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July 9 2018

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26 The Journal of Commerce | July 9 2018 Beneath the Surface Gary Ferrulli THE EUROPEAN SHIPPERS' Council, supported by well-known con- sultants, is asking ocean carriers for transparent and accurate fuel surcharges, even if a one-size-fits-all solution doesn't exist. A logical argu- ment can be made for that approach. There isn't one global cost for fuel by sailing, after all, because costs are a function of prices of fuel in a lane, schedule distance, steaming speed, and vessel consumption. It's also affected by utilization if you estab- lish a per-TEU or -FEU charge. Such a cost-based pricing struc- ture isn't a new request from ship- pers. It's why surcharges exist. In the distant past, when prices increased, shippers insisted on knowing why. When told it was a function of costs rising, be it fuel or a new labor con- tract, shippers said they wanted more transparency. They wanted detailed justification of higher prices. So, in the late 1970s, a group of senior carrier pricing executives operating within a conference structure created a basic formula for cargo rates and surcharges. The essence was: • A base ocean rate generally reflecting vessel and associated costs, all administrative costs, the cost of capital, taxes, rolling stock (containers and chassis including maintenance), systems, communi- cations, overhead, and something for profit • Terminal charges at origin and destination to reflect costs associated with local ports and terminals, including labor • Surcharges on cost factors that were subject to considerable fluctuation, that were visible to the public, such as a currency adjustment and fuel Looking at a port-to-port container operation, these are essentially the costs associated with that service. Once you get into through-intermodal services, you have to include: • Inland transport costs from/to origin or destination and returned to the inland terminal or port • Inland terminal costs • Repositioning costs for empties resulting from imbalanced trade lanes Every carrier's costs differ, and the variability is far greater than most might think. Just examine the audited financial reports from the carriers that make them public. When you calculate the average rev- enue per container and the average cost per container, the combination provides the margin per container. You'll note significant differences. What you generally see is an "oper- ating income" number — calcula- tions that don't include taxes, cost of capital, and depreciation, which also vary by carrier. In recent years, we've read and heard a lot about the cost savings generated by larger vessels vs. their smaller counterparts. Those num- bers are real and significant. Carriers with a large portion of their fleet consisting of 16,000-TEU vessels or larger have a significantly lower ves- sel cost base than carriers operating few, if any, of those assets. That gets us to a dose of reality: Prices and surcharges aren't cost- based — in a market environment, they can't be because the issue of competitiveness has to be consid- ered. Fact is, the market sets the rates, with all factors, including sup- ply and demand, coming into play. My point is that shippers' call to base the fuel surcharge on actual costs isn't what they really want at all. If carriers complied with that request, there would be hundreds of surcharge levels — by carrier, by lane, and, possibly, by sailing. How would that fit into their budgeting and forecasting? On the carriers' side, they'd need a small army of people with a broad-reaching process and considerable supporting systems to do the calculations daily, and then to send the results out to the customer base. Another element shippers say they want is stability — that is, a known rate for a lengthy period, likely to correspond to their budget- ing cycle. And, by the way, they'll reserve a good percentage of their annual volume to play the spot market. In my view, the shippers want an all-in price that is low and continues to go lower, forever. No surcharges, no rate increases. Guess what? They've already got- ten what they wanted from carriers: "Inflation-adjusted freight index fell over 50 percent in last 20 years," industry analyst and consulting firm Alphaliner wrote in a recent report. So what's the problem? Why the outcry for a cost-based fuel adjust- ment charge? The market-based pric- ing has given shippers a significant decrease in their transport-related ocean costs over an extended period of time. Is there a thought that cost-based pricing will reduce that further? The last seven years of financial results from the container carrier industry suggest not. My perspective could be very wrong, and the European Shippers' Council and its consultant partners could be right. Let's try cost-based pricing for a while. It may be a little messy with so many variations, but all the new technology being developed will keep track of it all. The carriers should want to try it, because they'd likely make money that way. JOC Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogistics Fuel for thought So what's the problem? Why the outcry for a cost-based fuel adjustment charge?

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