A surfeit of services
Journal of Commerce    Monday, May 10, 2004
By: BILL MONGELLUZZO

Asia-U.S. ocean logistics is being upended by a shortage of marine containers, severe rail congestion and harbor trucker unrest in North America. But in one area shippers can rest easy: Companies that source merchandise in China will have a cornucopia of ocean shipping services to choose from this year. Carriers are introducing seven new services in the trans-Pacific, and they all call in China.

The presence of the new services is having a twofold benefit for shippers. Not only will the passage of their containers out of China be eased by the additional capacity that the services offer, but the added capacity has played a role in denying carriers the full rate increases they had sought for the contract year beginning on May 1.

Yet there is a potential downside. None of the new services transit the Panama Canal to call at East Coast ports, a route with growing appeal to shippers with distribution centers on the eastern seaboard. Carriers earlier this year had planned to add several all-water services from Asia to the East Coast, but they either cannot secure enough ships on the charter market or they are unwilling to pay today's charter rates, which have surged to near-record levels.

"Four services had planned to start up by July 1," said John Wheeler, general manager of trade development at the Georgia Ports Authority. "Every one is postponed or delayed," he said. Savannah, which experienced a surge in Asian cargo following the lockout of West Coast longshoremen in October 2002, will again have 14 all-water services this year.

Still, the new services out of China underscore what practically every statistic shows: that China continues to solidify its role as the world's primary engine of manufacturing. Reflecting that, China Ocean Shipping Co. has gone so far as to initiate an express service that calls at only two ports - Shanghai and Long Beach. "That's where the action is," said Howard Finkel, the carrier's senior vice president of trade.

While carriers and shippers continue to disagree about freight rates and surcharges, shippers agree that carriers are getting it right when it comes to deploying new services in the largest U.S. trade lane. China accounts for more than 60 percent of all U.S. imports from Asia. Over the past two years, virtually every new service in the Pacific has touched China in some way.

The eastbound trans-Pacific this year is mirroring conditions that existed last year. Ocean containerized imports from Asia increased 10 percent in 2003, about the same as the increase in vessel capacity. Carriers generally deployed the right amount of vessel space in the right trade lanes. Most cargo leaving Asia sailed on the voyage for which the shipments were booked. Carriers are now offering more than 60 fixed-day, weekly services between Asia and North America.

A similar balance is anticipated this year, though fears of overcapacity played a role in the contentious freight-rate negotiations that are now wrapping up. The total increase in vessel capacity will be about 10 percent. Carriers project cargo volume in the eastbound Pacific this year will increase about 8 to 10 percent. That would make sense given the track record so far in 2004. Containerized imports at West Coast ports in the first quarter increased 8.9 percent, according to the Pacific Maritime Association.

Carriers believe the hot spot this year in the eastbound Pacific will be central China. Five of the new services call at Shanghai, Ningbo or both, reflecting the rapid growth of manufacturing in the Yangtze River corridor.

With many carriers operating in vessel-sharing alliances, shipping lines are able to offer multiple departures each week from key loading ports in China. Cosco, for example, has six weekly departures from Shanghai to North America and three from Ningbo. Cosco operates in the CKYH alliance with "K" Line, Yangming Marine Transport Corp. and Hanjin Shipping Co.

The CKYH group has been the most aggressive of the carrier alliances this year in introducing new services. The express service linking Shanghai with Long Beach began in mid-April, deploying just four vessels, rather than the normal five in the trans-Pacific. The 1,700-TEU vessels will maintain a transit time of 12 days between Shanghai and Long Beach.

The CKYH alliance in April also began a service linking Qingdao, Shanghai and Ningbo with Los Angeles and Oakland. The alliance in January began a South China service linking Ningbo, Xiamen, Hong Kong and Yantian with Long Beach and Vancouver, British Columbia.

Although the Yangtze River corridor is China's fastest-growing manufacturing center, South China and Hong Kong remain China's largest export region, as it has been for years. Earlier this year, United States Lines, a new entrant in the Pacific that resurrected the fabled U.S. Lines name, began a weekly service between South China and the West Coast.

Load factors on the carrier's 1,700-TEU vessels remain strong as cargo volumes from South China continue to build, said Ed Aldridge, president of U.S. Lines. Port rotation on the weekly service is Shekou, Hong Kong and Long Beach.

Lykes Lines, owned by CP Ships, also started a service from South China. It links Hong Kong and Yantian with Vancouver and Oakland.

The New World Alliance of APL Ltd., MOL and Hyundai Merchant Marine recently announced a new service linking Tianjin, Ningbo and Shanghai with Long Beach and Oakland, providing direct service from northern China and from Shanghai.

Also, China Shipping Container Line and Norasia Line initiated a service linking Hong Kong, Yantian, Shanghai and Ningbo with Vancouver, Seattle and Los Angeles. The vessels have a capacity of 4,000 TEUs, which is about the average for services to the West Coast.

Vessel sizes are increasing, however, as carriers in the U.S.-China trade substitute larger new vessels for smaller ships on existing services. For example, a joint service by Mediterranean Shipping Co and CMA CGM this summer will begin to replace 4,000-TEU ships with 8,000-TEU vessels.

Orient Overseas Container Line in March began the parade of new-generation container ships in the trans-Pacific with the arrival of the 8,000-TEU Hamburg in Long Beach. Later this year, Cosco and China Shipping Container Line will replace smaller vessels with 8,000-TEU ships in existing services. By early next year, the four services will each have a full complement of five 8,000-TEU ships operating between Asia and Southern California.

OOCL is a member of the Grand Alliance, which also includes NYK Line, Hapag-Lloyd and Royal P&O Nedlloyd. The Grand Alliance is not planning any new trans-Pacific services this year, although it is reinstating a service linking South China and Japan with Los Angeles and Oakland that it pulled out of service during the slack winter season. Also, the alliance is up-grading the vessels to 6,200-TEU ships.

Two large carriers that generally operate outside of alliances, Maersk Sealand and Evergreen Marine Corp., said they do not plan to add any services in the trans-Pacific this year.

The lack of growth in East Coast services is noticed up and down the coast. At the Port of New York and New Jersey, the bi-state port authority had anticipated three new all-water services this year, but the services are on hold pending the ability of the carriers to secure vessels, said Peter Zantal, manager of strategic analysis and industry relations. New York-New Jersey has 19 fixed-day weekly services from Asia.

The all-water services are not on hold due to a lack of demand. Wheeler at the Georgia Ports Authority noted that shippers are booking cargo six to eight weeks in advance on East Coast services from Asia. Panamax-size ships of 2,500 to 4,000 TEUs that are ideal for all-water services to the East Coast are popular on most of the world's trade lanes, so they are in short supply and may continue to be for some time, because the bulk of new container ships being built are in the post-Panamax category.

The new vessel strings underscore a paradox in the trans-Pacific: Carriers have failed to secure announced rate increases, yet capacity utilization rates from Asia to both U.S. coasts have been high all winter and spring as the U.S. seems to have an insatiable demand for products manufactured in China. Part of that is due to what many see as a diversification of cargo types moving on the water. While there is still a noticeable spike in cargo each summer and fall for back-to-school and holiday-season merchandise, the China trade is now diversified and runs the year round.

"There's a lot of cargo moving now that isn't seasonal in nature, everything from frying pans to baby strollers," said Ray Keene, chief operating officer at MOL. "The non-peak season is busier than it used to be," he said.

Carriers this spring attempted with apparently little success to leverage their high load factors into rate increases for the 2004-05 contracting season that runs from May 1 through April 30, 2005. The Trans-pacific Stabilization Agreement, a discussion group representing many of the largest carriers in the eastbound Pacific, set as its goal this year voluntary rates increases of $450 per 40-foot container to West Coast ports and $600 to inland intermodal destinations and East Coast ports. Contract negotiations between shippers and carriers are confidential, but the largest shippers are reportedly paying around a $100 rate increase and smaller shippers about $200. This is in contrast to 2003 when carriers won rate increases of $700 to $900 per FEU. Last week, NYK Line's president, Koji Miyahara, was quoted as saying that the carrier achieved rate increases of only $200 to $250 per 40-foot container.

Shipping lines this summer will also attempt to impose a peak-season surcharge from June 15 to Oct. 31, but prospects for the surcharge are uncertain. Some shippers already have signed contracts calling for no peak-season surcharge, while others are paying as much as $200. Last year, shippers held out on the peak-season charges as long as they could, and because vessel space was plentiful during the peak season, the surcharges eroded as the summer wore on.

Carriers in 2003 were generally profitable after two years of large losses in the trans-Pacific. Their strategy this year apparently is to seek modest rate increases while holding on to their market share. A similar strategy could develop in 2005 as capacity is again projected to increase about 10 percent with the introduction of still more new-generation vessels.