By MARK WILSON
December 15, 2008
Half-strength productivity at Canadian and U.S. container ports and the dismal returns container lines are getting from their fleets cannot persist, senior shipping executive Peter Keller told the third annual Canada Maritime Conference, in Vancouver.
Mr. Keller, president of NYK Line (North America) Inc., said it is theoretically possible for North American ports to double capacity without any huge investment by matching productivity levels routinely achieved in Asia.
As for containers lines, they will scrap older tonnage and trim or cut services as they struggle with high oil prices and rates of return on equity that miserably trail those of their customers, he warned.
Post 9/11, shipping lines had an ROE of less than one per cent. There was recovery thereafter to a high of seven per cent, but by 2007 the return had retreated to 1.6 per cent. Mr. Keller estimated that ROE this year will be one per cent and will be equally woeful going into 2009.
By contrast, the companies whose goods the lines ferry across the Pacific had returns ranging between 7.8 per cent and 17.9 per cent in 2007.
In reviewing the various components of the delivery chain that can extend from western China to a store near you, Mr. Keller found fault with all elements that handle imports once they come alongside at West Coast ports, identifying on-dock handling, trucking, warehousing and railroading as flabby.
He cited one measure of efficiency – the number of moves an hour that container cranes perform – as indicative of the need for brisker performance. “Terminals in most ports in the U.S. and Canada get 25ish moves an hour; terminal operators will say they get 30 or 32 moves an hour, but they are good at lying. In Asia, they get 40 to 45 moves an hour,” he said.
Another shortcoming is land utilization. Asian terminals are four or five times more proficient in squeezing usage from black top as their North American counterparts, Mr. Keller said.
The profligate use of space and the under-utilization of facilities cannot continue, as there are cost and environmental pressures to be faced. “In the longer term, we won’t be allowed to continue to dig dirt to fill in the waterfront,” he said.
Investment financing for terminal expansion, assuming it can be secured, is a constraint due to a lengthening string of zeroes. “We used to talk about building a terminal for tens of millions of dollars,” he said. “Today, the starting price is half a billion, not counting the cranes and mobile equipment.”
Warehousing is a problem because though it represents a huge investment, it is often a daylight activity, whereas other elements of the supply chain work around the clock. Single-shift or double-shift warehousing operations mean that goods are needlessly delayed, inventory costs inflated and hundreds of acres of covered storage left in sleep mode come nightfall. Again, valuable assets are being under-utilized.
Mr. Keller said the railways perform capably for much of the year but don’t hit the high notes that would justify rates of return shipping lines can only envy.
Inadequate roads and congestion impede trucking, and there can be no relief as there is neither the money nor inclination to add more lanes. Further, trucking is under threat from an initiative in Los Angeles to scrap the tested owner-operator model and restrict entry to the docks to unionized company drivers.
“(Under) our laws, owner-operators cannot be unionized,” he said. “Now, the Port of L.A., under the banner of clean energy, is making it a requirement that company drivers can be the only ones to drive clean trucks. There is a disconnect here.
“We need to understand that if we move away from the owner-operator model, costs will rise and productivity will fall. What happens in L.A. will be repeated in Tacoma and Seattle, and from there it is only a short hop across the border to Vancouver.”
He said there is need to see that owner-operators are properly compensated and that they drive low-emission vehicles. Putting them out of business will impose heavy costs on those who rely on trucking services.
Container lines, like truckers, need adequate compensation and if they fail to achieve it service will be affected.
Mr. Keller said that new ships are being delivered despite the high cost of construction when they were ordered, but there will be fewer new vessels on order this week than there were last week and the number will have contracted further by next week as ship operators adjust to anemic revenues.
Older less-efficient tonnage is being scrapped and steaming speeds are being reduced to save on fuel. “That isn’t the direction we should be going in but it’s where we are headed,” he said.
“You are going to see more and more announcements of deployments curtailed and of lines taking strings out or evaluating strings while hoping for some sort of recovery in 2009. Anticipate significant changes during the next couple of months and into next year regarding vessel allocation, deployment and service speed.”
Mr. Keller said NYK supports research directed at improving the fuel efficiency of ships and is already using fuel additives, but no wonderful technological breakthroughs beckon. NYK did develop auxiliary sail assist during an earlier brush with high fuel prices but is not reviving that experiment. However, it is fitting solar arrays to the top decks of car carriers to provide some of their electrical power.
Other efficiency and cost-reduction moves include tighter control of both containers and the chassis they ride on to reduce the time equipment sits idle and unproductive, thereby allowing numbers to be culled or new purchases delayed.
“When I travel around, I see big piles of junk, containers sitting there at a cost (to others) of only 50 cents or a dollar a day,” he said. “Containers are made of steel and wood, and you know the price of those materials. We have to work to secure the early return of containers, changing the rules if necessary.”
He said chassis numbers can be culled without any deterioration in service through equipment sharing with other operators. This is already being done in parts of the U.S and the practice is to be extended.
Among other points made by Mr. Keller is the effect that the opening of two new sets of locks by the Panama Canal Authority will have on container deliveries to the West Coast. The work, due for completion in 2014 and the canal’s 100th birthday, will allow 12,000-TEU ships from Asia to access the East Coast and Gulf ports.
“This is going to have a huge impact on international supply chains and cause us to rethink where we need ships and how we deliver service,” he said.
NYK derives revenues of $6 billion to $7 billion from vessel operations and $3 billion from providing logistical services. Its logistics arm is not tied to using NYK ships or NYK cargo aircraft, placing business with others as necessary. It competes with freight forwarders booking space on the group’s vessels or planes.
Mr. Keller said supply chain management can be entrusted to asset-based companies, such as NYK, or freight forwarders who do not have an asset base. While not suggesting that one model is superior to the other, he did say that the client can have confidence in the service provider who has “skin in the game.”