NEW YORK — The world’s largest shipping companies warn that skyrocketing fuel prices have outpaced contractually agreed-upon surcharges and that they will be looking to recoup losses heading into the peak holiday shipping season.
Transpacific Stabilization Agreement, a conglomerate of 12 major shipping lines that negotiates rates from Asian ports, issued a warning Sept. 22 that its members would begin reviewing contracts to achieve “improved cost recovery” because of the high cost of fuel.
TSA, whose members include APL Lines, Hanjin Shipping and Hapag-Lloyd, said fuel prices had risen faster than quarterly adjusted surcharges, leaving the shippers to pick up millions in costs.
“The problems and related costs have become serious enough that TSA member lines are reviewing current calculation formulas and existing contracts, and will be approaching customers to discuss possible options,” TSA said in a statement.
A TSA spokesman said the member lines felt they could not wait until the next round of contract negotiations, which begin in March and typically close in May, to pursue the increases. He said many customers have already been approached. The announcement came days before the start of October, a peak month for the shipping industry as importers fill holiday orders.
The silver lining of the fuel debate is that it signals that last year’s concerns over port congestion have smoothed, for the time being.
“In the past year, lines felt their top priority was to address infrastructure and congestion issues,” TSA executive director Albert A. Pierce said in a statement. “Solutions included all-water Panama Canal services using more and smaller, less-fuel-efficient ships, and calling [on] Pacific Northwest port gateways that add sailing time from China and Southeast Asia. Congestion has eased, but the fuel bill per round trip is much higher.”
TSA had no shortage of evidence to support the claim of rising costs. The average price of marine bunker fuel at the nine fueling points used on Asian trade lines has risen 73.7 percent to $344 per ton compared with $198 per ton in January, according to TSA. Highway diesel fuel costs had increased to $2.85 a gallon from $1.96 during that period, a cost that is often passed on to ocean carriers as a fuel surcharge.
Fuel is also the highest fixed cost facing the shipping industry, which is no surprise, considering the huge size of ships. For example, APL Lines launched the APL New York in May. At 20 stories tall and 965 feet in length, the container ship can carry more than 5,000 20-foot equivalent units — the standard maritime industry measurement used to count cargo containers — and makes the trip from Hong Kong to New York in about 23 days. A 35-foot-tall, nine-cylinder engine accounts for 25 percent of the ship’s weight, burning 170 to 180 metric tons, or 60,000 gallons, of fuel a day. In all, the ship carries 7,500 metric tons of fuel. In comparison, the world’s largest container ships can carry more than 9,000 TEU.
The number of ships has grown rapidly in the last decade. According to the U.S. Maritime Administration’s Office of Statistical & Economic Analysis, 3,375 container ships were in operation globally at the end of 2004. Of those, 69 percent have been built since 1995. Another 950 container ships are scheduled for delivery during the next three years.
The good news is that heading into the holiday season, port congestion levels have remained low on both coasts. While container traffic is expected to hit record volumes during the month, congestion ratings have remained low at the nation’s largest ports, according to the NRF. Domestic ports handled 1.38 million TEU during August, an 11 percent increase compared with August 2004. The NRF forecasts that container traffic would peak at 1.42 million TEU in October, a 7.4 percent increase over the same period a year ago.
“Over the next six months, monthly volumes will be 5 percent to 8 percent higher than a year earlier, compared with double-digit monthly growth during 2004,” the NRF said in its report.
Still, the twin ports of Los Angeles and Long Beach, Calif., which make up the nation’s largest port system, posted double-digit gains in container volume for September. The Port of Long Beach handled 313,460 inbound loaded containers in September, up 22.6 percent from 255,592 last year. At the Port of Los Angeles, loaded inbound containers rose 10.1 percent to 350,754 from 318,722 last year.
Sara Mayes, president of the Fashion Accessories Shippers Association, said higher fuel costs should be absorbed by the shipping companies, noting that many of the shipping lines posted big profits last year.
“What happens to an employee that has to drive to work? Is he going to ask for a fuel adjustment?” asked Mayes. “We all have to deal with it. Our members have to ship to distribution centers and stores, it’s hitting everywhere along the line.”
Mayes said fuel prices will be a “contentious issue” when it comes time to renew contracts, but those that have contracted through FASA have the protection of fixed contracts to take them through the year. Mayes also believes rising fuel costs will be offset by falling rates as more ships with greater capacity are introduced.
Bill Clark, president of the American Institute for Shippers Associations, also believes shipping lines have overstated the impact of rising fuel costs.
“There maybe a lag because of the contracts that they have in place, but those lags will be overcome by the fuel surcharges that they put in place,” said Clark. “If they wind up taking it on the chin for a short period of time, it will be more than made up in the near term.”
Clark said he believes most, if not all, peak shipping contracts are already nailed down, giving the TSA little chance to effect any change over the next 90 days.
“I would expect it will make a difference next year,” said Clark.
Anne Kappel, vice president of the World Shipping Council, said the problem is not only that fuel prices have risen, but that they have remained high. Kappel pointed out that surcharges were established to provide greater transparency as to what the importer was paying and to allow the shipper to adjust that cost up and down as fuel prices fluctuate.
“Fuel price fluctuates and you know that’s going to happen if you’re an ocean carrier,” said Kappel. “It’s a record high now, and if it stays that way, carriers will have to evaluate the cost of continuing certain services.”
While port congestion has become less of a problem this year, Kappel said it is still a concern, given the rising volume of containers flowing into the ports.
Some importers are missing out on other ways to lower costs, noted Steve Ferreira, founder of Ocean Freight Refunds, which audits freight records to reclaim improper charges. According to Ferreira, out of every 100 shipments, four or five will have a “correctable defect.” Fuel surcharges is one of the areas where mistakes can occur.
“What often happens is if the goods are coming out of Shanghai or Bombay, a young freight clerk working for the carrier will not look at the detail of a new contract, and instead of correctly billing the surcharge, they’ll bill it a new, higher level,” said Ferreira. “Sometimes the importer does not catch that.”
Ferreira studied the freight records of top 1,000 importers in the country over a three-year period. The study revealed that importers had about $50 million in erroneous freight rate charges that could have been claimed.
“At a 5 percent profit margin, it takes $10,000 of sales to make up for a $500 ocean freight invoice error,” the company said in a statement announcing the results.