Anger Management

Anger Management Shippers struggle for composure as rates rise, ships slow and cargo is held in Asia. Early '10 surge surprises carriers, who must return to money-making.

By Eric Johnson

      The acrimonious relationship between shippers and ocean carriers appears to be nearing an all-time low.
      At one of the container shipping industry's biggest annual events, the Trans-Pacific Maritime Conference in Long Beach, Calif., in March, shippers and carriers unleashed verbal barrages at one another that left the audience buzzing. That the attacks came in sessions that were intended to build toward a more productive 2010 just underscored how fragile relations are as annual contract negotiations approach.
      But the vitriol should have come as little surprise. Tensions have been building for months, ever since carriers took a determined approach to hauling themselves out of the depths of 2009.
      What has rankled shippers of late is a three-pronged undermining of their businesses:
      ' Rates have been rising at pace as carriers try to quickly make money from transporting containers.
      ' Ships are slowing down as carriers try to cut down on fuel consumption and soak up excess capacity.
      ' Most problematic, cargo leaving Asia has been consistently bumped due to a demand surge that has left capacity at a premium. It's a surge that carriers said they didn't see coming, but one in which shippers say as much as 30 percent of their volume leaving Asia has been rolled onto later sailings.
      Those three issues have conspired to send shippers into a rage, none more so than Bjorn Vang Jensen, vice president of global freight and logistics services for Electrolux.
      'We know there are issues on the carrier side,' said Jensen at the conference, sponsored by the Journal of Commerce. 'But this completely unexpected volume surge? There are 2,000 years of shipping experience in this room and nobody figured out that the Chinese New Year fell later than normal this year? And restocking started in October. I don't buy that you couldn't deploy capacity. I do buy that you didn't want to deploy the capacity.'

'You put yourself where you are right now. We didn't do anything. The way carriers are going about this is the problem.'

Pat Moffett vice president of global logistics and customs sompliance, Audiovox Electronics Corp.

      Jensen said shippers should not bear the brunt of poor decisions made by carriers in the last two years.
      'Service has never been worse after getting rates up to break-even, and that's not even talking about slow steaming,' Jensen said. 'I've never seen shippers so angry. You dug that hole. We did not dig that hole. You've got the message. We're pissed off. You have to understand, you've done wrong.'
      Another shipper spoke just as critically about the carriers.
      'You put yourself where you are right now,' said Pat Moffett, vice president of global logistics and customs compliance for Audiovox Electronics Corp. 'We didn't do anything. The way carriers are going about this is the problem. We know that the increases are coming, but you need to get rid of your shovels and stop digging your own graves.'
      If the conference was about building bridges, carriers at least appeared ready to acknowledge the mistakes they made in 2009.
      'I'm optimistic by nature, but we are doing very badly: in terms of customer service,' said Claudio Bozzo, president of Mediterranean Shipping Co. (USA). 'We cut on IT and on training. We had to cut on personnel. The truth is we lost a lot valuable resources. And we were a little slow in rehiring when the surge began. We lost valuable contacts, so you lost the person who you called and you have to teach your business to someone new. Everybody is trying to rebuild these contacts, but it will take months.'
      While there was plenty of hand-wringing, the crux of the matter is how carriers have managed capacity in the first quarter of 2010. Hardly any shippers were ready to begrudge carriers their right to raise rates, but they did feel wronged when rates were rising and thousands of TEUs of capacity were held out of service.
      They are also concerned about how quickly carriers are raising rates.
      'We know rates have to come up to a certain level,' Jensen said. 'It's the pace that we have a problem with.'
      Or as Moffett put it: 'I had 13 40-foot containers bumped off one ship. What took five years to destroy can't be rebuilt in four months.'

Unexpected Surge. The carrier representatives who spoke at the conference said the surge was completely unexpected.
      'What happened the last couple months was a big surprise to everybody,' said Bill Rooney, president of Hanjin Shipping America. 'Everybody attributed it to the restocking of inventory. Capacity will remain fairly tight but not as tight as January and February. We are in business to provide transportation services, so if demand rises, we will provide for it. For us, our winter program will end soon and we'll be adding capacity. One of the problems carriers face is that many shippers want to ship peak volumes from the same ports at the same time.'
      Rooney said the capacity situation in early 2010 will impact contract negotiations and rate levels.
      'If you were in the transpacific trade, for every point of market share, you lost $30 million to $40 million,' he said. 'We cannot provide service unless we're making money and there is no chance of addressing service unless we're making money.'
      A shipper then asked the carrier panel why they agreed to rate reductions near 30 percent in 2009 when most shippers would have been happy with 10 percent to 15 percent reductions. Rooney responded that rates were dropping so fast that carriers faced a difficult decision.
      'We had two choices,' he said. 'Either tell customers we won't accept unsustainable rates and step aside from the business, or stay in the game so that when things came around, you still have a place at the table.'
      That rate volatility, more than anything, plays havoc with the industry, Jensen said. He refuted a notion that Eivind Kolding, chief executive officer of Maersk Line, put forward in a keynote speech earlier in the day. Kolding intimated that increased ocean freight rates had a fairly small impact on the overall cost to produce goods given that ocean transportation is such a small percentage of total cost.
      'When rates increase, that's (millions of dollars) straight off of Electrolux's bottom line,' he said. 'You have to sell a lot of refrigerators and vacuum cleaners to make up for that. The idea that we can accept volatility in rates is offensive. It's also false.'

'We cannot provide service unless we're making money and there is no chance of addressing service unless we're making money.'

Bill Rooney president, Hanjin Shipping America

      Carriers have their issues with shippers too. In his speech, Kolding said carriers need to hold shippers accountable for booking no-shows, a situation that leaves carriers with space to fill at a moment's notice.
      'There's a bad habit of accepting overbooking ' 25 to 35 percent on a transpacific service,' he said. 'This is what we have to do to make sure our ships are full. We need to charge for no-shows. There is no excuse to be 20 percent off of your booking target.'
      But Jensen retorted later: 'If you have 30 percent no-shows, then feel free to load any of the 30 percent of my containers you're rolling.'
      Jensen quickly referred back to 2009, and the way carriers followed each other to the bottom on rates in the transpacific, and especially from Asia to Europe.
      'If zero rates ever existed (as were rumored in early 2009 on the Asia/Europe trade), no shippers ever asked for it,' he said. 'If it existed, it was because it was given. I will never apologize for taking money that is lying around.'
      The sessions' tone was probably not helped by the fact that one session focused only on carriers and the next only on shippers, giving neither side the ability to quickly refute claims made by the other. When carriers were urged to defend themselves during the shipper session, Bob Sappio, senior vice president of Pan-American trade with APL, was quick to point out that both sides were to blame.
      'Carriers behaved stupidly, but there's enough blame to go to both sides of the table,' he said. 'You're telling me there was not a single shipper who tried to leverage down a carrier or e-bid with no room for service? If you think the industry is commoditized, think of which carriers performed and met their commitments.'
      Amidst all the acrimony, there was some talk of how to make things better.
      'We're all better served by a balanced relationship,' Rooney said. 'Sometimes carriers are the villain and sometimes we're the damsel in distress.
      'Shippers should look beyond rate agreements. Shippers should look at the use of premiums and discounts for varying levels of capacity, service and performance, and place a dollar value on consistency and reliability.'
      Rooney advocated the use of scorecards for shippers to rate their carriers, but he also said carriers should reward shippers for accurate forecasting and penalize them for no-shows. He said longer contract durations would smooth out the roller-coaster rate environment, and suggested that there might be a place for indexed rates.
      'We go through this kabuki over what eventually ends up being market rates,' he said. 'Perhaps indexing them might prove beneficial.'
      Jensen said shippers just want what is stated in their contracts: 'We want a new way of contracting that rewards innovative thinking. We want the space we were promised. We don't want to have forecasting people all over Asia sending information to carriers only to have them roll my cargo anyway.'
      He also jabbed the carriers over surcharges: 'I can't go to Wal-Mart and say, 'You've got to pay an emergency copper recovery fee, and don't forget about the steel adjustment factor.'
      Jensen had little time for complaints from one carrier representative that freight rates have not increased in 20 years.
      'Yes, the price stays the same,' he said. 'Boo hoo. A PC costs the same as it did 20 years ago. The price stays the same, but the specs go up. Or the price goes down and the specs don't change.'
      And he railed at what he considered open collaboration by carriers (rather than what used to occur in closed conference meetings).
      'You are allowed to collaborate in full public view,' he said, referring to the current practice of one carrier announcing a rate hike and others quickly following suit. 'I don't think you'd see our industry allowed to do that without some serious scrutiny.'

Contracts Worthless? Given those consistent rate and surcharge increases, the idea that contracts are worthless was a recurring theme as well.

Jimmy Crabbe vice oresident of global ocean freight services, UPS
'I've never seen an industry where the value of a contract is worth less than in our industry. The ink is not even dry before the amendments come.'

      'Every day, we got offered rates $200 lower than the rates we had signed,' said Jimmy Crabbe, vice president of global ocean freight services for UPS. 'The industry is not healthy. It's not sustainable. The question is, how do we avoid this going forward? There's information we are not privy to. Tell me your utilization rates if you tell me you're losing money. Justify why your rates should be higher than another. As much as carriers deny that market share is what they are after, I think that's what put you in this position.'
      Non-vessel-operating common carriers appear to be in a position to gain from the tension.
      'There are long-term partnerships that have been jeopardized,' Crabbe said. 'We've seen some (beneficial cargo owners) come to us for the first time because they have felt let down by the carriers. I've never seen an industry where the value of a contract is worth less than in our industry. The ink is not even dry before the amendments come. It's ridiculous. You can't create stability by signing contracts that are meaningless.'
      Yet Jensen and Moffett both said NVOs still don't provide competitive rates compared to direct relationships with carriers, despite all the service failings they say they encounter.
      'We have considered' using NVOs, Jensen said. 'We polled a number of NVOs as to their interest. We had one stipulation: the NVO had to use carriers we are not using. We have never seen an NVO get within $400 per high-cube (container) of our highest negotiated rate, and I don't expect to. However, it seems to me that NVOs aren't able to get space these days either.'
      Again Moffett agreed.
      'We look at 3PLs and NVOs, but every year, the rate doesn't seem to measure up,' he said. 'I'll always look, but we get more leverage going direct with carriers.'

Working Together. Meanwhile, Bozzo, of MSC, said carriers and shippers have to work together to reduce their joint volume of work.
      'When you don't know who to contact, you get scared you won't get the answer you're looking for, so you start adding 'CCs' to your e-mail,' he said. 'We are collectively making it worse. Rolling cargo, canceling bookings means more work for you as well as us because you spend money to make calls and send e-mails. We have to do something about this. We are generating work for ourselves with no additional value.
      'We may say that customers service is not as good as it was, but the truth is it's as bad as it's been. This is not a problem of this year, it's a problem with this industry.'
      But the underlying problem is finances. Carriers lost so much money in 2009 that they've had to take extraordinary measures to ensure losses don't persist in 2010, even if those measures risk alienating customers.
      Y.M. Kim, president and CEO of Hanjin Shipping and chairman of the Transpacific Stabilization Agreement, said the top 20 carriers lost $11 billion in the first nine months of 2009 and that a $13 billion to $15 billion for the year from those carriers looks likely.
      He said return on investment is notoriously low for carriers, showing a graph that the industry got 7 percent return from its heady days of 2003-2004.
      'Most industries get 10 percent or higher,' he said. 'This trend of high investment and low ROI is not sustainable. Asset values of carriers have been damaged, not just revenue. The industry lost 32 percent of asset value on the transpacific (according to an internal Hanjin estimate) and that hurt our ability to get capital. Carriers need a value recovery to be financially viable.
   'I'm not sure the general rate increase in May (TSA is pushing for an $800 per TEU rate increase in spring negotiations) will bring us back to profitability,' Kim continued. 'People in other industries ask me how we operate at less than the break-even point, and honestly, I don't have an answer.'
      Kim, in one of the more constructive moments of the conference, said partnerships were a necessity.
      'Shippers need on-time delivery, space and availability and service sustainability,' he said. 'Partnerships between shippers and the carrier community can be built. I'm committing myself to more frequent dialogue with you.'
      Sappio added that solutions lie within the Ocean Shipping Reform Act, which 'allows us to get more predictable in how we structure contracts,' an issue he discussed as far back as 2006 ('A missed opportunity,' www.AmericanShipper.com/links).
      And a final encouraging comment came from Moffett.
      'Every year, we come here and people say let's work together and we say, 'That sounds nice,' ' he said. 'This is the year we have to leave here and do something about it.'