Export Revival Threatened By Shipping Bottlenecks
By JENNIFER LEVITZ, TAMARA AUDI and JOHN W. MILLER
Minnesota farmer Wayne Knewtson has 2,000 acres of soybeans, and soy-milk makers in Vietnam eager to buy his crop.
The only problem: delays of three and four weeks in shipping them. His customers "are not happy," Mr. Knewtson says. And because he doesn't get paid until the beans arrive in Vietnam, he has had to take out a loan to cover expenses on his farm.
The U.S. finally is enjoying some strength in exports, thanks to economic recovery in Asia and a generally weak dollar. But just as U.S. goods find demand abroad, there's a problem getting them there.
When ships carrying imports call less frequently at U.S. ports, American producers have to wait longer to ship their goods abroad.
It's the opposite of what one might expect. Carriers have a surplus of ships. And since the U.S. still imports more than it exports, freighters arrive in America looking for export cargo to take back, so they don't have to go home empty.
Yet American producers of everything from hazelnuts to cardboard are complaining they can't get their goods shipped in timely fashion. Eighty rail cars filled with dried peas sat for weeks on train tracks outside Seattle, waiting for a ship to India. Wheat for Asia is stuck in a warehouse in North Dakota.
The bottlenecks are among the many challenges to President Barack Obama's goal of doubling U.S. exports in five years, a hope he detailed in a speech Thursday.
The constraints arise from the unusual economics of transport businesses such as ports and container shipping. U.S. ports, thanks to the huge appetite Americans have developed for goods made abroad, are oriented more to the import than the export trade. So are the big foreign ship companies, which gear their schedules and their routes to American imports, not to exports.
The ship glut, instead of providing more vessels, perversely is helping make fewer available. That's because the glut, in combination with a fall in trade during the recession, cut shipping rates below the cost of operation for some routes. Carriers responded by idling many ships and reducing their trips to the U.S., to save money and try to force shipping rates higher.
Rates on container ships tumbled nearly 50% last year. The carriers lost $20 billion, according to the Transpacific Stabilization Agreement, a cons ortium of major shipping lines."All carriers have reduced capacity and frequency to U.S. ports," said Tan Hua Joo, an analyst with Alphaliner, a Paris maritime consultancy. In October of 2008, he said, there were 70 weekly cargo-ship trips to the U.S. from Asia; now there are 54.CMA-CGM SA of Marseille, France, reduced shipping capacity to the U.S. East and West coasts by 22% in 2009 and stopped sending ships to one port, in Mobile, Ala.
Carriers also have been idling ships. Last year—even as new vessels ordered in good times kept arriving from shipyards—the industry idled 11% of its fleet capacity, some 500 vessels.
In addition, over 200 ships were sold for scrap in 2009, representing more capacity scrapped in one year than in the past 10 years combined, according to Alphaliner.
Finally, many carriers have reduced the speed at which their ships travel, to save fuel. Ten of 19 routes from Asia to the U.S. East Coast have gone to "slow steaming," Alphaliner says. The trips can take a week longer than usual. While helping carriers' finances, this tactic further stretches out delivery times for U.S. exporters.
When ships carrying imports call less frequently at U.S. ports, or even skip some ports they once went to, exporters have to wait longer or look harder to find a ride for the goods they want to ship abroad.
Pork producer Smithfield Foods Inc. used to ship from ports in the Pacific Northwest. Because of a shortage of ships and containers there, Smithfield is instead hauling pork raised in the Midwest to Houston and putting it on vessels that traverse the Panama Canal. The result is higher costs and delays of seven to 10 days for customers in Hong Kong and South Korea, Smithfield says.
The crunch is especially troubling to agricultural exporters, who mostly don't sell branded products. "There are not enough ships or containers to handle the exports that the world wants to buy from us. This situation is becoming more dire by the day," said Peter Friedmann, executive director of the Agriculture Transportation Coalition, a lobbying group. "This isn't Nike or Adidas. If they can't get our hazelnuts, they'll buy them from Turkey."
Jeff Pricco, a Minneapolis-area soybean exporter, says he told a customer in Malaysia it would take 60 days, compared with the usual 15 to 21, to deliver 40 tons of soybeans. The customer said "we need it sooner" and went elsewhere, Mr. Pricco says.
Some exporters facing delivery deadlines resort to air freight, despite a cost that might be 50% higher. "It's a great opportunity for us," said Jess Bunn, a spokesman for FedEx Corp., which is doubling its fleet of planes serving U.S.-Asia routes. United Parcel Service Inc.'s international air-shipping business rose 12% in the fourth quarter.
Further frustrating exporters: Carriers are charging more. Exports in December reached their highest level in 13 months. In the middle of January, more than a dozen ship companies imposed a $400 "emergency" surcharge on the roughly $1,500 price for shipping a 40-foot container to the West Coast from Asia.
The rate had been as high as $2,700 before the financial crisis. The $400 surcharge "is far from bringing the carriers back to profitability or even to the break-even point," said Jean-Philippe Thénoz, vice president of North America lines for France's CMA-CGM.
While it isn't unusual for carriers to idle ships or reduce routes occasionally, analysts say they are withholding capacity more aggressively and for longer. "The carriers are thinking, 'How can we realign supply and demand?' The way to do that is to restrict tonnage," said Neil Dekker, an analyst with Drewry Shipping Consultants Ltd. in London.
Paul Bingham, a managing director at research firm IHS Global Insight, said, "It's almost unprecedented [to] have a carrier artificially adjusting freight transportation capacity in an attempt to affect the classic supply-demand relationship."
Rep. James Oberstar, a Minnesota Democrat who heads the House Committee on Transportation and Infrastructure, is pressing the Federal Maritime Commission to look into whether carriers are engaging in anti-competitive behavior by restricting capacity to raise rates. Without directly addressing that issue, FMC Chairman Richard Lidinsky Jr. said his agency has been meeting with shippers and carriers, seeking solutions to the current lack of capacity.
Eventually, higher prices should lure more ships into American ports. Shipping companies defend their cutbacks. "You can't just raise rates or you scare customers away. The only thing we can do is look at capacity," said Frankie Lau, a spokesman for Orient Overseas (International) Ltd. in Hong Kong.
The Federal Maritime Commission says that carriers aren't allowed to act collectively to cut capacity, and the carriers say that they don't—they act individually.
The companies also say they don't collectively set rates, but just discuss them, which the FMC agrees the lines are permitted to do. The FMC says shipping lines are among the few industries unaffected by U.S. antitrust law, largely because of the large number of international companies involved.
Eivind Kolding, CEO of Maersk Line, a subsidiary of shipping giant A.P. Moller-Maersk AS in Copenhagen, says the tight market is related to a surge in U.S. exports in the fourth quarter, which carriers didn't see coming. Carriers worry that if they respond by putting more ships in service, but trade drops off again, they'll be stuck with operating empty vessels that are expensive to maintain. U.S. exports did turn slightly slower in January from December, data out Thursday showed, though they remain well above a year earlier.
The crunch is a window into the larger revolution of the last two decades, as globalization transformed U.S. trade. Buoyant U.S. consumption had ships full of everything from jeans to computers crossing the Pacific and pulling into U.S. ports.
Ship companies expanded the global fleet at double-digit annual rates from 2004 through 2008. Over the next two years, they are due to receive hundreds more mammoth vessels, ordered during the boom, that they don't need.
U.S. ports, meanwhile, expanded import facilities. Georgia spent $500 million between 1995 and 2005 building docks and railyards at the port of Savannah. It also enticed importers to build distribution centers, a model followed by ports in Virginia, South Carolina and New York.
While some ports, such as Savannah's, have also kept up export traffic, America's trading infrastructure grew imbalanced, with a huge capacity to import goods but an attenuated capacity to export them. Loads of grain or corrugated paper leaving the U.S. took a back seat to the DVDs and toys coming in.
The Los Angeles Harbor Grain Terminal, which occupies a crowded corner near the Port of Los Angeles, lacks enough space to handle the volume of exports arriving from inland.
"We've always been the ugly stepchild when it comes to trade," said Dwight Robinson, vice president of the terminal. He said the grain terminal had to move off its waterfront property in the mid-1980s to make way for an area to unload imports.
Recently, nearly 100 rail cars stuffed with animal feed, grain and soybeans from the Midwest packed the lone railroad track leading into the export center. There are plenty of containers, just not enough space on the railroad tracks, said Mr. Robinson.
Geraldine Knatz, executive director of the Port of Los Angeles, said the port is set up to receive imports and exports equally.
The recession brought a steep downturn in imports. One ship company, the APL unit of Singapore's Neptune Orient Lines Ltd., saw its shipments to the U.S. fall 14% to 19%. But the import infrastructure was built over decades and occupies large amounts of property, not just right at ports but nearby. Reversing this to handle more export capacity would be a huge undertaking that couldn't be accomplished overnight.
Ship companies, having cut back the frequency of their trips to the U.S., and still under profit pressure, say they won't increase service again until U.S. imports pick up sharply. They wouldn't schedule their routes based on U.S. exports unless those rose a great deal, said Tony Mason of the International Chamber of Shipping, a ship-owner group.
Some U.S. importers say space is tightening even for them.
Audiovox Corp., a Hauppauge, N.Y., company that imports electronics, had 13 containers of DVD players left at the dock in Hong Kong last month after being bumped from an overbooked cargo ship, said Pat Moffett, vice president of global logistics. To meet the deadline of a U.S. retailer that had run an ad promoting the electronics, Mr. Moffett said, he had to pay 35% more to ship by air.
"In my 30 years in this business, I have never seen anything like this. This lack of vessels is a nightmare," he said.
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