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Nov.10, 2014

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BENEATH THE SURFACE Gary Ferrulli 46 THE JOURNAL OF COMMERCE www.joc.com NOVEMBER 10.2014 ONE STEP FORWARD, TWO STEPS BACK IS THERE ANYTHING good to report, or is the congestion on the U.S. West Coast and at some European ports so dominant that nothing else really matters? The situation in Los Angeles- Long Beach is as well-covered a story as I've seen. A mess in the making for months, relief only will come when holiday season shipments slow and before the Chinese New Year surge hits. Real solutions won't be available until all stakeholders get in a room together and don't emerge until they have the answers. Chassis shortages are at the root of much of the problems, experts say, and with nearly 10 percent of chassis unavailable because they need main- tenance — double the norm — those shortages are worse than usual. Some large beneficial cargo owners, meanwhile, are keeping chassis as much as twice as long as two months ago. Logistics within the port areas also adds to the inefficiencies. In the meantime, what happened to longshore labor negotiations? The health care tax issue is unresolved and looks like it will stay that way, according to my contacts. And what about there being no permanent increases in headcount for the Inter- national Longshore and Warehouse Union in more than seven years? Now there aren't enough workers to fill gangs, and terminals are using two or three cranes per vessel when five are available. There is some good news, though. Fuel prices have fallen sig- nificantly since September, includ- ing a 15 percent drop in the first three weeks of October alone. But this is great news to whom? If you're a large BCO or non-vessel-operating common carrier with a service con- tract, you aren't paying a bunker surcharge to begin with. Is it worth asking for a reduction in your con- tract rates? When you signed the contract, bunker prices were well above where they are now. With the big reduction, there's an argument to be made for a rate reduction. Carriers should benefit signifi- cantly from the lower fuel prices, considering their single largest oper- ating cost has declined by more than 20 percent. But spot rates in some trades have fallen by even more. And service contract levels, most of which don't cover carriers' full operating costs, stay steady. Maybe those rev- enue and cost lines are getting closer, but how many carriers have consid- ered or acted upon the lower fuel prices as an excuse to lower rates? There is one clue: Trans-Pacific spot rates spiked and stayed that way for several weeks until after China's national Golden Week holi- day in October, when rates dropped. That's typical of the timing for a rate drop in a historical sense, but it didn't reflect market conditions. Vessels in the trans-Pacific were still relatively full, West Coast ports and terminals were backed up and con- tinue to be, yet rates fell. Why? "Rates always drop after Golden Week," more than one carrier exec- utive told me. That's like saying you keep the heat on when it's 80 degrees outside because it's Febru- ary. Rates are supposed to reflect the market conditions, yet they didn't. That may be a clue that declining fuel prices have some carriers low- ering their rates. The other ray of light is news that G6 Alliance members MOL and OOCL have ordered 10 vessels larger than 18,000 TEUs for the Asia-Europe market. The ships will allow them to operate one string and compete on costs with the 2M partnership of Maersk and Mediter- ranean Shipping Co., and the Ocean Three Alliance among CMA CGM, United Arab Shipping Co. and China Shipping. Although the other G6 members haven't ordered ultra-large vessels, rumors are that they will, though likely not for a few months. In the meantime, those carriers could buy space from MOL and OOCL, if the G6 still exists when the vessels hit the water. The G6 agreement expires in 2016, and if members can't reach consensus on ship sizes, one has to wonder about the longevity. Although many question the validit y of building ultra-large container vessels because of the dif- ficulties they present to ports and terminals and to carriers' ability to fill them, I see them as a necessity for survival in the Asia-Europe market, the world's largest container trade. Without them, carriers can't com- pete without losing money. That's not a great way to run a business. As for landside congestion, ports and terminals must effectively deal with those issues. Lacking some catastrophic event, global trade isn't going to shrink, and the distance between Asia and Europe isn't going to change. Rates will fluctuate based on the market, so service providers must have economically feasible assets in place. And, it isn't as if ports and termi- nals have been caught by surprise; 15,500-TEU ships have been in the water for more than eight years, and carriers are ordering 10,000-TEU- plus ships by the dozens. Yet how many U.S. ports and terminals can handle them efficiently? Why not? The problem, then, is the slow reaction time to what in essence is growing global trade. The ships must be bigger and more efficient. Ports and terminals have to catch up, and as quickly as possible. That won't be easy, but it's necessary. JOC Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him at mrgtf4811@mindspring.com.

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