Exports to Asia are healthy, but they’re not enough for carriers to structure service networks around the westbound transpacific trade.
By Eric Johnson
Westbound transpacific trade grew a robust 10 percent in 2011, while eastbound transpacific trade actually receded by 1 percent.
What’s more, over the past four years, U.S. export growth has grown by an average of 5 percent, while U.S. imports have declined by about 3 percent in that same period.
Those top-line numbers would seem to suggest that liner carriers serving the U.S. export market to Asia might be induced to structure their networks more around that growing trade. But the reality is the transpacific is still an eastbound trade.
“Up to an extent,” said Jean-Philippe Thenoz, senior vice president of North America lines at CMA CGM, when asked whether U.S. export growth might change the way carriers service the trade. “We try to match import flow into the (inland point intermodal regions) to export capacity from a ramp standpoint. This is not an easy exercise, as export volume can be erratic due to the U.S. dollar level whenever exempt commodities are concerned, like scrap and waste paper, or due to weather conditions, like the agri-business and cotton. But we try our best to reduce empty repositions from inland and find suitable traffic outbound.”
Lamont Petersen, vice president of transpacific westbound trade for Hyundai Merchant Marine, said the reality is that the westbound trade is often about cost control more than profit.
“The prominent factor driving deployment decisions in the TP trade, and thus delineating head-haul from back-haul, continues to be contribution margin,” Petersen said. “In my opinion, even though exports from the states are buoyant, the aggregated financial contribution of export commodities falls far short of consideration as the primary or dominant lane in the transpacific. In fact, my business card should probably declare my responsibility as ‘VP-cost avoidance’ rather than VP-transpacific westbound. The contributions of the westbound trade are measured in operating cost savings rather than profits in a traditional P&L sense. I believe carrier deployment decisions will continue to be driven by the eastbound trade.”
That said, Petersen said the rise in U.S. manufacturing hasn’t gotten its full due.
“When we examine transpacific trade data for 2011, we draw hope and optimism for a brighter economic outlook and job growth, in terms of good jobs, from growth in exports of manufactured goods,” she said. “While most of the pundits have been focused myopically on growth in agricultural commodities, we should be applauding our manufacturing sector which, without the limelight, posted significant year-on-year growth rates in 2011.”
Petersen also noted that Hyundai could yet prosper from the U.S.-South Korea Free Trade Agreement.
“Being a Korean-flag carrier, HMM is also anticipating a windfall from the U.S.-Korea trade agreement,” Petersen said. “Korea is already an important Pacific Rim trading partner for the U.S. (third behind China and Japan), and the trade agreement is expected to increase trade by approximately $9 billion per year, and I’m betting it won’t all be exempt and seasonal agricultural commodities.”
Analysts as well don’t see exports as being lucrative enough to drive network decisions.
“Perhaps not enough yet,” said Paul Bingham, economics practice leader at the consultant CDM Smith. “There clearly is opportunity in exports, but given they are still heavier and lower-unit value on average, carriers are right to be cautious about seeing this as much more than a positive contribution to the entire voyage operation. There are clearly some marginal shifts in service decisions from the availability of paying export cargo that benefits both the steamship lines and the railroads for that matter.
“While U.S. exports to Asia are likely to continue to grow strongly, U.S. exports to Europe are likely weaker as Europe falls into recession and the euro is weak against the dollar,” he said.
Martin Dixon, research manager for Drewry’s Container Freight Rate Insight, said the impact of slowing imports shouldn’t be mistaken for a greater focus on exports.
“This is an interesting longer-term development,” he said. “We see imports’ share of total U.S. container trade declining over the next few years, though the eastbound trade will still remain very much the head-haul, both in terms of volume and value. The slowing pace of outsourcing, as well as below trend economic growth, will check imports.”
Another expert said exports from the Midwest will become attractive if they help carriers reposition boxes.
“U.S. exports are becoming more important to carriers, particularly agricultural products out of the Midwest,” said John Isbell, vice president of the supply chain consultant Starboard Alliance. “Carriers will likely offer more attractive pricing on their IPI rates based on where they need containers versus to destinations where they have to reposition empty containers. This will be an important part of the rate negotiations between shippers and carriers.”
But Brian Conrad, executive director of the Westbound Transpacific Stabilization Agreement, whose 10 members carry a large share of the containerized U.S. exports to Asia, said the trade imbalance is too large to ignore despite recent export growth.
“In talking to the carriers individually and how they look at their networks, it’s still the eastbound that’s the dominant trade,” he said. “While they look at exports and how they relate to the overall roundtrip picture, when they make their decisions, it’s still the eastbound that drives these decisions. It has to be said that the export market is still growing, but if you still look at the absolute volumes, it’s not as big as the eastbound, it’s still two-to-one.”
Another factor that prevents lines from basing network decisions on exports is a lack of control.
“With exports, there are so many variables,” Conrad said. “A commodity will switch to dry bulk markets if the Baltic Dry Index goes down. Weather can affect the cotton or vegetable crop. To plan a network on something so completely outside the realm of what the carriers or even analysts can predict makes it difficult.”
Rather than formulating a transpacific network based on exports, some lines big in the westbound trade will look more closely at roundtrip revenue.
“In the WTSA, we talk about westbound issues rather than roundtrip,” Conrad said. “But I think the carriers take into account roundtrip economics.
“A lot of carriers will say the westbound economics are not significant enough to base network decisions around that leg,” he said. “It depends on their presence in the westbound trade. Some carriers with a big presence eastbound, but not on westbound, for them it’s very much a repositioning trade. Some other carriers who are big players on the westbound, for them the roundtrip is more of a factor.”
A long way to go
