Container Lines Remain Bullish On 2004 Pacific Cargo Market

Furniture World Magazine

Shipping lines serving the trade lane from Asia to the U.S. are reporting a buoyant first quarter, with vessels operating at full capacity in all but the weeks coinciding with the Asian Lunar New Year holidays. Advance bookings and discussions with customers suggest that the trend of tight space will continue through much of April, and resume after a typical May lull, with summer back to school and holiday shipments leading a peak season spike through September. Air cargo carriers are reportedly experiencing a comparable first quarter surge, shifting additional flights to North Asia to meet growing demand. The 14 major carriers in the Transpacific Stabilization Agreement (TSA), an industry discussion and research forum, say they are confident that cargo demand will grow by around 10% over the 2004-05 service contract season, in line with the 9-10% annualized growth in vessel capacity anticipated during the same period. London-based Drewry Shipping Consultants projects that demand and supply growth in the transpacific market will stay roughly in line through 2006. Asia-U.S. shipments grew by 9.3% in 2003 over a near record year in 2002, as businesses replenished inventories; as U.S. consumers increased disposable incomes with tax cuts and by home refinancing at lower interest rates; and as China has emerged as a global manufacturing center. China now accounts for more than 60% of the entire Asia-U.S. freight market of some 9.1 million 20-foot containers (TEU) annually. China’s economy grew by 9.1% in 2003. Foreign investment, most in contract manufacturing, topped $57 billion. Much of that investment has translated into containerized shipments to the U.S. TSA lines said that, in their view, neither a dramatic adjustment to exchange rates, a near-term increase in U.S. interest rates, nor a tangible protectionist U.S. backlash over jobs are likely to dampen two-way trade. Japanese and Korean shipments to the U.S. also posted significant gains in 2003, particularly in automobiles and parts, and in consumer electronics. Offshore investment by Chinese state-owned enterprises in Thailand, Vietnam and elsewhere, are expected to result in increased exports to the U.S. in coming years. Elimination of global textile quotas is expected to boost shipments from Asian markets previously at their quota limits. Developing a robust and diverse logistics infrastructure to meet this new demand out of Asia has presented major operational challenges and required significant carrier investment – in chartered ships, feeder ship and barge connections, inland trucking and warehousing, and management of container equipment. Sudden eastbound trade growth has produced a near 2.5-to-1 ratio of loaded containers moving to the U.S. versus returning to Asia. Construction costs for new container vessels rose 16% in 2003 for mid-sized and larger ships. Charter rates rose by 75% for ships in the 3,500-TEU capacity range, and more than doubled for smaller ships. Even at these rates, all but 0.1% global container capacity is fully booked. Empty containers returning to Asia each week in 2003 were equivalent to 27 sailings by 4,000-TEU vessels – some 53,000 40-foot containers. Sporadic container shortages have developed due to congestion delays in port, idle equipment at origin or in midpoint terminals and warehouses awaiting pickup. Tight steel supplies due to China’s industrial demand have caused production cutbacks and price increases by Asian container manufacturers, further limiting equipment availability. Optimizing utilization, and complying with new security mandates, have required significant investment in information systems, screening technology and administrative reorganization. Rising oil and gas prices – apart from marine fuel – have meant higher rail, trucking and port charges that have, to date, been absorbed by carriers. Finally TSA noted that the continued seasonal nature of most cargo traffic from Asia to the U.S. forces carriers to scale their staffing, operation and assets to meet peak period demand. Drewry reports that transpacific lines were at or or above full vessel utilization through much of 2003, deploying the equivalent of 12.6 million TEU vessel slots to carry 9.1 million TEU of cargo. This is because stowage, load sequence, oversize cargo, channel draft and other considerations limit effective capacity, and additional “redundant” capacity is needed to cover sudden cargo surges during the year. Shipping lines face leasing, amortization, maintenance and other carrying costs for this capacity during slack periods. Increasing volume and complexity of the trade, with customer demand for expanded routes and value-added services, has pushed up these costs by more than 25% in the past year. “We see a very strong year ahead in 2004, and exciting prospects for long-term trade growth,” said TSA executive director Albert A. Pierce. “At the same time, the operational and cost challenges we now face will only increase over time as larger ships enter into service and transportation networks expand to service a fast-changing market. All parties in the supply chain – carriers, ports, terminal and warehouse operators, transportation intermediaries and customers – must redouble their efforts to cooperate, communicate and share the burdens we confront as an industry to keep the cargo moving.” TSA is a voluntary discussion and research forum of 14 major container shipping lines serving the trade from Asia to ports and inland points in the U.S.