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The following commentary, written by CVI president Mike Coleman, appeared in Virginia Business Magazine’s recent special issue highlighting maritime and international trade.

Ocean shipping projections continue on rocky seas

I started writing this annual ocean shipping forecast for Virginia Business in 2010 and every year I hope to be able to describe an improving industry, rate stability, and parity between vessel capacity and demand. Instead, I am repeating descriptions like “tumultuous”, “overcapacity”, “volatility”, and “roller-coaster” and, to my disappointment, will have to use similar descriptions again this year. Ocean freight rates have plummeted over the course of 2015, capacity continues to outpace demand, and the next year is looking relatively bleak for the ocean shipping industry.

Ocean freight rates are at record lows across most trade lanes. While this has benefited importers and exporters, it has been devastating to carrier profitability and raises concerns about stability. As of March 18th, the Shanghai Containerized Freight Index, a reliable source for transpacific ocean freight spot rates, pegged $761 as the average market rate for a 40’ container from Chinese base ports to the U.S. West Coast and $1,659 to the East Coast. Rates this low are not even close to compensatory for the carriers and are not sustainable for the long term. Nonetheless, weak demand coupled with the ongoing glut in capacity is going to work against any significant rate hikes in the 2016.

In carriers’ ongoing efforts to reduce unit costs, we have seen some anticipated mergers and shifting alliances this past year. In December, CMA-CGM announced its acquisition of NOL/APL. The combined operation will include a fleet of 563 vessels, $22 billion in turnover, and position CMA-CGM as the third largest container line in the world. China Shipping Container Lines is in the process of merging into its larger competitor China Ocean Shipping Company (COSCO). Both carriers should be able to quickly realize gains in efficiency by operating as one entity. There is ongoing speculation of a potential merger of Korean carriers Hyundai Merchant Marine and Hanjin in 2016.

CMA-CGM and the new China COSCO Shipping Corporation are reported to be discussing the formation of a mega-alliance that could include Evergreen, OOCL, and Islamic Republic of Iran Shipping Lines. If formed, it would result in the largest alliance in the history of containerized shipping and would pose a serious challenge to the dominance of the 2M (Maersk and MSC) alliance. Expect to see additional mergers and expanded alliances as carriers continue to seek market control and the scale they need for profitable growth.

To add to the challenges, the industry is fast approaching the implementation deadline for loaded container weight verification in accordance with the International Maritime Organization’s (IMO) Safety of Life at Sea
Convention (SOLAS). Beginning July 1st, the shipper listed on the bill-of-lading will be required to certify the Verified Gross Mass (VGM) of loaded containers prior to lading. There are two options for calculating VGM: (1) weigh the packed container using calibrated and certified scales; or (2) using a certified method to weigh all cargo and materials packed into the container and adding the tare mass of the container. Without a VGM, the container cannot be loaded and will likely be turned away at the terminal gate.

Until recently, there had been very little guidance from carriers on how the VGM requirement would be implemented and enforced. The Ocean Carrier Equipment Management Association (OCEMA) issued a “Best Practice and VGM Process Map” on March 21st addressing some of the practical concerns including the where, when and how. In short, the shipper will need to submit VGM electronically to the carrier by the deadline provided by the carrier at time of booking, the carrier will then submit to the marine terminal in time for development of the load list, and the marine terminal will then transmit the VGM to the vessel operator to use in development of the stow plan.

There are many practical considerations left to be addressed. Among others, what are the options for shippers that do not have access to certified scales? What will happen at the gate if VGM’s were not properly transmitted? Will terminals certify weight for VGM submission? Who is going to pick up the added costs? What authority will police VGM submissions and who bears what liability? My hope is that the IMO will move toward a reasonable implementation period for compliance with VGM similar to the Customs and Border Protection’s roll out of the Importer Security Filing requirement. Otherwise, we can expect disruptions across global supply chains on July 1st.

After several delays, the highly anticipated opening of the expanded Panama Canal is set with a dedication planned for June 26th and commercial operations starting in the third quarter. The larger canal will be able to accommodate much larger vessels of every sort, including container ships of up to 13,000+ TEUs. Ports along the East and Gulf Coasts have spent billions dredging harbors and upgrading infrastructure to accommodate larger container ships. Readiness of the major markets is key for deployment of the largest class vessels. The ports of New York and New Jersey continue to wait for the raising of the Bayonne Bridge, now scheduled for completion in 2017. We should not expect to see any significant changes in vessel deployments or service strings until completion of this project.

Early indications are that BCO rates are going to fix only slightly above the current depressed spot market rates. BCO rate levels will likely serve as a benchmark for the spot market for the remainder of the contract year. This is not a positive sign for the industry and, at least in the long term, not positive for those of us procuring ocean freight. Rates this low are great in the short term, but if we continue at these levels, expect to see fewer carriers, larger alliances, fewer sailing options, and diminished focus on customer service in the years ahead.

Mike Coleman
CV International, Inc.

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