Experts predict bleak picture for 2008 West Coast shipping year
Fuel costs, the Chinese Olympics and the U.S. economic downturn will present challenges and possible pitfalls for the 2008 West Coast shipping year, industry experts predicted Wednesday.
Supply chain experts from the shipping, trucking, marine terminal, rail, retail and financial sectors all agreed 2008 is shaping up as a bleak year, with uncertain days ahead that may hold even more economic pain.
Economist Paul Bingham of Global Insights set the mood at Wednesday's 2008 Annual Peak Season Forecast Conference in Long Beach, telling the audience of nearly 500 the United States has been in a recession for several months, though his firm does not see the rest of the world slipping into a global recession similar to 2001.
'Our prediction for 2008 is slower growth,' Bingham said. 'From the perspective of a downturn, this year is going to be much more mild than what we saw in 2001.'
One serious problem Bingham predicts is overcapacity due in large part to the industry's aggressive construction of megaships greater than 7,500 TEUs. New vessels coming onboard this year represent 13 percent more capacity in the entire world fleet, he said.
'Trade is not growing that fast,' Bingham said, 'So, the question is, what do they do with all that capacity?' He believes the new capacity will be reluctantly placed in the transpacific trade.
He also said high fuel prices remain an issue for the industry. 'It is likely that these very high fuel prices we're seeing today are not likely to reduce substantially through the end of the year.'
While Bingham predicted that some of the additional fuel costs will be passed along to customers, some will need to be absorbed by the shipping lines, further affecting their financial situation and another factor in lowering demand for trade, including during the key peak season.
'We will have a peak season this year, but it will be very moderate in terms of volume, but it will still be running at volumes greater than 2005,' Bingham said. 'So understand that there is some weakness in growth here, but we're still talking about very significant volumes of cargo though the ports, even on the inbound side.'
Cargo owners also warned that exchange rates and the rise in fuel and raw materials in China will slash profit margins.
Charlie Woo, head of MegaToys in Los Angeles, said that for the last 20 years when retailers went to China to price goods, the overcapacity of manufacturing resulted in lower prices year after year. 'Except now,' Woo said. 'In the space of a month or two, my costs went up by 15 percent and now I have about a 5 percent margin left.'
Woo said that even if the fluctuating exchange rate between the Chinese and U.S. currencies stabilizes for the rest of the year, he and other retailers will still be faced with 'very thin' profit margins. Fluctuations such as these are not a large concern when the retailers had large profit margins, but with falling margins, they have become a greater concern.
'Now that I am down to almost no profit, I am trying to find every dime,' Woo said.
Presenting the ocean carrier perspective, Brian Black, a senior vice president at Hyundai Merchant Marine, also named the rise in fuel costs as a major challenge. 'Right now about 60 percent of our costs to operating our transpacific vessels are related to fuel,' he said.
Carriers are getting hit by a 'triple dip' when adding in the railroads fuel surcharge and trucking fuel surcharge to the initial outlays for vessel fuel, he said, adding carriers cannot bear fuel costs indefinitely.
'This year in negotiations, both for imports and exports, the carriers are going to have to share the costs with you as the importer or exporter to help with the cost of fuel,' Black told the audience.
Black also said that while his firm projects continued strong growth in exports with lightly better growth in imports over 2006, a real challenge this year will be presented by the Olympics in Shanghai.
The Chinese government had previously announced that to clean the air in Shanghai, factories around the city would be shut down four to six weeks before the Olympics. Black said his firm has received indications that the shutdown will actually occur eight weeks before the opening ceremonies. There will be three possible options for importers dependent on the Shanghai manufacturing plants: ship before the Olympics, find other sources outside Shanghai, or wait until the Olympics are over.
“Whatever happens, it’s going to require careful planning,” he said.
One optimistic point mentioned by all eight panelists related to the ongoing negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association. However, other than each panelists saying that they were not too concerned about the contract talks, little was said about the talks, even from the ILWU and PMA panelists.
PMA representative Doug Tilden said during the disastrous 2002 talks that led to a 10-day lockout of dockworkers, both sides attempted to try the case in the press. 'This will not happen this time,' Tilden said. 'The environment for reaching a conclusion is the best it has ever been and the relationship between the two sides is at a high-water mark.'
Mike Mitre, head of the ILWU's 20,000-member Local 13, also refused to discuss contract talks, but instead focused on problems in the ports that could lead to loss of jobs. He pointed most directly at the lack of development at the two ports over the past five year caused by environmental issues.
'We live in the local communities,' Mitre said, 'We don't want our kids getting asthma ' but we also don't won't to get into a situation where we chase work away.' He said the ILWU understands environmental concerns and the need for terminal development must find a balance.
'But when you start talking about these environmental groups that have had such a large say — some of these groups are about a dozen people. We're talking about 100,000 affected ILWU family members,' Mitre said. 'Those 12, 15, or 17 people, somehow, do not outweigh the local workforce that these local towns are supported by.'
Frank Pisano, vice president of the TraPac Terminal at the Port of Los Angeles, pointed out that his 8-year-old son was born the year his terminal began working on its redevelopment plan that remains stalled by environmental issues.
'We have lost 50 percent of our business,' Pisano said of the delays, despite the plan creating more than $400,000 a week in ILWU wages and removing 8,000 truck trips from local freeways. 'Tell me how people are harmed by removing 8,000 truck trips a week? It is endless. What do these guys want?'
The existing inefficiencies at the ports that should be addressed by development are costing the industry in a big way, he added.
'If you are carrying on an 8,000-TEU ship, you are losing on average $500 per container when you come into Long Beach or Los Angeles,' he said. 'Nobody is making money in this business. Nobody.' ' Keith Higginbotham