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U.S. exports to Asia were up 10%. Exports grew by 19% to China, 18% to Taiwan, 8% to Indonesia, 9% to Thailand and 25% to Vietnam. Asian industrial demand remained high for raw cotton, animal feed, hides and forest products for construction. Horticultural products from citrus to frozen potatoes to wine to prepared foods, posted triple-digit growth. Refrigerated meat and poultry, frozen and canned foods and other products sold to western-style supermarkets and fast-food outlets. Exports of animal feed to Asia posted a healthy 24% gain last year, to nearly 106,000 TEU. Hay, which already ships in much larger volumes, saw exports increase by about 4% to 233,000 TEU. Vegetable and animal by-products, such as fats and oils, were up 16.5%. Year-on-year protein exports to Asia were up 25% during 2005, reflecting very strong pork sales for the second straight year, and reopening of Asian markets to U.S. poultry. Beef exports are at less than half of 2003 levels, and four countries – Japan, Korea, China and Russia – account for almost all of the difference. Hopefully, that situation will be changing soon. We received some very good news out of Japan in July – that inspectors had completed their work, individual U.S. packing plants had addressed outstanding concerns, and Japan is now open to beef exports from 34 of 35 of the plants inspected. Korean inspections concluded in June, but there are apparently technical problems delaying an announcement. China is back in negotiations, and that’s a positive step. Our optimism remains cautious – the market reopening process has been two steps forward and one step back for some time. The best-case scenario will be shipments of boneless cuts only, under 30 months of age for Korea and under 20 months for Japan. Still, these are high-value exports and an opportunity for U.S. producers to begin restoring their competitive position in Asia. The issue for westbound ag shippers in 2006 is service. The issue for carriers is costs. No question, the last three years have been hard on U.S. exporters to Asia, largely because imports have driven the Pacific trade. Carriers scale their vessel and equipment fleets to the import segment. When imports backed up the port terminals, trucks with export shipments were lined up outside the gates as well. Import rail embargoes out of harbor-adjacent rail ramps stalled export trains coming in. Empty repositions competed head-to-head with low-margin export loads for space on a westbound sailing. Security deadlines for filing bill of lading and export documentation prior to receipt of the cargo at the pier add to the difficulty. We’ve also been hearing from exporters recently of carrier documentation problems – some involving carriers in the midst of mergers, some involving carriers that have centralized their back office documentation functions offshore to control costs. Finally, we’ve been hearing of inland exporters missing port cutoff times for their shipments because of truck shortages and equipment availability problems. Each year ocean carriers are pushed hard by eastbound shippers – particularly large retail accounts each managing in the vicinity of a quarter of a million containers annually – to apply the FedEx model to ocean transportation: Capacity and equipment availability as needed… full routing and schedule flexibility… and web-based shipment visibility end-to-end. On the service side, everyone wants a transportation and logistics partner. But on the pricing side, ocean carriers often find themselves demoted back to vendors. Information-sharing and operational contingency planning all take a back seat to forecast cargo growth versus slot capacity. Carriers have been under enormous, simultaneous service and pricing pressure in the eastbound market since 2003. We’ve seen a game of musical chairs in the Pacific, with a reshuffling of carrier alliances and the more recent round of merger and acquisition activity, not just among carriers but among terminal operators as well. When you don’t have pricing power in a market, you pursue scale and cost efficiencies. It’s that simple. I’m not justifying the hardships exporters are experiencing – I’m simply offering an explanation. There is good news in all of this: The U.S. transportation/ logistics infrastructure is getting a long-needed overhaul. This redesign is driven by Asia imports, particularly from China. It has to be. Last year, on average, 2.5 loaded containers were discharged at U.S. ports for every one loaded container going back out on the return. The sheer volume of eastbound cargo, 11.8 million TEU in 2005, with 7.4 million of that – 63 % – coming from China, affects routing and equipment decisions. Relative westbound economics, with wastepaper, hay, metal scrap and plastic scrap comprising a third of total westbound freight, has to be a consideration. The high-end refrigerated segment has its own unique economics in terms of the transpacific round trip, with offsetting costs in both directions. There is also light at the end of the tunnel, and ag exporters should see some relief in 2006 and 2007. Several trends suggest a stronger westbound market, among them a weakening dollar… rising consumer demand in China and Southeast Asia… reopening of beef and poultry markets for U.S. producers… and a steadily rebounding Japanese economy. As a result, we’re likely to see the cargo imbalance ease somewhat. Port and inland rail infrastructure improvements will take at least another several years to substantially complete, but improvements will gradually work their way through the system. Segregated export terminal gates and yard areas, night gates, virtual container yard programs, rail shuttle service and other measures all potentially help smooth cargo flow and balance loads in the harbor area. Some in the room are no doubt thinking, ‘I didn’t ask for the Alameda Corridor or PierPass but I’m paying for them and the costs keep going up.’ But imagine if grade crossings had not been eliminated along the more than 20 miles of Southern California streets from the harbor to the UP and BNSF rail ramps when China trade began ramping up in 2002. And look at the difference when we keep terminal gates open from 6:00 p.m. to 1:00 a.m. under PierPass. Sure, we should have 24-hour terminals in three, eight-hour, straight-time shifts and we should have night-shift loading and receiving at shipper facilities. We’re getting there. As we get there, and as the culture changes, the need for PierPass fees hopefully can and will be revisited. Transportation used to be Point A to Point B and fragmented among modes, each with parochial interests tied to a historic or captive customer base. It was U.S. export-driven and not especially time-sensitive. As container cargo gradually increased new ships were ordered, channels were dredged a few feet deeper, terminals knocked down an old administration building or transit shed and paved a few more acres, the railroad added another train. Those days are gone. Practically speaking, transportation is end-to-end and integrated. It is also global, and the U.S. is a net buyer, not a net supplier. Short-term cargo growth is driving infrastructure expansion. The pace is immediate, not leisurely. In many locations we have reached the limits of physical growth, and must begin to think in terms of balancing productivity, environmental and land use impacts, and costs. Transportation companies are increasingly global and publicly listed, accountable to shareholders as well as customers. And they are facing investment requirements that are huge and cannot be deferred. Whether it’s an ocean carrier, railroad, terminal operator, trucking company, airline or integrator, every dollar matters. In today’s market, at today’s rates, no one in their right mind does pricing on the back of a cocktail napkin. Carriers are going to tighten free time allowances and raise detention charges to keep cargo flowing through the terminals. They’re going to charge where feasible for chassis and specialized containers, to make sure that equipment is available and in good working condition. They’re going to cover CY and CFS receiving costs. They’re going to recoup Panama and Suez Canal fees. And they’re going to pass through security and documentation costs as they arise. Surcharges are irritating, but they serve a purpose. If westbound container lines folded all of their surcharges into base rates tomorrow in the interest of “simplicity,” three things would happen: Tariff rates would fluctuate weekly to adjust for costs; contract rates would be set high or include escalators that anticipate future cost increases; and shippers would begin insisting on transparency, that we break out cost factors one by one so they could beat down the all-in rate. Base rates have come to represent the value of the service – providing a container for loading; transporting the loaded container from origin to ultimate destination; and managing the routing, transfer, handling and storage of the container and cargo in transit, with delivery according to schedule and the specified terms of shipment. The value of the service is subject to market and competitive factors and is, of course, open to negotiation. Costs are costs. The choice is simple: You cover your costs or you leave money on the table. Nowhere is this more the case than with fuel costs. In the first week of January 2005, the weekly average bunker fuel price was $197.79 per ton and the weekly average highway diesel fuel price was $1.96 per gallon. As of mid-July 2006 the bunker price had risen more than 94% to $383.89 per ton. The highway diesel price was up 49% to $2.92, directly impacting carrier truck, cargo handling and other operations, before counting any new rail and truck fuel surcharges imposed on container lines. The increase in marine fuel prices alone has driven up the average cost of a single westbound transpacific sailing for a single ship by nearly $700,000. That’s one way, not round trip, and it’s not the total cost, just a rough average amount by which the cost per sailing has risen in 16 months. Keep in mind, too, that half of a typical westbound sailing is empty containers being repositioned, for which there is no offsetting revenue. Carriers cannot afford to mitigate costs of this magnitude by folding the surcharge into base rates, freezing the surcharge in contracts, or adjusting the surcharge quarterly as fuel prices are spiking weekly. In the past year fuel prices were rising so quickly that the lag time in quarterly reporting and adjustment failed to keep up with fuel prices in real terms. Worse, the rate at which fuel prices accelerated outpaced the quarterly tier increases, so that carriers actually lost ground in cost recovery over time. The buildup in fuel prices over a quarter often produced sharper spikes in the surcharge which were difficult for shippers to absorb. And when prices eventually began to decline, shippers continued to pay top dollar in their surcharges for another three months. Shipping lines have become more strategic in their use of bulk purchasing and hedges such as futures trading. The former entails transport, storage and administrative costs, and refining patterns and priorities can limit supplies. Hedging benefits are limited in the marine fuels market, and the risks are considerable. We’ve heard from shippers of hides and other commodities for which forward sales are common, who rely on quarterly adjustments in planning their shipments and pricing, and who are afraid of documentation problems. Other customers, however, have urged us to moderate surcharge increases and deliver relief more quickly as prices fall by shifting to monthly adjustment. Hopefully carriers and shippers can work together to address specific needs. One other area I want to touch on, where costs are closely linked to freight rates, involves refrigerated meat and poultry rates. As Asian markets gradually reopen, the challenge will be to recapture tens of thousands of refrigerated and temperature-controlled containers that have migrated to other trades in the past three years. Simply put, a temperature-controlled container carrying chilled beef, pork or lamb in the Latin American or Australasian trades commands higher rates than historically has been the case in the transpacific, where the equipment also has few refrigerated return loads. Another by-product of industry consolidation is fewer regional carriers. Major container lines are global. As such they’re looking beyond a single route segment, or even the round trip, to maximize return on assets across many trades. Sometimes equipment is committed to a specific trade, sometimes it is deployed in a triangular or one-way round-the-world service, and sometimes the demand is there but the revenue doesn’t justify redeployment. WTSA carriers scheduled and postponed subsequent rate actions on meat and poultry while volumes were depressed. When those markets do return, lines have to be up and running at full speed with well-maintained equipment ready, in a market willing to pay a premium for quality U.S. product. The $400 per FEU guideline increase recommended for new contracts is modest, after three years of flat or declining rates. It sends a needed market signal that cargo and equipment demand are serious, and competitive with sourcing countries like Australia or Brazil. I continue to believe that creativity and cooperation in service contracting offer opportunities for carriers and shippers to manage costs and unlock value. The notion that surplus slot capacity – or lack of it – should be the primary driver of freight rates makes little sense. Lane balance has value. Equipment availability and velocity have value. Improved inland truck and rail coordination have value. Shipment timing and matching of specific loads have value. Advance planning and IT documentation solutions have value. The U.S.-Asia market outlook appears bright for 2006 and beyond. Rates are likely to rise incrementally. Costs, as reflected in ancillary charges, are going up as the entire transportation/logistics sector invests in infrastructure and service improvements to match long-term demand. Carriers and shippers must find and unlock the value in their respective operations and their broader relationships over time. We’re in a challenging transitional period, but the news isn’t all bad by any means.
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