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June01, 2015

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28 THE JOURNAL OF COMMERCE JUNE 1.2015 BENEATH THE SURFACE TOP 100 IMPORTERS AND EXPORTERS Gary Ferrulli IT SEEMS LIKE mere weeks since we heard TPM Conference speakers in Long Beach, including keynoter Karl Gernandt of Kuehne + Nagel, discuss low ocean rates in major trades and their relationship to subpar service — "discounted rates equal discounted services." Trans- Pacif ic ea stbound rates, some speakers noted, would rebound in the next round of service con - tracts, running through next April — maybe not to levels the Transpa- cific Stabilization Agreement was suggesting, but up nonetheless. How quick ly t hat rhetoric appears to have turned into an early Christmas for beneficial cargo own- ers. Anticipating the supply-demand ratios again were trending to the demand side for the year, rates for major BCOs barely moved, if at all. To be sure, some inland point inter- modal rates bumped up, but still aren't close to the cost levels asso- ciated with providing the services. Rates to the U.S. East Coast also increased slightly from last year's contract levels, but are still hundreds of dollars below recent spot market rates. Imagine a scenario that nego- tiations are actually occurring on ships that have been full for weeks, if not months. But in the spirit of Old St. Nick, reducing prevailing rates by $500 while anticipating what the market will be in three months can only come true in fairy tales and con- tainerized shipping. The trans-Pacific hasn't been profitable for carriers in at least three years. So, after hearing the clamor for more reliable services, even faster services, and hearing BCOs say they would pay more for reliable services, why would carriers go the opposite direction? The com- bination of needing to be profitable and customers wanting reliable ser- vices should be enough evidence, if not incentive, for carriers to change their strategies, solidify rate struc- tures to a profitable level, and indeed provide reliable services. So why don't they? Some will say the supply-demand ratios and the new capacity entering the market kept rates down. Not so fast, when you consider I'm receiv- ing calls from BCO interests saying, "Listen to what I was just offered." These BCOs hadn't even begun to negotiate when some carriers offered lower rates, setting the tone for what followed. Some carriers again chose to opt out of service contracts and their falling rate levels with specific large shippers, focusing instead on the spot market and midsize BCOs and non-vessel-operating common carriers. But others simply looked at their allocated space and rushed to fill it regardless of what it took. So we are back to an age-old issue: overcapacity and whether it's manageable. The carriers and the industry have managed it before, as recently as 2010. The result: nearly a $30 billion turnaround in carrier financials from 2009 — $21 billion- plus in global industry losses in 2009 vs $8 billion to $10 billion in profit in 2010. Someone needs to explain the logic in why carriers haven't done it repeatedly. If anchoring 600 vessels worked in 2010, why can't it work in 2015? The industry as a whole hasn't made money in the past three years or more, as a precious few have raced far ahead in terms of profit- ability, while the rest have plodded along or stayed in the red. All have benefited from lower fuel costs, but a combination of cost containment and efficiency, revenue management and capacity manage- ment is the real answer. Skipped sailings, which do temporarily man- age capacity, simply drive shippers crazy because they're done only occasionally and result in another unreliable outcome. A nc hor i n g ve s s el s , w h i le reducing sailings to match market volumes — and more importantly doing it in a planned environment — should provide the reliability cus- tomers want. The issues involved in anchoring capacity while introduc- ing new tonnage and capacity is certainly a challenge, especially for larger vessel-sharing alliances, but history shows it can be done. Not manag ing the capacit y simply depresses rates, keeps costs high because ships that should be anchored are sailing, and dimin- ishes reliability when carriers skip sailings. Nothing good comes from constant overcapacity. It's a rate depressant that leads to unrea- sonably low returns or losses and, ultimately, unreliable services to customers, who tell us that isn't what they want. But my 40-plus years of experi- ence tells me capacity management isn't going to happen and that what shippers really want is reliable, faster services at existing low rates. Carrier returns are the carriers' problems, and will play out over the coming year. In the meantime, thanks to the carriers for the early Christmas present. JOC Gary Ferrulli is president North America at Unicon Logistics. Contact him at If anchoring 600 vessels worked in 2010, why can't it work in 2015? CHRISTMAS IN JUNE

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