Make room

Make room Obama's export ambitions push ship capacity issue to forefront.

By Chris Dupin

      With President Obama proposing an ambitious plan to double U.S. exports in the next five years, the shipping industry's ability to help reach that goal is being scrutinized by both Congress and the Federal Maritime Commission.
      'If individual economic trends in the maritime industry do not support the increased carriage of products from the U.S. to destinations abroad, our nation's ability to expand its exports may be threatened even if there is increased demand for such products,' said Rep. Elijah E. Cummings, D-Md., chairman of the House Subcommittee on Coast Guard and Maritime Transportation.
      'Just as demand for U.S. goods abroad has begun to rise, shippers are finding that outbound capacity is limited and that containers are scarce, particularly in the U.S. interior where many agricultural exports are produced,' said Cummings at a congressional hearing in March on whether there is sufficient capacity on vessels to meet U.S. import and export requirements.
      'U.S. exporters also report that when service is available, carriers are often assessing extra surcharges in an attempt to raise their revenues,' he added.
      At the hearing Cummings and the subcommittee heard from frustrated shippers and their representatives, a steamship executive, and FMC commissioners.
      'I'm basically at the end of my rope,' said Chris Mullally, president of Mohawk Trading Co. in Albany, N.Y., an exporter of cattle hides. 'While there is much talk at this table about the problem getting enough containers, I would like to say the bigger problem is that even when we can get these containers today, we cannot get them on a ship. I cannot ship my product to the customer who has bought it and the delays have become tremendous.'
      The hearing came just days after the FMC announced it was launching a fact-finding investigation into the capacity issue.

Lidinsky

      FMC Chairman Richard Lidinsky told Cummings' committee that his agency was 'keenly aware of complaints by U.S. exporters and, more recently, importers about the difficulty obtaining space to ship their products.
      'The reports from shippers have been remarkably similar. Many say they have been forced to amend their service contracts and commit to higher rates in order for carriers to transport their cargo. Many have had shipments delayed or 'rolled' to future sailings. Exporters, particularly agricultural exporters, have had difficulty obtaining containers,' Lidinsky said.

Dye

      In April, FMC Commissioner Rebecca F. Dye, acting as fact-finding officer, began holding hearings as part of the investigation, soliciting confidential testimony from U.S. exporters and importers, carriers, ports and other industry participants about shipping capacity challenges.
      Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation, said he was encouraging his members, who include some of the biggest importers, to submit comments to the FMC.
      NRF members are upset about cargo rolled or bookings being refused in late 2009 and early this year, he said. In some cases, shippers who had signed contracts in early 2009 were asked to pay emergency rate charges and after they did, cargo space became available.
      The issue is coloring negotiations between importers and carriers this year with 'a lot of shippers expressing disappointment with what happened. The same issue is coming up, with fears for the end of this year and early next year,' Gold said.
      'There is still a concern that carriers will not bring back all the capacity until they see a steady demand and increased rates,' he said. 'We are forecasting there will be an increase in trade during the year and we need to make sure there is capacity there to handle it.

Craig

      'We wouldn't be surprised if there is a concurrent hearing on the Senate side within the next couple of months. This issue is very timely,' said Ashley Craig, an attorney specializing in international regulatory, legislative and policy issues at Washington-based law firm Venable.
      The issue has 'bubbled up to the point where you have large U.S. exporters and inbound U.S. importers who are feeling the pinch. It's a political item; there is no way around it,' Craig said.
      The focus on boosting exports could give new traction to goals long held by some shippers, such as the desire to end the limited antitrust immunity that carriers enjoy within U.S. discussion agreements.

Berzon

      'Continuation of limited antitrust immunity for ocean liner carriers remains a barrier to achieving an even more robust, competitive and efficient maritime industry,' Michael Berzon, head of the National Industrial Transportation League's ocean transportation committee, told Cummings and the committee.
      He noted European Union regulations do not permit discussion agreements among carriers in liner services calling on the continent, and the NIT League believes this more market-based approach 'provides European companies a distinct advantage over their U.S. counterparts.'
      'How much different would the current shipping environment be, regarding carrier-shipper relations and capacity circumstances if antitrust immunity was not part of the carrier's business model?' asked Hayden Swofford, executive director of the Pacific Northwest Asia Shippers Association, a Langley, Wash.-based group that arranges transport for forest product shippers, during committee testimony.
      Craig said there are a number of competitive questions revolving around the capacity issue, including whether carriers are strictly abiding by their so-called discussion agreements with the FMC, which allow them to discuss general economic trends, but not capacity.
      U.S. regulators' interest could be mirrored by those in Europe, said John Cassels, an attorney with Field Fisher Waterhouse in London.
      'The relationship between the U.S. and European Union authorities is symbiotic ' where one leads, the other one tends to follow,' he said.
      With the end of the bloc exemption for liner shipping companies in Europe two years ago, the industry may be scrutinized because of the theory that 'commercial behavior lags behind where the rules actually are.' In addition, he said the new EC vice president in charge of competition policy, Joaqu'n Almunia, has shown a keen interest in transportation.
      Cassels said he would not be surprised if some shippers moving product between Asia and Europe have contacted European officials 'sparked on by what's going on in the U.S.' with the FMC's interest in the transpacific trade.
      Craig even suggested the Justice Department might take a look at the industry, noting that happened a decade ago when the FMC was investigating the Transpacific Stabilization Agreement.
      Lidinsky noted carriers estimate their collective losses to be $15 billion to $20 billion in 2009.

Sappio

      It was 'the worst year in the liner
shipping industry,' Robert Sappio, senior vice president at APL, told the House subcommittee.
      Carriers cut capacity sharply, he explained, because two years of turmoil in the business, including a 15 percent drop in container volumes, caused a sharp reversal from the average 9 percent growth the industry experienced from 1987 to 2008.
      'Carriers are in business, and certainly APL is in business to build ships and move cargo,' Sappio told the subcommittee. 'We are not in the business of limiting capacity.'
      He added the sharing of economic data and growth or decline in traffic on various trade lanes by discussion agreements 'is absolutely something that does not lead to a restriction of capacity.'

Koch

      Chris Koch, president and chief executive officer of the World Shipping Council, said the problems exporters are facing 'is a market issue ' for some shippers, when capacity is at levels it is today, they are facing some issues they have not faced in the past.'
      The primary issue facing exporters is getting containers to inland locations where they want to load cargo, 'but where equipment does not want to logically go.'
      If agricultural products exporters want to regularly move goods by container, they will have to commit to volumes and rates that will be attractive to carriers to position equipment at inland locations, he said.
      Koch also noted ports such as Long Beach, which have capacity on ships for export cargo and surplus containers, are seeking to attract shippers who will move cargo by rail in bulk and transload it in Southern California.
      Sappio told Congress that a problem for container carriers moving exports from the United States is 'ghost bookings,' where shippers book space on ships, but then don't show up with cargo.
      Ghost bookings are a major problem, carriers say. Sappio said historically about 20 percent of shippers' export bookings fail to
materialize. Maersk gives an even higher figure: 'Today, it is not unusual for over a third of our bookings not to materialize, and the figure is often even higher.'
      Maersk in April plans to institute a program that would fine shippers if they book space on ships and then don't produce cargo. Uffe Ostergaard, head of yield management for Maersk Line, said the company has rolled out the program on two routes:
      ' China to the Middle East, where the penalty will be $100 if the shipper does not produce the box for which it has made a booking.
      'A string from the U.S. West Coast to Asia, where the penalty will be $10 per box. But the company would also pay the shipper $10 if it accepts a booking, but then is forced to cancel it.
      The idea is not to create a new revenue stream, but to limit cancellations, Ostergaard said. The company hopes to eventually roll out the program globally.
      The idea intrigues Peter Friedmann, executive director of the Agriculture Transportation Coalition. Some AgTC members have expressed frustration about the availability of capacity for export products.
      He said there has been discussion of 'some regulation under the Shipping Act, whether there should be penalties for carriers who deny a booking once they have taken it.'
      But he didn't think the $10 fee was meaningful.
      'I would say in the current environment shippers would prefer those numbers be 10-20 fold,' of what Maersk has announced, he said, or even as much as a $1,000 penalty. 'In other words, make it a meaningful contract.'