Transpacific shipping lines have proposed hefty freight rate increases and a peak season surcharge as operating costs soar on the back of rising bunker fuel prices.
"We've already seen significant carrier redeployments that reflect the deteriorating economics in the high-cost transpacific market, relative to other trades," said Transpacific Stabilisation Agreement (TSA) chairman and American President Lines chief executive officer Ronald Widdows.
"Given cost increases expected through the end of 2007 and into 2008, and the potential for service disruptions, there's an obvious and compelling need for a viable rate structure that encourages adequate carrier reinvestment."
The TSA has proposed a freight rate increases of US$400 per FEU for US West Coast port-to-port and door cargo, and $600 per FEU for all other traffic, including intermodal and US East Coast all-water shipments.
TSA member line vessels will also impose a $400 per FEU peak season surcharge between June 1 and October 1 next year, subject to adjustments relating to the timing, duration and strength of the 2008 peak.
But that's not all. The TSA wants the restoration of a floating bunker fuel surcharge 每 broken out from base rates and adjusted on a regular basis to reflect bunker fuel price fluctuations 每 in all contracts that have had bunker surcharges mitigated, capped or folded into base rates.
TSA lines also intend to modify the timing of service contracts, extending 2008-09 contracts by an additional two months, to expire on June 30, 2009. This will give shippers the benefits of two additional months at 2008 contract rates, and will also mean that future 12-month contracts will have July 1 start dates.
Finally, carriers plan to include provisions in upcoming contracts that will enable them to recover increased West Coast trucking costs which may arise from legislative and/or regulatory changes, such as implementation of the transport worker identification card (TWIC) and the proposed Los Angeles-Long Beach harbor truck plan.
According to JS Lee, senior executive vice-president of Hanjin Shipping and a member of TSA's executive committee, transpacific container lines still anticipate a 7-8 percent increase in basic operating costs apart from fuel 每 inland rail and truck charges, container handling at destination US ports, and repositioning of empty containers back to Asia after cargo has been delivered at US interior points.
Lee added that carriers also must address increased costs that were not recovered in current contracts. Beyond that, he said, restoring carrier revenues to sustainable levels of profitability cannot be done in a single year, and the market should be prepared for a continuation of this initiative in 2009-10 contracts.
A TSA survey of member line operating costs relative to freight rates shows current rate levels well below break-even costs for nearly all carriers on most route segments.
Bunker fuel prices rose by 34 percent during the first nine months of 2007, from an average $295 per tonne in January to an average $395 per tonne during September.
An internal TSA survey reveals that this $100 per tonne difference in price 每 taking into account typical vessel capacity, actual lift based on effective capacity and utilization, fuel loading prices, fuel consumption per day, sailing time and a pro rated share of fuel cost for repositioned empty containers - translated into a $132 million increase in aggregate fuel costs paid by TSA lines in September over January to move the same volume of freight.
In October, fuel prices reached record levels and an average for the month of $436 per tonne, suggesting an aggregate fuel bill of about $150 million higher than in January 2007.
Increases in the TSA bunker surcharge, from $455 per FEU in January to $680 per FEU in October, only partially addressed these rising costs, due to the lag time in calculation and to the pace and extent of fuel price increases. And in a number of contracts, caps and other restrictions even further prevented meaningful cost recovery as fuel prices spiked throughout 2007.
"Lines will, of necessity, be pressing the issue of a full, floating bunker charge very seriously in upcoming contract negotiations," Widdows said.
"We understand that this is a major item in the overall rate structure and that shippers are looking for pricing stability over the 12-month contract term. But the market must understand that fuel prices are far too volatile, and ocean carriers are far too exposed to fuel cost fluctuations over a 7,000 to 10,000-mile, 12 to 18-day one-way sailing, to lock in a single price for a year."
Noting that airlines, railroads and truckers all collect full, floating fuel surcharges, he added that container lines are particularly vulnerable to fuel cost impacts, and failure to recover those costs amounts to a hidden subsidy imposed on them.
"At current price levels, fuel is no longer just another cost component," Widdows said. "We're at a point where service levels at minimum and, for some carriers, financial viability are threatened if we are not able to share these costs more equitably with the customer base. It's not a sustainable situation."
Service levels and operating flexibility will be particularly important in the coming contract year. Independent industry analysts forecast 7-9 percent cargo demand growth in 2008 每 the same or slightly higher than predicted for 2007.
TSA anticipates new transpacific vessel capacity to increase by 5.2 percent growth among TSA members, and 6.3 percent across the entire trade, and potentially less in the event that there is not sufficient improvement in the economics.
Allocations of new capacity are being driven by the high-growth Asia-Europe and intra-Asia trade lanes, with smaller ships cascaded out of those trades accounting for much of the new capacity scheduled for the transpacific.
TSA executive administrator Brian M. Conrad said that despite positive economic signs such as recent US employment figures and 3.9 percent GDP growth in third quarter 2007, cargo demand in 2008-09 could moderate further amid uncertainty in the housing and credit markets.
"It is also clear, however, that carriers will be seeking out markets and deploying vessels and equipment where the economic conditions are most favorable, so we see an continuing healthy supply/demand balance in the transpacific even at somewhat lower levels of growth, should that scenario develop," he said.
Widdows added that shippers are already looking to their carriers to help them avoid potential delays in 2008 as longshore labor negotiations intensify on the US West Coast toward a July 1 contract.
Asian terminals are additionally experiencing congestion and delays as demand outpaces expansion throughout the region, even though there has been some reduction in the pace of growth in volumes to the US.
"There will be many variables affecting service and schedules next year, making service choice and contingency planning all the more important," he said.
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