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Carriers Sound Alarm on Fuel

Ocean freight carriers are giving apparel importers advance warning about their intent to move aggressively in the next two years to recoup rapidly rising...

NEW YORK — Ocean freight carriers are giving apparel importers advance warning about their intent to move aggressively in the next two years to recoup rapidly rising fuel costs.

This story first appeared in the December 4, 2007 issue of WWD.  Subscribe Today.

Freight rate contract negotiations between ocean carriers and importers kick off in March and are typically concluded by May 1. In previous years, the Transpacific Stabilization Agreement (TSA), a conglomerate of 14 shipping lines that negotiates rates from Asian ports, has sought to justify increases by citing factors ranging from growth in trading volume to higher investments in terminal operations and security. Fuel prices have always figured into the negotiations, but the rhetoric from TSA heading into 2008 indicates that fuel will be the primary issue.

In a keynote speech at the Textile & Apparel Importers Trade and Transportation Conference last month, Ron Widdows, chief executive officer of ocean carrier APL and executive committee chairman of the TSA, characterized fuel costs as the “most significant problem” facing the industry.

“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,” he said.

Widdows said the price of a metric ton of bunker fuel has jumped to more than $500 after starting the year at around $250, and compared with less than $75 in 1998. Fuel represents more than 50 percent of ship operating costs. Despite the extreme fluctuation, carriers find themselves locked into contracts that limit their ability to recover those costs.

A statement released by the TSA on Nov. 14 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. With fuel prices not likely to come down, Widdows told conference attendees that carriers moving goods from Asia were “going to take a heck of a beating serving the U.S. market.”

Carriers are being forced to come up with ways to compensate for the discrepancy. Their solutions could pose problems for importers looking to get their goods on stores shelves in a timely fashion. Boats are being slowed down to conserve on fuel and lines are shifting capacity to the more profitable trade lanes. Widdows noted that such tactics only mitigate the problem.

The TSA laid out the rate increases it would be seeking in a statement on Nov. 1. Member lines, which include APL, Hanjin Shipping and Cosco, will 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 is sought for containers destined for the East Coast, whether they be moved from West Coast ports by rail or truck or sail through the Panama Canal. A $400 peak season surcharge is 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.