Friday, April 1, 2011

Ocean Carrier Sees Increased Trade Growth, Warns of Constraints

Frank Baragona, president of CMA CGM (America), joined the Port of Long Beach "Pulse of the Ports" panel on Wednesday to offer up an industry view from the perspective of the ocean carriers.

While bullish on the continued growth of trade heading into 2011, Baragona offered warnings about issues such as container supply, landside infrastructure constraints, and rising bunker fuel costs that could damper the perceived recovery since the disastrous 2009 downturn.

"We do see continued [US] GDP growth – and that is a positive thing – in excess of 3 percent [in 2011] coming off less than 3 percent last year," Baragona said.

"This is a good signal that consumers' confidence is recovering and people are back transacting business in the marketplace."

Baragona said that the two biggest issues threatening a sustained economic recovery from his perspective are high unemployment and the housing/access to credit situation.

Despite this, Baragona said he is optimistic of a continued slow recovery.

Turning to capacity supply and demand, Baragona said that on a global level capacity has grown on average 10 percent per year over the past decade to a 2010 level of just over 14 million TEUs.

He predicted a similar 8 percent to 9 percent annual growth rate in global capacity for the next two years, ending 2012 at about 17 million TEUs.

Despite seeing a global 14 percent growth in demand during 2010, Baragona said that 2011 would likely come in at about 8 percent demand growth and 2012 would see about the same.

"So, yes there is ample global capacity. [Global] demand is tracking slightly below capacity, so this indicates that there should be adequate supply globally to meet the demand," Baragona said.

Specifically in the transpacific, however, demand continues to track well below capacity and Baragona predicted that the trend would continue in 2011, with transpacific eastbound capacity having about 3 million more TEUs than called for by estimated demand.

Baragona said that his firm had earlier predicted a more optimistic picture for demand in 2011, but the rise in bunker fuels prices, the disaster in Japan and the turmoil in the Middle East have all put a cloud on those projections, though he remains guardedly optimistic for a positive year.

Turning to issues on the landside, Baragona said that the key concern is efficiency at the ports to deal with the 12,000-plus TEU vessel classes that are now entering service.

"We would like 150 moves an hour, but we are not there yet. These ships cannot be laid up for three or four days. They only make money when they are out steaming," Baragona said.

He added that it is not just the dock, but also the rail networks, the highways systems, the port infrastructure that all play into the needed efficiency.

From a carrier operational perspective, Baragona said that bunker fuel costs, slow steaming and the Panama Canal are all major topics of internal discussion.

Baragona called his presentation chart of bunker fuel prices per ton over the past three years "scary," adding that in just over 26 months the price per ton of bunker fuel has almost tripled.

"If anyone in this room questions the logic of a bunker surcharge, this should explain it," he said.

Baragona said that a typical CMA CGM 8,200-TEU vessel on a roundtrip from South China to Long Beach and back burns about $3.5 million to $4 million in bunker fuel per trip.

"That number continues to go every day," Baragona said. "This is why the bunker formula is so important in our service contracts. It represents 60 percent of the costs of that service."

In addition to surcharges, another method to deal with rising fuel costs is slow steaming on the backhaul, where vessels on their return trip move at speeds well below standard ocean-going vessel cruise speeds. Estimates suggest that a vessel cruising at 17 to 19 knots instead of full speed at 23 to 26 knots, can save about 5 percent to 7 percent on fuel costs.

Baragona said that the industry has been quick to adopt backhaul slow steaming. Of the 45 service loops on the West Coast, for example, the number using slow steaming has risen from one service in mid-2009 to more than 15 in February 2010 and almost 25 as of today. Baragona pointed out that on the East Coast the rise of slow steaming has been even more pronounced, rising from two service loops out of 22 in mid-2009 to 12 in February 2010 to nearly 17 as of today.

As long as bunker fuel costs remain a sizable component of the costs of ocean transport, Baragona said slow steaming on the backhaul will remain a justifiable cost reduction strategy for the foreseeable future.

Turning to the opening of the $5 billion expansion of the Panama Canal in 2014, Baragona said that "It will provide an alternative. It is going to provide options to the supply chain that don't exist today."

The problem, he said, is that it is not yet known how much it will cost to transit the canal when the new larger locks open in 2014.

"The key to this," Baragona said, "is that it will change the dynamics on the East Coast. Today, we are unable to get any ship through the canal over 5,000 TEUs. And the only way we are currently able to operate larger ship efficiently [to the East Coast] is to bring them through the Suez."

Baragona said that there will be a shift from the West Coast to the East Coast, but he hesitated to describe it as a "fundamental" shift.

"You will see a shift because not everything that moves today is time sensitive," he said.

He predicted the canal opening will allow the industry to provide larger, more fuel efficient and more economical vessels to the supply chain. In the end, he said, it will provide the customer with a trade off: between cost and time to market.

The one caveat he offered, though, was the ability of infrastructure on the East Coast in 2014 to accommodate the larger vessels that will be able to transit the canal.

It is not the case today, Baragona said. "A lot has to be done on the [East Coast] infrastructure to capitalize on the opportunity."

Another constraint that Baragona said does not get a lot of discussion is the worldwide container supply. He pointed out that 96 percent of new containers are built in China and in 2008 and 2009 China almost shut off the construction. Supply dropped from 5 million new containers a year in 2007 to 300,000 in 2010. Add to this that new and larger ships continued to join the fleet and this led, in some part, to the situation last year where shippers began to experience a shortage of available containers.

Baragona said that worldwide container supply has continued to drop in relation to the number of vessels slots – from three boxes per slot in 2000 to about two boxes per slot today.

The ideal model, he said, is an equal container pool in Asia, on the vessels, and in the US, all cycling.

Baragona said the while there will be "adequate and reasonable" vessel capacity through the whole 2011 peak season, the concern he pointed to is whether there will be enough containers.

"My advice is this," Baragona said, "Be very judicious in your contracting. Equipment availability is going to be critical. I don't think any company is immune from it and I would certainly be cautious."