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Aug.8, 2016

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BENEATH THE SURFACE 18 THE JOURNAL OF COMMERCE AUGUST 8.2016 Gary Ferrulli IS THIS PROGRESS? WITH THE FIRST half of the year behind us, it's time to examine whether there's been any improve- ment a round major conta iner shipping issues. When the year began, reliability was high on peo- ple's lists and that has improved somewhat, even if shippers still complain bitterly about that and transit times. Labor? There have been no lengthy shutdowns or slowdowns, though there has been a lot of talk about early contract negotiations to avoid those in the future. That's a rerun, however, and it didn't work the last time. Those talks also consistently avoid the issue of pro- ductivity. Please wake up! It makes a huge difference in so much of what we talk about: handling big ships; costs associated with U.S. ports and terminals; land usage; port and ter- minal automation; access to cargo; congestion; extended gates and truck queues. As for the state of the shipping industry, you may need a program to tell who the players are. Besides CM A CGM ta king over NOL/ APL, United Arab Shipping Co. and Hapag-Lloyd are on track to merge; the Korean carriers seem to be in a state of flux with several rumors — all denied —about Maersk Line acquiring Hyundai Merchant Marine, and the announcement that it would join the 2M with Maersk and Mediterranean Shipping Co. Intrigue abounds: It would be one way to help the ailing Korean ship- ping industry, while Maersk would get newer replacement vessels with- out ordering new ships and further glutting the market. There's also the rumor that didn't quite make the headlines: Maersk buying Hamburg Sud, a deal that, on the surface, makes commer- cial sense, because Maersk again would gain newer capacity without exacerbating overcapacity. And, of course, there have been numerous alliance announcements, which raise questions not only about who will be working with whom, but also the huge issue about which ports and terminals they'll serve. On the landside, what railroads do each carrier use and how might that impact on-dock rail issues? There has been some discussion about the next step in industry cost savings coming from the land side, starting with the ports and termi- nals. Consolidation on that front is complicated by lengthy contracts between the carriers, ports and ter- minals, however, and I cringe at the prospect of coordinating those oper- ations with alliances of up to seven lines. And that still leaves some smaller players out there alone, or with VSAs that may or may not be in place a year from now. Finally, the elephant in the room: carrier profitability. Some point to the mergers and acquisi - tions as a step in the right direction. Some point to capacity-management prog rams carriers have imple- mented to stabilize rates. I'm not sure they've done enough to make it work. For example, following recent increases in eastbound trans- Pacific spot rates, carriers imposed a general rate increase on July 15, the very day they announced a decrease to take effect three days later — and followed by a huge peak- season surcharge for Aug. 15. Two or three contract rate changes in a week might be great for data input employees' overtime, but it causes the rest of our heads to spin. Unless lightning strikes, the industry will lose money for the sixth straight year, and that's not good news for anyone associated with or using containerized ship - ping. The inevitable reduction in the number of global carriers is in no one's best interest. Low rates for months, even years, isn't the way to reliability, competition, innovation or enhanced services. It is the road to limited options, eerily similar to the evolution of the U.S. rail industry after deregulation. In that case, the largest shippers pushed through the legislation believing that, with their buying power, they'd be just fine. They also knew smaller shippers, with - out common-carriage principals, wouldn't be able to compete. What's left is thousands of miles of abandoned track, many locales without rail service, a virtual end to real rate negotiations and screams from shippers that they aren't pro- tected from abuse of market power. Large shippers asked for it, and they got it. It seems the railroad management of the 1980s and 1990s was a lot like the Disney character Br'er Rabbit, who cried and pro- claimed, "Don't throw me in that briar patch. Please don't throw me in that briar patch!" Could we be in the same place w it h ocea n ca rriers a nd t heir management? Certainly, the herd is being thinned, and capital road - blocks to entry into global services ma ke new compet it ion nea rly impossible. With price-fixing and antitrust immunity, carriers for decades had a license to print money, yet scores went bankrupt and few made money. If they couldn't thrive in that environment, how can they now? Even with the herd thinned, is there overall management capacity to take full advantage of the condi- tions being created? Certainly, Maersk has a bull's- eye on profitability — it's made billions of dollars over the past five years, while the rest of the industry has foundered. OOCL also has done reasonably well, but that's more a reflection of its smaller size. As for the other large carriers, it's a work in progress, at best. As usual, time will tell, but I've seen this movie before, and it doesn't end well. JOC Gary Ferrulli is president-North America for Unicon Logistics. Contact him at

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