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Staying Afloat

Maria Weiskott -- Gifts and Dec, 12/9/2010 5:49:27 AM

A shortage of shipping space and increased charges is impacting gift importers. But current changes may keep business above water.

The ocean shipping sector has experienced extraordinary tumult during the past year, especially the transpacific. The upheavals include vessel space reductions, container shortages and unexpected levies and surcharges added to shipping contracts.
Staying Afloat      These reductions were largely caused by the recession, and carriers' attempts to stay in the black while facing dramatically falling use of their services. According to the Transpacific Stabilization Agreement (TSA), demand fell by more than 15 percent in 2009, while rates fell by a third to more than half, depending on commodity and routing.
     "Transpacific container lines took dramatic, emergency steps to cut costs and preserve basic service levels during a period of unprecedented turmoil," noted TSA chair Y.M. Kim, who is also CEO of Hanjin Shipping Co., another major transpacific carrier.
     TSA is an association of major container lines that together develop "guidelines for rates and charges" in the trade from Asia to U.S. ports and inland. If that sounds like the kind of price fixing that most businesses aren't allowed to do, you're not wrong: right now ocean carrier agreements are immune from antitrust laws, but members of Congress have introduced legislation to change that. (The European Union eliminated the antitrust immunity back in 2007.)

THE TRICKLE DOWN EFFECT

Needless to say, all this has had a serious negative impact on manufacturers, in terms of late, or even missing, deliveries, as well as increased prices. The ripple effect of this turmoil may yet impact the retail landscape and eventually even take a toll on consumers, who have already become more cautious and conservative in their buying habits.
But manufacturers, who for months have been struggling to maintain their businesses under the weight of these circumstances and trying to spare their customers any trickle down effects, may start benefiting from modifications by carriers themselves as well as by action in the nation's capital.

CHANGE AFLOAT

     The good news is, some change is already materializing, with tonnage capacity and additional containers coming online. The increases are anticipated in large part because idled ships are being reactivated and new vessels ordered before the recession are expected to be delivered.
     According to one estimate by England- based SeaAxis, a major maritime container lessor, vessel capacity may rise 16 percent by year-end, and 13 percent next year.
     Three of the largest ocean carrier companies, Denmark's Maersk Line, Italy's Mediterranean Shipping Co. and France's CMA-CGM, together have already added a significant amount of tonnage back into the Pacific trade, well in time for the peak season. The three are members of the TSA.
     All told, the three carriers collectively added six vessels to the transpacific trade between China and the U.S. West Coast, a crucial trade route for gift, home accessory and toy manufacturers, all of whose merchandise is shipped primarily in ocean containers: China accounts for nearly half of U.S. import container shipments.
     The carriers were able to add the tonnage by restoring a vessel-sharing agreement they terminated late last year because of the serious downturn in demand for their services.

SURPRISE! YOU OWE MORE MONEY

In addition to removing vessels from service and implementing spending cuts for containers, perhaps the most dramatic impact was the "emergency revenue charges" added to previously negotiated and set contracts with shippers. The charges substantially raised the cost of what shippers had agreed to pay for merchandise carriage, setting in motion yet another spiral of uncertainty among suppliers by adding unanticipated expense to their cost of doing business. The charges ranged from $320 to $505 per container, depending on size.
The emergency revenue charge is just one of the ancillary charges the TSA, or any other such agreement serving other trades, can add to base freight rates. Ancillary charges, the TSA states, "are intended to recover rising or constantly fluctuating costs that are beyond carriers' control," such as a drop in demand or increases in fuel charges. (See chart for types of ancillary charges.)

COPING MECHANISMS

While ocean carriers passed along charges to their customers - among them shippers, manufacturers, importers and other suppliers - gift manufacturers were, and still are in many cases, faced with a similar dilemma.
At Midwest-CBK, a leading manufacturer of home décor and gifts, company president Frederic Contino said Midwest worked diligently to "mitigate the impact of increased shipping costs on customers."

The ripple effect of this turmoil may yet impact the retail landscape and eventually even take a toll on consumers, who have already become more conservative in their buying habits.

At the same time, Lifetime Brands, a provider of nationally branded kitchenware, tabletop and home décor products, switched inventory gears by temporarily accelerating the timing of company imports to counter the impact of shortages of containers and ships. Jeffrey Siegel, company chair and CEO, said that while Lifetime remained committed to lowering overall merchandise inventories by reducing the number of SKUs, and by shortening the period between procurement and sale, "We foresee carrying somewhat higher than normal inventory levels into the fourth quarter of 2010."

Alan Dorfman, who heads up Basic Fun, a manufacturer of licensed gift and toy products, said the company had some delays, but nothing substantive. Dorfman added, however, that he expects to see more impact now, "as we get into the holiday crunch. The company has a very good freight broker that helps us, and we have not been hit too badly by the container shortage. There have been a few instances, and it has caused some headaches, but as it is an industry-wide ailment, our affected customers have been sympathetic. Not that I want to press our luck," he quipped. Waxing more philosophical about the added charges, he said, "Costs go up and costs go down - we have become accustomed to that."

FINDING THE FACTS

Nevertheless, Washington is not willing to risk any phase of economic recovery being stalled by ocean turbulence, and earlier this year directed the Federal Maritime Commission to launch a fact finding investigation. The title of the investigation is Vessel Capacity and Equipment Availability in the United States Export and Import Liner Trades; the current state of the U.S. economy and liner trade growth; and progress of the Container Availability Pilot Project.
The investigation was supposed to conclude by summer's end, but has been extended until the end of November to allow the commission to continue the investigation through peak shipping season and to develop additional solutions.

PRELIMINARY FINDINGS

     The commission did, however, release preliminary findings after private interviews with hundreds of shippers and carriers, issuing several recommendations. They included increased oversight of the TSA and its sister agreement, the Westbound Transpacific Stabilization Agreement, which covers ocean shipping from the U.S. to Asia.
...perhaps the most dramatic      The commission determined and instituted the following.
     • Rapid Response Teams: Teams within the commission's Office of Consumer Affairs and Dispute Resolution Services have been organized to quickly address and help resolve disputes between shippers and carriers - particular problems involve cancelled bookings, rolled cargo, and container unavailability.
     • TSA and WTSA Oversight: The commission will increase oversight of the Transpacific Stabilization Agreement (TSA) and the Westbound Transpacific Stabilization Agreement (WTSA) by requiring transcripts of certain agreement meetings.
     • Global Alliance Oversight: The commission has directed staff to prepare recommendations for prompt commission action on ways to increase oversight of global vessel alliances.

...perhaps the most dramatic impact was the "emergency revenue charges" added to previously negotiated and set contracts with shippers.

Additional solutions were noted by FMC Commissioner Rebecca Dye in the interim report, which will continue to be developed during the second phase of the investigation. They include: best practices discussion pairs between shippers and carriers, carrier representatives to serve on Rapid Response Teams, development of model service contract terms, and establishing industry and FMC staff working groups to address export capacity and container availability.
Dye stated that "these immediate and longer-term actions will result in a more efficient ocean transportation system and improve the international supply chain for American exporters and importers."

A BILL IN THE HOUSE

Meanwhile, there are some in Congress who believe they already have enough information to improve conditions in the ocean carriage of freight.
Reps. James L. Oberstar, (D-MN) and Rep. Elijah Cummings, (DMD), recently introduced the Shipping Act of 2010 (H.R. Bill 6167), which would eliminate antitrust immunity for ocean carrier agreements.
Calling the bill a competitive measure, Oberstar, Committee on Transportation and Infrastructure chair, noted "Eliminating the antitrust immunity for these conference agreements will increase competition by requiring ocean carriers to compete in the marketplace with the best price and service to get shippers' business. That will benefit industry as a whole."

At Midwest-CBK...company president Frederic Contino said Midwest worked diligently to "mitigate the impact of increased shipping costs on customers."

     Other aspects of the bill include:
     • Carriers' practice of imposing surcharges, "seemingly at will," would need to "accurately reflect increases in the carrier's cost."
     • Empowers the FMC "to help resolve service contract disputes quickly through mediation and arbitration, so that the freight can keep moving."
     • Prohibits carriers from discriminating against a shipper that provides its own container or other equipment.
     • Addresses the practice of bumping or rolling containers. The bill would prohibit ocean carriers from "engaging in deceptive practices, including the unreasonable failure to provide transportation services as agreed to in a negotiated service contract." The FMC would develop remedies and penalties for carriers that engage in deceptive practices.

THE INDUSTRY REACTS

     While the prospect of more capacity may be a welcome relief to shippers, the prospect of more regulation is questionable.
     "More federal regulation always has an impact on cost. I would expect more regulation to the carriers would result in higher administrative and legal costs, which will find its way back to us, the end user," Basic Fun's Dorfman speculates.
     "So, should I get excited about this? Antitrust deregulation from the government has not lowered the cost of air travel, nor has it given me better rates on telephone service," he says, adding, "I don't expect that the carrier industry would be changed to the user benefit for some time."
     And, indeed, only time will tell. Stay tuned.

Maria Weiskott formerly served as editor in chief of Gifts & Decorative Accessories, Playthings and Shipping Digest. She can be reached at maria. weiskott@weiskott.com.

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