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WWD Sourcing Horizons issue 05/13/2008

Retailers and vendors importing goods through West Coast ports have cause for concern, as ocean freight carriers seek to recoup skyrocketing fuel prices and the deadline for a new labor contract with the dockworkers’ union approaches.

This story first appeared in the May 13, 2008 issue of WWD.  Subscribe Today.

Negotiations between importers and ocean freight carriers over freight rates for goods originating from Asian ports kicked off in March and are likely to be concluded this month. Traditionally, the Transpacific Stabilization Agreement, or TSA, a collective of 15 major container shipping lines, issues guidance outlining the fee increases they will seek in the contract negotiations several months in advance.

In years past, the lines have cited a range of factors necessitating fee increases, from growing trade volume to their increased investments in terminal operations and security. Fuel prices have always been a consideration, but heading into this year’s negotiations the TSA made it known that it would be particularly aggressive in its effort to recover the cost of soaring fuel prices.

In a keynote speech at the Textile & Apparel Importers Trade and Transportation Conference in November, Ron Widdows, chief executive officer of container line APL and executive committee chairman of the TSA, said fuel costs posed the most significant challenge to ocean carriers.

“The simple story is the cost of fuel has not been recovered in any way, shape or form in the rate and that is an enormous problem in this trade,” said Widdows in reference to the Asia-West Coast shipping lane.

According to Widdows, the price of a metric ton of bunker fuel had jumped to more than $500 after starting 2007 at around $250 and compared with less than $75 in 1998. Bunker fuel prices have since reached record highs, cresting the $550 per ton mark. Fuel represents more than 50 percent of ship operating costs. Despite the extreme fluctuation, carriers are locked into contracts that limit their ability to recover those costs.

In November, the TSA said the gap between what carriers spent on fuel and what they recouped in surcharges totaled more than $5 billion between February 2006 and August 2007. As a result, TSA member lines like APL, Hanjin Shipping, China Shipping and Cosco said they would look to charge $400 for each standard 40-foot container, known as an FEU, shipped from Asia to the West Coast. A charge of $600 per FEU was sought for containers destined for the East Coast, whether they be moved from West Coast ports by rail or truck or sailed through the Panama Canal. A $400 peak season surcharge was also being sought for shipments traveling between June 1 and Oct. 31.

The TSA also said it was looking for “an immediate adjustment” to existing contracts and that all new contracts for 2008 would include a floating bunker surcharge.

Last year, the TSA sought $300 per FEU from Asia to the West Coast, $650 per FEU for moving goods inland by rail or truck from West Coast ports and $500 per FEU for shipping goods to the East Coast through the Panama or Suez Canals. The peak-season surcharge was, again, $400 per FEU. However, the peak season dates ranged from June 15 to Oct. 15.

Importers’ response to TSA’s guidelines was to delay initiating negotiations in an effort to test the ocean carriers resolve, according to the TSA. In January, however, the TSA announced that in one-on-one negotiations carriers were finding success in attaining rate increases and floating rate provisions in early contracts. Importers, on the other hand, said the TSA hadn’t come close to achieving the increases originally sought. Sources said some importers have allowed for floating bunker rates but capped the rate, while some importers have even managed to negotiate a fixed bunker rate.

“I would be surprised if, by and large, importers would pay TSA guideline increases,” said Hubert Wiesenmaier, executive director of the American Import Shippers Association Inc. “It depends on how much you can negotiate.”

Wiesenmaier acknowledged that bunker fuel prices are a legitimate and significant issue faced by ocean carriers.

“I don’t think that can be denied,” he said.

Despite pricing pressure on the Asia to West Coast route, ocean carriers have continued to grow by devoting resources to intra-Asia trade. A number of ocean carriers turned in eye-popping profit gains in 2007. TSA member lines NYK, MOL and K Line all reported profit gains of more than 55 percent in 2007. Cosco, also a TSA member, saw profits rise 135 percent to $2.8 billion. APL saw revenues increase 15 percent to $6.9 billion in 2007. APL’s average revenue per FEU during the fourth quarter was $2,865, representing an 11 percent increase from the fourth quarter of 2006. The company achieved record container volume of 2.4 million FEU in 2007, a 12 percent increase driven by intra-Asia trade.

According to an apparel industry source, APL is looking to increase its trans-Pacific container volume by 17 percent to 573,275 FEU in 2008. Average revenue per FEU is targeted to at $4,400. The carrier is looking to improve its collection of bunker adjustment to 51 percent compared with 28 percent in 2007.

An APL spokesman confirmed that these targets had been part of the company’s business plan, but that they are about three months out of date and do not represent its current plan. The company declined to share details of the new targets.

While importers grapple with freight negotiations, they’ll also be paying close attention to the ILWU’s labor contract negotiations with the Pacific Maritime Association. The current contract expires on July 1. The last round of negotiations in 2002 was particularly contentious and resulted in union workers being locked out of West Coast ports for 10 days at an estimated cost to the U.S. economy of $20 billion. All indications are that negotiations are going smoothly so far and neither side anticipates the situation escalating to the levels of 2002.

“The mood on both sides of the table seems generally positive and respectful, and that makes it easier to solve problems and move things along,” said Craig Merrilees, ILWU communications director. “All this is a big improvement over the attitude we experienced in 2002. The contrast between then and now is refreshing.”

Paul Bingham, an economist with Global Insight Inc. who tracks container traffic at the nation’s largest ports, believes it is likely that union officials and workers recognize the realities of the current environment. Container volume has sunk as a result of the weak economy, more ports are opening in Mexico and the Panama Canal is in the process of being expanded.

“A lot of them are probably more in tune with the market environment than they were six years ago,” said Bingham. “They realize that the cargo doesn’t have to come through the West Coast.”

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