The Bottom Line: Fuel, tolls, other variables

The operating costs of shipping between East Asia and the U.S. East Coast could fall by up to 30 percent because the labor and fuel costs per container are lower on larger vessels, according to industry experts.

But the cost savings only apply if a ship is full, Michael Wilson, senior vice president of business operations for Hamburg Süd North America, said during a panel discussion at the Intermodal Association of North America’s annual conference in Fort Lauderdale. Fla., in September.

A 10,000-to-12,000-TEU vessel operating through the Panama Canal at only 50 percent utilization will have operating costs per slot that are more expensive than a panamax vessel, he said.

Mega-ship cost savings can also be undercut by ports that have yet to build infrastructure to accommodate the new cargo surges. Loading and unloading can cost more if a port doesn’t have adequate cranes, cargo-handling equipment, storage space, easy intermodal rail access, available chassis and fluid truck gates.

“The cost picture changes more unfavorably as the ship size comes up until the port infrastructure is capable of handling these vessels,” Wilson said. But if those upgrades are in place, “I actually think ports have the potential to be more efficient with fewer, bigger ships” than servicing panamax-size vessels, James Newsome, the head of the South Carolina Ports Authority, said in mid-January at a major transportation conference in Washington, D.C.

The ability of liner firms to run mega-ships through an expanded Panama Canal beginning sometime next year will probably shave more than $400 from vessel operating costs per container, depending on the price of fuel, Kevin Lynskey, deputy director of PortMiami, said at IANA. Whether any of that money gets shared with customers, he added, remains to be seen.

Wilson said ocean carriers provide a great deal of transparency in their pricing models and a lot of savings in recent years have been passed onto shippers as the larger ships have come on line.

And, according to Lynskey, the newest ships will be even more efficient than those cutting the waves today.

“It is interesting that a ship designed today and coming on the market two years from now is designed for slower speeds. Some of the 15,000- and 16,000-TEU vessels designed five years ago, they didn’t get the efficiency,” he said. “So I think there’s still more savings that’s going to pop out of these things.”

The Panama Canal toll structure could influence demand for all-water services to the East Coast, but industry officials say the canal authority officials won’t price themselves out of the market. Vessel operators pay about $80 per TEU, depending on the size of ship, to transit the canal.

“How long they keep that is going to be a mystery because they’re going to do what you would do if you controlled the only street in town: They’re going to price it low, grab market share and start ratcheting it up. But they’re not going to be silly and price it now,” Lynskey said, in part because of competition from the Suez Canal.

“If you look at the savings and the debt payments [for expansion construction] that have to be made, and the fact that 40 percent of revenues for the canal are from containers, you’re not going to have an extraordinary need to hyper-price a container. You might opportunity price it, but they will pay off that investment,” Lynskey said.

And if tolls go up an extra $15 per TEU it won’t eat far into the overall savings from big-ship utilization, he said. Anti-trade rhetoric

During a Republican presidential debate in January, candidates took turns talking tough about trade. It was the first lengthy treatment of the subject in any of the debates so far this campaign season. Infrastructure also made a cameo appearance.

The most interesting idea was posited by Sen. Ted Cruz of Texas. Former “Apprentice” host Donald Trump played his usual shock-jock role, saying he would slap steep tariffs on goods from China if that country didn’t stop unfair policies designed to give its companies unfair trade advantages. He said the United States is running a $505 billion trade deficit with China, when in reality the deficit is closer to $370 billion. He complained that China manipulates its currency to influence exports and heavily taxes U.S. Imports.

Sen. Marco Rubio and Gov. Jeb Bush, both of Florida, cautioned, however, that imposing antidumping duties only hurts U.S. consumers, who end up paying the tariffs, and companies, who get retaliated against.

Sen. Cruz proposed a simple flat tax of 10 percent for individuals and 16 percent for businesses, which would be adjusted downward for exports to offset any tariffs faced in an overseas market. Gov. Chris Christie of New Jersey endorsed tax reform that would allow taxation of repatriated corporate profits to be used for infrastructure investment. On MSNBC’s “Morning Joe” program, Trump said the United States is “becoming like a Third World country” because it is willing to spend $2 trillion to fight a war in Iraq, but not rebuild the backbone of the U.S. economy.

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