Comments and Letters: Do NVOs like low rates?

Do NVOs like low rates? 
   Your January issue editorial, “Low container-shipping rates aren’t shippers’ problem,” surprised me somewhat, so I let it soak in and thought, “Let’s start the year with a debate”—at least with someone who knows and been around the business for more than three years.
   The issue is how do non-vessel-operating common carriers view rates, especially those of today that are substantially below those in recent years. Your opening remarks would leave one to think that NVOs like low rates to pay to the underlying carrier. It may sound logical, when in fact it is just the opposite.
   Essentially, NVOs work off  margins between their buy and sell rates, and in today’s world their buy rates for the most part are public information. The Shanghai Containerized Freight Index, which is published weekly, tells the world what the NVOs’ buy rates are on the spot market.
   So in early January, when the transpacific eastbound rates to the U.S. West Coast went to $650 per 40-foot container, NVOs’ margins fell right with the buy rates. They couldn’t go to shippers and say, “I want $1,300 to the U.S. West Coast from China base ports,” like they could if the buy rate were, let’s say $1,200. For the most part the NVO makes between 10 and 15 percent margin, so the higher the buy rate the higher the margins. NVOs don’t want low rates; for the most part they don’t do us any good, just the opposite. And for those who think and care about those things, if liner carriers are losing money at those levels, how long before more consolidation occurs and there are fewer carriers from which to choose? That can’t benefit neither the NVOs nor beneficial cargo owners (BCOs). 
   Among the BCOs, it’s a mixed bag; when they budgeted for their 2015-16 service contracts, they had the 2014-15 numbers in place at about $1,500 to the U.S. West Coast and $2,900 to the U.S. East Coast. They may have taken a little off or even added a few percentage points for the 2015-16 contracts and they were very close. But when the spot market dropped to even $1,200 per 40-foot container to the West Coast, their rates were relatively non-competitive and stayed that way. To be sure, some of their volume is moving in the spot market at those rates, but most of it is moving under service contracts at higher levels.
   And lastly on shippers saying low rates aren’t their problem; until the attrition catches up and there are far fewer carriers, things will look a lot differently. But that is tomorrow’s problem, don’t worry, be happy.

Gary Ferrulli
president,
Unicon Logistics,
Los Angeles

Informing industry investors 
   I was kindly invited to Stifel’s Transportation and Logistics Conference in Miami in mid-February, and it’s always an interesting event to attend.
For one, it groups most of the major public truckload and less-than-truckload carriers, as well as freight brokers/third party logistics companies all in the same place. That gives an interesting snapshot of the domestic freight market, from their impression of demand, rates, driver retention, and regulations.
   But more interesting is that this event gives those companies a chance to show investors what they do, and who they are. The crowd is composed of a mixture of institutional investors and industry veterans (sometimes there’s even overlap between those groups).
   The investors are there to learn more about the companies to be swayed. That’s a different audience than carriers, brokers and 3PLs face when presenting at other industry conferences, where the emphasis is on capabilities, strategies and best practices.
   At the Stifel event, the emphasis is numbers, on internal company performance, not external perception of that performance. It makes for a totally different dialogue.
   There are carriers and brokers that are absolutely comfortable in their skin, able to explain their business in a straightforward, but meaningful way, and also able to articulate how they make money doing it. There are others that present in terms of their ethereal strategy (never really making it clear to investors how that strategy will be executed or what the bottom line benefit will be when it is). Or those that talk about growth opportunities by saying how big their market is (failing, of course, to mention their size in their market).
   Boiled down to its essence, the event might seem like a dog-and-pony show for investors, but it is more than that. It’s a window into how the market, and all its constituent parts, thinks of itself. There’s a recipe for real anxiety here—couple the need to impress investors with the reality of how fragmented the trucking and brokerage markets are and you could get some twitchy executives.
   But while external factors (like the economy or regulations) have an indelible impact on carriers as a whole, the ones that run good businesses approach events like this with an air of confidence. There is a clear pecking order among the different categories—the haves and have-nots as Stifel itself has called them in research notes—and the event proceeds with that in mind.
Let’s never forget, just as shippers want to satisfy consumers to make money, transportation companies want to satisfy shippers to make money. This is not a charity business, even as rates in some lanes veer toward pro bono.
   Gaining an understanding of how companies position themselves in front of investors is a great counterpoint to the way they position themselves in front of customers. Service providers like to believe they can serve their customers in all ways, but when they need to explain themselves to would-be investors, it’s very clear where they see their strengths. (Eric Johnson)

Cheap oil bad for canals? 
   SeaIntel Maritime Analysis has stated container carriers can benefit by diverting ships on Asia-to-U.S. East Coast and Asia-to-North Europe services via the Cape of Good Hope, thereby eliminating canal tolls.
   With the price of bunker fuel dropping sharply, the firm said container-shipping companies are rerouting vessels away from the Panama and Suez canals on the backhauls of Asia-U.S. East Coast and Asia-North Europe services, even though they have to speed up to keep ships on schedule. Between October and mid-February, SeaIntel said this was done with 115 vessels, 112 of them on the Asia-USEC backhaul.
   “Our analysis shows that both the Panama and Suez canals face a significant challenge in the current low bunker price,” the firm said.
   Applied more widely, the alternative route around Africa could also help ameliorate the overcapacity problem faced by the container-shipping industry.
   “Slowing down the services by a week in each direction to go around Africa would soak up a potential 60-80 vessels, of which half would be mega-vessels,” SeaIntel wrote. “This could take a significant bite out of the current over-capacity, possibly even (partly) restoring the supply/demand balance.” (Chris Dupin)

Supporting ocean wildlife 
   A recent announcement by Hong Kong-based OOCL was heartening for those interested in ocean conservation.
On Feb. 15, the carrier announced it would no longer accept cargo bookings of “whale, shark, and dolphin, and their related products with immediate effect.”
   An article last year by the Pew Charitable Trust, said “Hong Kong has been front and center” in helping countries implement protections for this trade.
Shark fin soup is a common luxury dish served at weddings and other banquets. A September 2010 article on the website of WildAid reported “50 to 80 percent of all shark fins, or about 10,000 tons goes through Hong Kong ports, with the majority of the product destined for the Chinese mainland, and to a lesser extent Malaysia, Taiwan, Indonesia and Thailand.”
   WildAid said its campaign against shark fin soup, which began more than a decade ago and aired ads with now-retired Houston Rockets center Yao Ming, met with good success.
   It also said this February that a “vast majority of Hong Kong restaurants continue to serve shark fin soup.”
   However, a Pew survey last year found 70 percent of Hong Kong residents have reduced or entirely stopped eating shark fin soup, with 81 percent stating they did so for environmental reasons.
(Chris Dupin)