative; U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil

 

Zara Implementing RFID Tagging System

Reports indicate that Zara, a known icon in world class logistics and supply chain management, is implementing a microprocessor-based RFID tagging system to facilitate item-level tracking from factory to point-of-sale. This initiative was revealed at Zara’s parent company, Inditex SA, annual stockholder meeting earlier this month.

The tracking system embeds chips inside of the plastic alarms attached to various garments and supports real-time inventory tracking.  The retailer indicated that the system is already installed in 700 of its retail stores with a further rollout expected to be 500 stores per year.  That would imply that a full rollout to all 6300 Inditex controlled stores would entail a ten year rollout plan.  No financial figures have been shared regarding the cost aspects of this plan.

 

Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs

One of our predictions for 2014 (available for complimentary download from Research Center above) called for stable commodity and supplier prices with certain exceptions.  One of those exceptions is turning out to be both the cost of cocoa and transportation.

Citing current and expected higher commodity, packaging, utility and transportation costs, Hershey announced last week an increase in wholesale prices by a weighted average of 8 percent, which is rather significant. That was followed by an announcement from Mars Chocolate North America this week that it will institute price hikes amounting to seven percent. A Mars statement issued to the Wall Street Journal indicated that it has been three years since the last announced price hike and that Mars have experienced a dramatic increase in the costs of doing business.

According to the WSJ, cocoa grindings, a key gauge for chocolate product demand, has surged over 5 percent across Asia and 4.5 percent in North America.

By our lens, the next move will more than likely come from Mondalez International.

For consumers, indulging in Hershey Kisses, M&M’s and Snickers will be more expensive.

 

Pratt and Whitney and IBM Embark on Predictive Analytics Initiative

Another of our 2014 predictions called for increased technology investments in predictive analytics.  One indication of that trend was an announcement indicating that aircraft engine provider Pratt & Whitney is partnering with IBM to compile and analyze data from upwards of 4000 commercial aircraft engines currently in service.  This effort is directed at developing more predictive indications of potential engine maintenance needs.  According to the announcement, each aircraft engine can generate up to a half terabyte of operational performance data per flight. According to an IBM statement: “By applying real time analytics to structured and unstructured data streams generated by aircraft engines, we can find insights and enable proactive communication and guidance to Pratt & Whitney’s services network and customers.

Previously, Accenture announced a partner effort with General Electric’s Aviation business to apply predictive analytics in areas of fuel-efficient flight paths.

 

U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil

As a response to heightened calls for increased safety of trains carrying crude oil across the United States, the U.S. Department of Transportation announced this week a set of comprehensive new rules for the transportation of crude oil and other flammable materials such as ethanol. The move follows similar efforts announced by a Canadian transportation regulatory agency.

The new rules call for enhanced tank car standards along with new operational requirements for defined high hazard flammable trains that include braking controls and speed restrictions. The new rule proposes the phase-out of the thousands of older and deemed unsafe DOT 111 tank cars within two years. Rail carriers would be required to conduct a rail routing risk assessment that considers 27 safety and security factors and trains containing one million gallons of Bakken crude oil must notify individual U.S. state entities about the operation of such trains.  Trains that haul tank cars not meeting enhanced tank car standards are restricted to 40 miles-per-hour while trains carrying enhanced tank cars would be limited to a 50 miles-per-hour speed restriction. Further under the proposed new rules, the ethanol industry will have up to 2018 to improve or replace tank cars that carry that fuel.

The proposed new rules are now open for industry and public comment over the next 60 days and are expected to go into effect early in 2015. According to various business media reports, there are upwards of 80,000 DOT-111 rail cars currently transporting crude and ethanol shipments.  When the new U.S. and Canadian rules take effect, there is likely to be a boon period for railcar producers and retro-fitters.

 


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