Last year saw massive changes in container shipping, but will they benefit retailers and other shippers in 2017?
Source: ©2017 DEUTSCHE POST AG
This year, shippers will have to grapple with the implications of changes that rocked the container shipping industry in 2016 – the continued delivery and deployment of dozens of mega-containerships; widespread overcapacity; carriers suffering huge financial losses, eventually leading to the Hanjin Shipping bankruptcy; and a wave of mergers and acquisitions, some consummated and some still in progress.
Many retailers and others importing goods from Asia are grappling with these changes as they renegotiate transpacific shipping contracts, which commonly run from May 1 to April 30.
Those contracts will kick in as carriers consolidate the four major global container carrier alliances on the east-west trades between Asia, North America and Europe into just three agreements this April.
The Trump Factor. Adding more uncertainty is the election of Donald Trump, who has questioned how much the United States is benefiting from international trade, often focusing his attention on the outsourcing of jobs to and importing of goods from Mexico and China.
Trump’s transition team has reportedly discussed imposing tariffs as high as 10 percent on imports in order to spur U.S. manufacturing, either through executive action or as part of a tax reform package.
Still, it’s early to tell if Trump’s rhetoric, or the actions of his new administration, will reduce container trade.
It’s one thing for Trump to convince Carrier to keep making air conditioners in Indiana or Ford not to open another assembly plant in Mexico, but it will be a much heavier lift to return other manufacturing jobs to the U.S.
For example, 97.3 percent of the apparel and 98.4 of footwear consumed in the U.S. in 2015 was imported, with 33.5 percent of apparel and 75.4 percent of footwear from China, according to U.S. government statistics cited by the American Apparel and Footwear Association (AAFA).
According to the Peterson Institute for International Economics, “For 825 products out of a total of about 5,000, adding up to nearly $300 billion, China supplies more than all other U.S. trade partners.”
“Clearly there’s a downside risk,” said Paul Bingham, vice president of trade and logistics at Economic Development Research Group. “Any move by Congress to actually throw up tariffs or even non-tariff barriers can certainly inhibit the volume of trade pretty quickly on the transpacific.”
Tariffs or other barriers thrown up by other countries – whether pre-emptive or retaliatory – could also hurt U.S. exports.
Case in point: China last month raised and made permanent tariffs first put in place in January 2016 on U.S. exports of corn, ethanol, and distiller’s dried grains with solubles (DDGS), an ethanol byproduct used as animal feed.
“These tariffs are the poster child of bad trade deals,” said Mark Marquis, chief executive officer of ethanol maker Marquis Energy. According to his firm, “U.S. farmers say these unfair tariffs will cost U.S. agriculture at least $2 billion per year.”
Last year, 234,895 TEUs of DDGS were exported from the U.S., 94,119 of those TEUs to China, according to data from trade information supplier Datamyne. Even with the lower tariffs in 2016, exports from the U.S. plummeted 70 percent in FOB value in the first 11 months of the year to $467 million.
“Even if there is some move to inhibit imports, if the dollar keeps strengthening, that will keep working to the advantage of the companies exporting to the U.S. and damage potential for exporters from the U.S.,” noted Bingham. “That will filter through to the container trades, as it has in the past for those products where the U.S. has essentially been a ‘swing supplier,’ and be competed away by other countries trying to export like the Europeans, Japanese, Canadians or Australians.” Many of those products are agricultural.
The Right Direction? Regardless of U.S. trade policy, some shippers are questioning the direction the container industry is heading. A report published in November by the Global Shippers Forum and supported by the National Industrial Transportation League said “mega-ships and strategic alliances reduce supply chain efficiency and rivalry on important parameters of competition, including capacity, sailing frequency, transit times, ports of call and associated service quality.”
The report asked if “the time is right to question the received wisdom that shipping alliances and consortia are preferable to consolidation between carriers,” even as 2016 saw the consummation of the COSCO-China Shipping and CMA CGM-APL mergers, and the announcement of mergers by Hapag-Lloyd and UASC, Maersk and Hamburg Süd, and the liner operations of Japanese carriers NYK, MOL, and “K” Line.
“To be honest, we’re still trying to figure out if the alliances, as a whole are good or bad,” said Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation (NRF).
Jessica Dankert, senior director of retail operations at the Retail Industry Leaders Association (RILA), says ocean carrier competition is important for retailers, and that with consolidation comes a risk of “further commoditization” of ocean shipping services.
“It’s important to maintain that degree of competition,” she said, so carriers can “differentiate both at the alliance level and the individual carrier-line level.”
Walter Kemmsies, an economist for Jones Lang LaSalle (JLL), believes further container industry consolidation is likely, but noted there is still “an awful lot of supply out there,” and rates could continue to suffer. Whether last year’s record containership demolition pace continues will be key.
Hanjin Bankruptcy. Hanjin’s insolvency had an “outsized impact” on the apparel and footwear industry, said Nate Herman, senior vice president of the AAFA. As manufacturers negotiate new contracts, many are taking additional steps to ensure they are sufficiently diversified should one of their carriers fall into financial distress. It took months in some cases for shippers to recover goods that had been in transit with Hanjin when the company went bust. Even last month Gold was hearing from NRF members still trying to return empty Hanjin containers.
London-based consultant Drewry estimates container carriers lost $5 billion in 2016 and projects average freight rates (blended contract and spot) will rise 12 percent globally and 14 percent on east-west trades, cautioning that contract rates could jump 20 percent to 40 percent on certain lanes in 2017.
There could be a “flight to quality,” as shippers seeking to book cargo only with the most financially stable carriers, said Drewry. But Herman said there is a “certain murkiness” surrounding the finances of some carriers, and that the demise of Hanjin was a surprise for most AAFA members.
“We learned from Hanjin that it’s not just one carrier who’s affected because of the shared space,” added Gold.
Dankert said retailers “are paying really close attention to” the reduction in the number of alliances and the long-range outlook for carriers as they negotiate contracts.
U.S. Federal Maritime Commissioner William P. Doyle said THE Alliance, one of the space sharing agreements that goes into effect in April, has inserted “framework language” about how members of the alliance could deal with a carrier in financial trouble.
The details still need to be worked out, but in theory, if an alliance carrier failed, a collective funding mechanism “could be used to pay operational expenses to bring ships into port and unload containers to ensure that cargo is not stranded on the water,” he said.
FMC Commissioner Rebecca Dye noted that such a plan is not part of the competition analysis performed by the commission, but she supports the idea if it is “in response to concerns and needs that are expressed by their customers and the marketplace.”
Herman said shippers are pleased with THE Alliance’s plan, but noted “the proof is in the pudding. Hopefully we won’t have to see how it works in reality.”
Bill Heaney, vice president and head of consumer and retail sectors in the Americas region for DHL Global Forwarding, said he is having more in-depth discussions with shippers “regarding bringing an NVO into their carrier base or contracts so they can be sufficiently diversified.”
Small retailers were always willing to talk to NVOs because they didn’t have the buying power to get lower rates, he said, and large retailers would sometimes use NVOs on smaller, more challenging lanes. But this year, even the largest retailers are talking to DHL in order to ensure carrier diversification, as well as maintain service to all the ports they had previously utilized.
Detention And Demurrage. Shippers have become increasingly concerned about port congestion, whether it is caused by the challenges associated with working larger ships, poor weather, insufficient infrastructure in and around ports, or labor problems such as those seen during the 2014-15 contract negotiations between the International Longshore and Warehouse Union and employers.
After being hit with extensive detention and demurrage charges even when congestion prevented them from retrieving or delivering containers on time, a group of shippers petitioned the FMC in December to clarify when such penalties are “just and reasonable.” (Demurrage is a charge imposed on shippers for space occupied by a container at a terminal after a specified number of days, also known as “free time,” expires. Detention is a charge for the use of equipment such as containers and chassis after a similar grace period.)
National Portal. A major initiative of the Federal Maritime Commission in 2016 was the creation of “Supply Chain Innovation Teams” that initially focused on improving the flow of imports through the largest U.S. cargo ports – Los Angeles, Long Beach, and New York/New Jersey – and are now turning to exports in their second phase.
Dye, who is heading up the FMC’s efforts, said the teams are “attempting to integrate the American supply chain by developing critical information that each of the actors need, making sure that it’s made available by the other actors.”
For example, information from port operators about when import containers are available for pickup must be accessible by shippers, information technology firms and inland transportation providers in a format that they can actually can use.
The FMC will create a pilot national information portal once the information needs of companies involved in exports have been determined, she said.
Dankert said RILA members hope the Trump administration will support increased investment in infrastructure, but it is crucial that “they are smart investments, and that we are looking at the network as a whole, and not just individual parts.”
Both Dankert and Gold said they were hopeful that efforts to improve the flow of cargo through the ports of Los Angeles and Long Beach by changing the way the PierPass program works would be successful.
PierPass funds operations of container terminals in L.A. and Long Beach at night and on weekends, and provides an incentive to use off-peak hours by collecting a fee on container cargo that moves in and out of terminals on weekdays. Many terminals in the two ports have also instituted appointment programs for draymen.
Stakeholders in recent months have discussed reforming the PierPass program to require reservations for all container movements and changing to a fee that would be charged round the clock. Another idea is to create a port-wide “peel-off” program where drayage movements would be handled in much the same way taxi drivers serve passengers in a queue at an airport, taking whatever cargo is given to them to whatever destination the shipper has specified.
Gold said after a decade in operation, it makes sense to evaluate PierPass and see if reforms are needed.
Other ports are also taking steps to improve the flow of cargo. Oakland terminals have set up truck reservation programs and nighttime hours, while the GCT Bayonne Terminal in New Jersey began phasing in an appointment system in January.
Omni-channel. One of the biggest conundrums facing retailers these days is figuring out how to reconfigure their distribution networks and physical store networks in the face of increased online shopping. Major retailers, including Macy’s, Kohl’s, Sears, and Walmart, have announced plans to close stores as a result of shifting demand patterns.
At the same time, Heaney says an increasing number of retailers are seeking multiple distribution centers closer to consumers so they can offer next-day (or at least faster) delivery to customers at their homes or local stores.
Mike Curless, chief investment officer for industrial and logistics real estate developer Prologis, said his company has seen growing activity by retailers, not just for space linked to “last-mile” deliveries, but for more traditional distribution requirements as well.
Three or four years ago, big retail distribution centers were more likely to be located in tertiary markets where real estate was less expensive. But retailers today are migrating those facilities to large population centers with major airports and, in some cases, seaports.
Consumer delivery expectations driven in large part by companies like Amazon are changing the decision-making process around facility location, said Curless. Proximity to major population centers is critical to having same-day, or even one- or two-day, delivery capabilities.
Because they are more likely to handle parcels than pallets, and because they are more likely to be involved in reverse logistics (some analysts say nearly 30 percent of e-commerce goods are returned, compared to 10 percent of goods sold through brick-and-mortar stores), e-commerce facilities must also be larger.
Greg West, vice president of less-than-truckload (LTL) at C.H. Robinson, said retailers and consumer goods companies are trying to find the best way to serve an omni-channel consumer that may want to shop on the internet, at a store, or over the phone.
Some companies are looking to spread inventory to more distribution locations or stores, as well as putting more pressure on their transportation providers and requiring tighter delivery times for merchandise.
If products are moving through a number of different distribution centers on their way from the port to the retailer, “there’s more of a chance for things to go wrong and on-time is probably just more difficult,” said West.
As a result, C.H Robinson has increased the scale of its LTL offerings and built a network of 16 consolidation centers, where products from multiple suppliers are co-loaded and then sent to retail distribution centers, helping suppliers to reduce the variability of delivery times to retailers.
Lisa Harrington, president of supply chain and logistics consultant the LHarrington Group, said she believes many manufacturing sectors – not just retail and fashion – may move toward shorter, regional supply chains due to the exponential growth of e-commerce and the accompanying consumer demand for shorter delivery times.
Instead of so many products being manufactured in China and moved over long distances to markets in the U.S., for example, those products could be made elsewhere in the Americas and shipped to the U.S. on north-south routes.
Harrington pointed to the success of clothing retailer Zara, which “broke the mold” by manufacturing clothing in Spain instead of Asia in order to shorten its supply chain.
Manufacturers must serve two masters, time and cost, she said. The ability to use analytical software down to the item level will make it possible to determine when it makes sense to produce an item closer to consumers and reduce inventory, or when manufacturing cost is paramount and longer delivery times make sense.