Just when we presumed that international ocean container carriers were finally paying more attention to customer cost and service needs vs. their own gross overcapacity challenges, they once again, shoot themselves in the foot.

Bloomberg and other logistics media are reporting that on the heels of modest signs of increased economic activity in the U.S. this past quarter, carriers are now singularly targeting the U.S. inbound market to recoup lost revenues.  The cost to move loaded forty-foot container from China to the U.S. peaked in July 2010 at a cost of $2833, dropped to as low as $1418 in December of 2011, and is now being quoted at an average $1824 per container. While the Bloomberg headline indicates a 28 percent rate increase, as in most events related to freight rates, the reference depends on which context carriers elect in their communications to shippers.

Continued gross overcapacity has led to idled ships, slower steaming times to conserve fuel along with numerous measures directed at cutting costs.  The current Baltic Dry Index, a measure of overall shipping and supply chain activity has slumped 55 percent thus far in 2012, which does not indicate any huge resurgence in global trade. Container ship operators apparently see signs of optimism in the U.S. economy and now want to leverage more revenue.

It is no secret that the world’s ocean container carriers are facing significant needs for consolidation and restructuring.  Reduced shipping volumes exacerbated by global economic turbulence, too many ships in the global fleet, and higher bank borrowing costs brought about by the current Eurozone crisis have placed many of the top  carriers under the looking glass of investment analysts.  In December, top-tier carriers began to form mega-alliances for jointly aligning capacity under the guise of providing enhanced customer service directed at the most active shipping routes. One could speculate why governmental trade agencies and shipping authorities have not taken a closer look at the implications of these alliances.  Perhaps these latest rate increases are the first signs, namely enhanced pricing power in the market.

Recent ship accidents, including the grounding of the ocean container vessel Rena off the coast of New Zealand raise concerns about compromises in safety. While all of this occurs, reliability and on-time performance remains suspect and tracing a container shipment can be a dark hole.

Is it no wonder that the U.S. is currently experiencing a resurgence of insourcing of manufacturing, given the extreme variability of container shipping rates?

In December, we shared our observation that the industry would continue in the midst of a fight for profitability in a highly uncertain global economy. If carriers collectively idle too much capacity, shippers would again be back to the unpleasant situation of the novel set of economics that occurred during the previous severe economic downturn. Overall capacity will shrink, remaining active ships will run at lower speeds to save on operating costs and reserving container space will again become a larger challenge. We speculated on higher rates for time-sensitive or higher volume shipping routes and that seems to be the current pattern.

Our advice to shippers and transportation sourcing teams is the following.  Pay close attention to industry developments and further signs of consolidation.  Seek out longer-term rate assurances but do not lock-in freight rates until clearer signs are evident. Monitor the total number of idled ships globally, especially since the Lunar holiday and peak Asia export shipping season has ended and this is the time when carriers will cut-back on capacity and service levels.  Most of all, demand more reliability measures and penalty compensation for non-conformance to schedule and more visibility to in-transit containers.

Finally- a memo to strategic sourcing teams who oversee contract manufacturing and major component supply.  Time to re-double analysis of current tradeoffs of outsourcing vs. insourcing. The new variable is turbulence in ocean container shipping.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Readers have been no doubt not been able to avoid all of the mass media reporting related to the Costa Concordia cruise ship disaster.  Not only was there loss of life but the circumstances related to this accident are very troubling for all of us to comprehend.

Why did the ship’s master navigate his vessel so close to a known reef? Then there are the unconscionable implications that the captain abandoned his ship before all survivors.

Carnival Corporation, the parent to Costa Crociere was quick to point a finger toward the ship’s captain, Francesco Schettino.  Meanwhile, global-wide media images flooding social and traditional media and continuing incident coverage are fueling a wave of concerns among maritime officials related to the state of safety procedures for large cruise ships.  There are reports that the International Maritime Association is prepared to review safety standards concerning large ships.

As supply chain professionals, we often approach such incidents from a broader lens.  In other words, is this an isolated incident or an indicator of broader issues concerning the safety of very large and potentially dangerous vessels, regardless of cargo?

In early January, we noted New Zealand’s worst maritime disaster, the incident of the stricken cargo ship Rena which is breaking-up on a highly ecological barrier reef.  The vessel struck the Astrolabe Reef enroute to the port of Tauranga in early October and has remained aground all of this time.  There remain concerns for fuel spillage along with some containers carrying hazardous materials spilling their contents in a highly maritime sensitive area. That incident raised troubling questions as to why the ship’s captain steered his vessel dangerously close to a known and long-chartered barrier reef while steaming at 17 knots.  This ship had documented safety problems, including the lashing of containers, and had been retained in previous ports. That incident has raised questions regarding ‘flag of convenience” ship registration to circumvent safety standards as well as whether ship operators and the shipping industry as a whole, reacting to overcapacity and financial trends has taken a zeal for cost control too far.

This weekend, an explosion aboard the 4191 ton oil tanker Doola No. 3 sailing off the coast of South Korea occurred as crewmen were draining gas from an oil tank. That vessel normally transports diesel fuel. had previously discharged a shipment of6500 tons of gasoline.

There have also been other ship related accidents including the August 2010 ship collision that involved the container ship MSC Chitra in waters adjacent to the port of Mumbai.

In six-sigma methodology, we are often reminded to analyze cause and affect patterns.  Too many and too frequent ship related accidents with unexplained circumstances should motivate maritime and government safety officials to take a comprehensive view of current operating practices involving the maritime industry.  Too many lives and too many exposures to more tragedy are at stake.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.

Over this weekend, international media has been reporting on New Zealand’s worst maritime disaster, the story of the stricken cargo ship Rena which is breaking-up on a highly ecological barrier reef.  The vessel  struck the Astrolabe Reef enroute to the port of Tauranga in early October and has remained aground all of this time.  The ship is registered in Liberia, owned and crewed by the Greek shipping company Costamare Inc., and was under charter to Mediterranean Shipping Group (MSC).  Reports indicate that the ship has been servicing routes involving Australia, China, New Zealand and Singapore.

This incident has many twists and turns. The actual grounding incident occurred on October 5th when the cargo ship ran head-on to the reef steaming at 17 knots. The reef itself has been documented on sea charts for over 200 years. At the time of the incident, the ship itself was some distance off course and outside recognized shipping lanes.  Both the captain and second officer, who were in command at the time, were previously arrested by New Zealand maritime authorities and await a formal investigation and hearing.

The ship containers and fuel were initially spilled into adjacent waters. Since October crews were somehow attempting various salvage operations, but continued high seas in the area have finally taken a dangerous toll as the ship is now breaking-up and threatens to do more ecological and other physical damage.

A BBC video and news report this morning notes that heavy seas have snapped off the stern section of the vessel and up to 300 containers have been washed overboard.  Some containers contained milk powder but there are concerns for some potentially dangerous cargos.  Salvage crews, however, had managed to attach tracking devices to suspect containers.  As can be viewed in the video and news account, two parts of the ship are now 20-30 meters apart and the hull has been breached by waves. The BBC reports that container recovery company Braemar Howells noting that 200-300 containers out of 800 still aboard had additionally washed overboard when the ship split. Salvage crews, however, had managed to remove 1100 tonnes of fuel oil from the vessel up to this point, but 385 tonnes remain on board, which to some small extent limits the potential for a far more severe ecological disaster.

This is yet another visible incident of the increasing potential for physical and environmental harm focused in ocean container shipping.  Readers may recall our coverage of the August 2010 incident involving two ships that collided near the port of Mumbai which also provided international news media with many visuals related to the dangers of these incidents.

This incident, however, has far more issues at play. A report published by the New Zealand Herald in late December notes that this vessel had at least 17 documented safety problems identified through ongoing safety inspections conducted in China, Australia and New Zealand prior to the actual grounding incident.  The violations included the metal pins securing cargo container . Authorities in Australia impounded the vessel, noting that containers might not remain secure in rough weather, but released it the next day after Liberian maritime authorities intervened and declared the ship safe to sail. In late September, just prior to the incident, inspectors in the New Zealand port of Bluff documented 19 problems, but allowed the vessel to continue.   The NZ Herald article features one excerpt of mention that should capture the attention of ocean container shippers:

“Whether or not the problems found in July contributed to the navigational error in October or the subsequent loss of cargo, experts say the Australian records paint a picture of an aging ship in poor repair and highlight a dangerous cost-cutting culture under the so-called flag-of-convenience system.”

The whole issue of “flag of convenience” registration, which now accounts for more than half of merchant cargo vessels, is used as a means to avoid safe operating procedures. It is an issue that is sure to come under additional scrutiny in the coming months.

Supply Chain Matters and other industry media have already noted the ongoing excess capacity and financial challenges now impacting the ocean container industry. Too many ships, declining cargo volumes and hemorrhaging balance sheets are evident.  The industry must now come to grips with a potential byproduct, namely issues of overall safety, crew competency and sea readiness of vessels.

Bob Ferrari

A highly significant supply chain related news story comes this week from Honda Motor Co., one that has the potential to bring significant change to North America based manufacturing.  As the Christmas holidays approach, Honda’s North American and supply chain partner employees will certainly have some cheer.

According to an article published in the Wall Street Journal (paid subscription or free metered view restriction), Honda plans to shift a major portion of its production capacity into North America over the next few years.

The implication for Honda’s current North American production facilities and supporting supply chains are highly significant since the numbers indicate as much as a 40 percent increase in production and the positioning of Honda North America as both a producer for both domestic and global export markets.  If the full plans are implemented, North America would represent more than 50 percent of Honda’s global production capability, with export volumes in the range of 200,000 to 300,000 vehicles annually.

The reasons for this major announcement are fairly obvious and far reaching.  With the continued stubborn strength of the Japanese yen making manufacturing exports highly unprofitable, many Japanese based manufacturers can no longer afford to have the bulk of export oriented manufacturing based in Japan.  This has led to many difficult decisions, not only for Japan’s automotive producers, but high tech and consumer electronics manufacturers as well.  The one high visibility exception has been Toyota, with its chairmen continuing to believe that the company has a commitment to continue to have some export production based in Japan. But even Toyota has begun planning for shifting increased capacity and output to North America and other global based facilities.

The other motivation points to global supply chain risk mitigation. The major disruptions concerning the devastating earthquake and tsunami that struck northern Japan and the monsoon-related floods that impacted numerous manufacturing facilities within Thailand have exposed certain risk vulnerabilities. At the height of the tsunami crisis that impacted Japan, Nissan exported V6 engines from its North America plants to Japan in order to keep its southern Japan plants operating. That action, along with others, caused Nissan to overcome the crisis much quicker than some of its Japan based competitors.

As noted in our 2012 Predictions series, 2011 events have been a wake-up call for globally sourced manufacturers, and global insurance and reinsurance carriers are in the process of re-evaluating high risk geographies, which could result in higher insurance premiums for regions more vulnerable to catastrophic natural disaster.

The prospects for increased manufacturing and automotive supply chain related jobs for the U.S. are obvious.  Supply Chain Matters, however, would add a note of caution.  For North America to become a new source of global export capability there will need to be major investments in supply chain and skills infrastructure.  In the case of Honda, the concentration of North American production and supply chain facilities lies in the U.S. Midwest region (Ohio, Indiana, Ontario Canada), and vehicles will have to be transported to export ports on either the U.S. west or east coasts.  If other Japanese and foreign owned manufacturers also expand, current facilities in the U.S. Southern region would add transportation segments to export-related ports.  With the pending opening of an expanded Panama Canal, U.S. ports could experience a dramatic increase in operations. Air freight hubs such as Huntsville and Nashville would be impacted with increased operational volumes.  With inter-modal trucking and rail capacity currently constrained, port authorities as well as rail, third party logistics and trucking carriers will need to invest in added infrastructure, equipment and productivity tools.  In the area of skills, many U.S. manufacturers complain that they cannot fill existing needs because of a lack of technically skilled people.

Our readers in North America should have one significant takeaway from the implications of this latest Honda announcement.  Now is the time to hold politicians and industry accountable for actively supporting and shepherding the required investments in world class transportation, logistics and skills infrastructure that can sustain North America as a global manufacturing hub and a generator of jobs.

The current Congressional gridlock must move beyond partisan politics and focus on what generating jobs really implies.  Recent opinion polls indicate that the U.S. electorate holds their Congressional legislators in the lowest regards.  News commentators now joke that criminals have higher public opinion ratings.

Supply Chain Matters continues to believe that the U.S. Presidential Commission on Jobs and Competitiveness must include in its recommendations both assessment and specific action plans for needed changes in U.S. supply chain and logistics infrastructure, and Congress and industry should immediately act in concert for active implementation of needs.

As the saying goes, when opportunity strikes, take action!

Job growth is on the doorstep, but it comes with a resolve to action. Get involved and have your voice heard.

Bob Ferrari

Supply Chain Matters has been highlighting these past few weeks on the beginning of significant consolidation among ocean container carriers in 2012. Events began with leading carrier Maersk Line launching daily ship sailings from Asia to Europe, which placed additional competitive pressure on the rest of the industry. The was followed by the industry’s second and third biggest carriers, Swiss based Mediterranean Shipping Company (MSC) and France based CMA CGM announcing plans to jointly align capacity in a broad based partnership spanning select routes.  That alliance posed a threat to overtake Maersk in terms of shipment volumes.  MSC additionally invited other carrier lines to join this alliance.

The latest announcement in this cascading set of events is the potential of a mega-alliance in Far East-Europe trade. Six other container shipping lines have announced the formation of an alliance that could potentially include 90 ships spanning 40 different ports. This so-termed G6 Alliance, scheduled to take effect in April 2012, includes may other industry players who have elected to respond with even broader shipper options for routes spanning Asia-Europe and other routes.

Adding more pressure to the industry are reports that the effects of the Eurozone financial crisis will add more challenges, not only for ocean and transport carriers, but airlines as well.  These industries now face significantly higher bank borrowing costs as European banks pull back from existing lending. The Wall Street Journal recently reported that companies now have to turn to the bond market or new banks to secure financing.  There is some speculation that orders for any new vessels, or major overhaul of existing vessels could be severely impacted by credit restrictions.

The winds of a pending shakeout and consolidation within the ocean container industry are growing stronger and with several additional mega-ships scheduled for operational launch in the next few years, the problem of over-capacity becomes ever more extreme. Manufacturers and retailers should have their transportation and logistics teams highly focused on industry developments, including even more restructuring and consolidation.

Now, more than ever, is the time to have various contingency options available.

Bob Ferrari

A little over three weeks ago, we penned a follow-on commentary in the wake of gross overcapacity among ocean container carriers, specifically that the leading carrier, Maersk Line, was launching a customer-focused innovation program to launch daily ship sailings from Asia to Europe. With more idle capacity, Maersk had the means to not only respond to customer needs for more flexibility in scheduling shipper container movements as well as insure more reliability in on-time arrivals. Our commentary noted that competitor lines had cried foul, and claimed that Maersk was attempting to gain further market share at the expense of the remaining carriers.

This week, the industry’s second and third biggest carriers have responded. Switzerland based Mediterranean Shipping Company (MSC) and France based CMA CGM have announced plans to jointly align capacity in a broad based partnership spanning several major ocean routes. The two privately-held and family-owned entities would form trade line partnerships to serve select Asia-Northern Europe, Asia-Southern Africa, and all South America routings. According to a report published in the Financial Times, this new alliance has the potential to overtake Maersk line, with the two lines together jointly representing 21.7 percent of container shipping capacity vs. 15.8 percent for Maersk. MSC has additionally invited other carrier lines to join this alliance in order to insure ships are operating at full cargo capacity. Controlling family members for both lines indicated in press interviews that these actions are required in order to respond to a rather challenging industry environment.

This announcement came shortly after Maersk indicated that it now plans to cut its capacity on Asia to Europe routings, which was noted as a sign that the Eurozone financial crisis is having an additional impact on international trade.  Maersk officials further noted that they would consider idling more capacity after the Lunar New Year in late January. In an article published in the Wall Street Journal, the head of Maersk’s North Asia noted that almost all carriers are now losing money on operations.  A further announcement came from Orient Overseas, which plans to cut Asia-Europe capacity by 20 percent.

Supply Chain Matters believes that carriers are now compelled to action in responding to the realities of gross excess capacity slowing international trade, and attempts by the leading carriers to lock down market share. The announcements are also a prelude to further industry consolidation or carrier exits occurring in 2012 as the strongest attempt to force exit of other carriers.

The open question is what will shipping rates look like in 2012?

While carriers have now announced programs to pool capacity, the industry is in the midst of a fight for profitability and in a highly uncertain global economy. If carriers collectively idle too much capacity, shippers are again back to the unpleasant situation of the novel set of economics that occurred during the previous economic downturn. Overall capacity will shrink, remaining active ships will run at lower speeds to save on operating costs and reserving container space will again become a challenge. There could be higher rates for time-sensitive or higher volume shipping routes.

We want to hear from ocean transportation shippers.  How is your organization planning for 2012 rates and service needs?

Bob Ferrari