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Mar.09, 2015

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BENEATH THE SURFACE 76 THE JOURNAL OF COMMERCE MARCH 9.2015 Gary Ferrulli I DON'T KNOW about you, but I want to read or hear about something other than the congestion at West Coast ports, the Pacific Maritime Association and the International Longshore and Warehouse Union. Although the nine-month con- tract "negotiations" that finally brought a tentative agreement on Feb. 20 — and labor relations over- all — are critical issues, there are other important issues to address, including the upcoming negotia- tions for 2015-16 service contracts in the eastbound trans-Pacific. Depending on when you're read- ing this — before, during or after the March 1-4 TPM Conference — you're either preparing to receive, are receiving or already received some insights on where those nego- tiations might be headed. But I'm writing this two weeks before TPM, so I have to rely on my knowledge of what's happening in that market today to conclude what the likely outcome will be come May 1. First and foremost on my mind are carriers' 2014 financial results, which included a few surprises when some carriers that didn't appear to have a chance to report a profit actually did. It's important, of course, to counterbalance that with how those profits came to be — sale of assets, etc., versus pure operating income. Still, more carriers made money than the five or six the indus- try originally anticipated. The flipside of the coin is that one carrier, Maersk, registered a multibillion-dollar profit, and oth- ers came in at hundreds of millions of dollars, with each showing the traditional operating profit rather than asset sales. Finally, other carriers continue to lose money, significant enough in some cases to make me wonder about their long- term viability. A good portion of all of the prof- its, or improvement on the losses, has to do with fuel costs dropping so dra- matically, and not any strategy from anyone within the carriers' offices. A nd t hat br ing s us to t he renewal of trans-Pacific eastbound contracts in about two months. Port congestion has impacted the mar- kets in several ways, besides nearly killing a few segments and diverting a significant amount of cargo to the U.S. East and Gulf coasts. Cost-wise, the port situation has been a killer for carriers, but it's done wonders for freight rates to all coasts, none more so than the East and Gulf coasts. My early discussions with car- riers indicate they are looking at multiple actions to enhance revenue, one of which would be increases to the U.S. West Coast even for the largest beneficial cargo owners. We aren't talking increases measuring in the hundreds of dollars, but cer- tainly something more than carriers got last year. The second part of the equation is the MQCs, or minimum quantity commitments. Almost shockingly, I'm hearing that more carriers want to limit the volumes they agree to move for the large BCOs. Some have learned that what Maersk has been doing for at least a few years is revenue management, moving less service contract cargo and handling more spot market cargo, some of which moved last year for $1,000 more per 20-foot container. On ships carrying 8,000 TEUs or more, a 25 percent bump in spot market cargo hits the bottom line quite nicely. When the dust settles on the West Coast (will it ever?) and ports and terminals return to normal oper- ations, I expect the high spot market rates to the East and Gulf coasts to come down. But with space utiliza- tion likely to be high because BCOs don't want to put all of their eggs in the West Coast basket again, the rates will be higher than 2014-15 levels, maybe by $200 per TEU or more. If — and in my mind there shouldn't be any ifs, but I know better — the carriers get $150 more per TEU to the U.S. West Coast and at least that much to East and Gulf Coast ports, and if fuel prices don't spike again, the industry could see some rather attractive operating income numbers in the trans-Pacific, where there has been little or no profit for several years. That appears to be an almost best-case scenario for the carriers. But in their collective economic situation, why not? Well, history says that doing what's best for the bottom line is a rare occurrence for the industry as a whole. Carriers did that in late 2009 and 2010 by remov- ing massive amounts of capacity from global markets. They've never repeated those actions, although on several occasions they could and should have. So will the carriers take the course to profitability in the 2015-16 contract negotiations? Or will the lure of market share protection or expansion come into play as it has so many times in the past? I've always been told, and learned over time, that the market sets the rates. The market set the rates well up in the latter part of 2014 and the beginning of 2015, because of market conditions. Some of those conditions will be lingering in March, maybe even April. Will that be enough to push service con- tract rates up for large BCOs, thereby setting the table for the rest of the market? Stay tuned. JOC Gary Ferrulli is president North America for Unicon Logistics. Contact him at THE OTHER CONTRACT TALKS

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