TSA sees healthy growth, but lines still not recovering costs
Member carriers in the Transpacific Stabilization Agreement mapped out plans for 2008 and 2009 in a meeting in Taipei last week, saying that flat growth this year shouldn't stop it from being a healthy year, and that concerns of overcapacity are off the mark
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TSA chairman Ron Widdows, who is also chief executive officer of Singapore-based APL, said the conference expected 2007 to be the year when vessel capacity caught up with demand after a decade in which capacity has failed to meet huge growth in the transpacific.
According to TSA, July Asia/U.S. liftings for TSA lines totaled 480,000 FEUs, up 8.6 percent from 442,000 FEUs carried in July 2006. Cargo volumes in the first half of 2007 were up 7.1 percent from the same period a year earlier, reflecting a 6.3 percent increase to the West Coast and a 9.9 percent increase to the East Coast. Carriers are forecasting a continuation of current trends, with 7 percent to 8 percent cargo growth for all of 2007.
'While growth has moderated a bit, first half year over year growth remains healthy, and we continue to hear from our customers that their projections for the balance of 2007 and into early 2008 are for the current growth trend to continue,' Widdows said. 'Specific importers and retailers may be seeing some softness in their sales, but at the same time others are experiencing robust growth. It is clearly too early to conclude to what extent recent volatility in the U.S. financial markets will affect the transpacific market. Based on current views, we do not see a situation developing that curtails growth to a material degree.'
Widdows stressed that cargo growth, even at reduced levels, comes on top of an enormous base and continues to stress the capabilities of terminals.
Pointing to long-term capacity analysis prepared by MDS Transmodal, TSA said cargo growth outpaced effective capacity growth in the transpacific every year from 1997-2006. The struggle to remain profitable in the transpacific market has been a major influence in carriers' individual asset deployment decisions in both 2007 and 2008, TSA said.
'Container lines are more likely to focus investment and vessel assets in trades that generate an adequate return,' Widdows said, 'and for many carriers, whether members of TSA or not, the transpacific is a more challenging trade in which to operate profitably.'
At a conference on carrier supply and demand issues in Hong Kong last week, held by the Hong Kong Shipping Gazette, carriers said that effective capacity is sometimes only 75 percent that of nominal capacity due to a host of factors like weight restrictions and cargo patterns.
TSA forecasts 5.2 percent capacity growth in 2008 for its members, and 6.3 percent for the trade overall — and possibly less when factoring in winter season deployments, which typically see vessel dry-docking and other service changes during the first quarter each year.
TSA lines anticipate that demand pressures in 2008 will be most acute in the East Coast all-water market, as shippers gauge risk and plan for contingencies during the upcoming West Coast longshore contract negotiations. It is also likely that many shippers, especially larger accounts, will advance some of their cargo to earlier ship dates via all coasts, potentially contributing to a spike in volumes in advance of the expiration of the current contract between waterfront employers and longshore labor.
TSA has begun updating its cost studies, looking at both expected cost increases in 2008-2009 as well as understanding to what extent contracting in 2006-2007 resulted in costs escalations that were not fully recovered.
'Frankly, carriers did not achieve the revenue improvement sought in recent negotiating,' Widdows said. 'West Coast local rates remained relatively flat, intermodal rates increased by an average of $300-$350 per FEU, and East Coast all-water rates rose by $100-$150 per FEU, well below the level required to have the industry operating at a profitable level. Those cost pressures have not gone away, and for many cost elements the pressures have simply continued to escalate. Ocean carriers are being severely squeezed in every area of their operations, from fuel consumption to intermodal rail and trucking rates to environmental and security compliance.'
Widdows added that, in coming months, transpacific carriers must provide greater transparency to customers on costs and operations, and must better articulate how the current environment in the transpacific freight market is not sustainable going forward. It will be equally important to provide the shipping community with a longer-term view of how carriers view the dynamics of the transpacific well out into the future, not only in the next round of contracting. TSA also intends to address issues that have surfaced in recent meetings with customers, Widdows said, including ways to simplify the contracting process, the potential for changing the timing of contracts, how to better address surcharges, and how to cooperate in policy areas such as transportation infrastructure and environmental improvement.
TSA expects to finalize its targets for further rate recovery during 2008-2009, and to provide guidance to the trade regarding what is envisioned beyond the next negotiating cycle, in late September.
Also at the Taipei meetings, TSA lines agreed to extend Widdows' tenure as TSA chairman through the end of 2008, and to retain the same executive committee membership including American President Lines, Evergreen Line, Hanjin Shipping Co. and NYK Line.
'We felt that the progress already made to transform TSA into a more effective agreement — that is seen by our customers as providing reliable, useful data and insight into this important trade lane — would benefit from a continuity of leadership,' said Jack Yen of Evergreen, a member of the executive committee.