I interviewed David Sanborn who discussed Trends in Ocean Transportation.
I’m looking forward to hearing your views today on the trends in transportation. Can you first provide a brief background of yourself?
Yes, Dustin, thank you for this opportunity to speak a little bit about international transportation business and trade. I’m David Sanborn. I’m a United States Merchant Marine Academy graduate and a Naval Reserve officer in days gone by. I had a third mate’s license with the U.S. Merchant Marines.
Since I graduated from Kings Point, which is the acronym for the Merchant Marine Academy, I have been involved in international transportation from the standpoint of working for shipping lines, working for terminal operators, and also being involved in LNG projects. My family and I have been expatriates in a number of locations. I’ve worked in Europe, in Spain and the Netherlands. We lived and worked in Asia, in Hong Kong and Singapore. Most recently, I had a four-year stint on an LNG project in Australia. I am presently working in Panama.
I’ve conducted a great deal of business and spent a lot of my time in Latin America. I’m presently located in Panama, working on a green field container project. Having bounced around, you can tell from various places I’ve worked, it’s been a rather interesting time. I’m 40-plus years into the business, have had numerous of opportunities to live and work in some very interesting places, on my own and with my family.
Thanks. My first question is: What’s the state of the ocean-shipping industry today?
It’s very much in a state of flux. A lot of this has to do with the economies of many countries and the changes in international trade patterns. International trade, in terms of cargo and shipments of freight, is generally down right now. This is not such an unusual circumstance because, in our industry, we go through a lot of peaks and valleys. I’ve witnessed, in the years I’ve been in the trade, at least six or seven such major fluctuations. These have been for a number of different reasons: world economies, individual economic situations, and changing economies in various countries of the world. Many of these variations also have a lot to do with the supply and demand of vessel space.
Right now we’re going through a very significant situation where, with the overall trade being down, the shipping lines are working very hard to maintain utilization at reasonable levels on their vessels and in their various vessel strings. The interesting situation hand in hand with this is that we’ve had a very significant decrease in the cost of fuel, and all of these shipping lines have been working hard for the past five years to reduce their operating costs.
As a consequence, most of the larger carriers are still doing pretty well financially, but they’re not doing as well as they otherwise would be. Part of that is because the current trend in the industry is to acquire larger vessels in order to get the best economies of scale. We’re up in the 18,000 to 20,000 range with a number of the shipping lines acquisitions. We’re having to deal with the reality that there are a number of major ports in the world that cannot handle those vessels. Nevertheless, especially in the Asia-Europe trade, where the ports do have that capability, we’ll see the larger vessels plying those trades and a number of the major ports in the U.S. playing catch-up, especially those on the East Coast of the United States. The West Coast ports are in better shape in that respect in that they have deeper draft and can handle the larger vessels. Because of the trade numbers being down, we’re seeing a situation where the shipping lines are taking certain vessels out of service for short periods of time, and they’re changing their various trade-lane coverage, so they can improve upon the utilization of the vessels. That’s another interesting situation.
The overall biggest issue here is that the freight rates are, in most trade lanes, as low as they have ever been, and this is one of the reasons why many of the shipping lines are in a significant state of flux in terms of trying to fill their vessels with cargo that’s not paying nearly what it normally does. This situation is being somewhat masked because of the lower fuel expenses. The other cost cutting measures they are taking are always a good thing, but the low freight rates eventually have to improve in order for the shipping lines to sustain long term earnings.
Can you talk more about consolidation and what needs to be improved there?
There are a couple things. What I’ll do, Dustin, if you don’t mind, is to break this into two parts: one is terminal operations, and the other is the actual shipping lines.
We’re seeing more and more shipping lines that are joining forces, merging, forming more VSAs. Most recently, CSAV and the German carrier Hapag-Lloyd have merged. By all accounts, that merger has been very successful in terms of better financials for both of those companies. We’re going to see more of that. We’re hearing other rumors of the lines in China being pushed by their government to consolidate and form a different kind of shipping line. That’s something which, from the looks of it, is moving forward.
In overall terms these shipping line consolidations will result in an interesting situation where the shipper is not overly happy about such developments. They see these mergers as a possibility for less choice and less competition, which inevitably results in supply-and-demand issues. Such actions should, by all intents and purposes from an economic perspective, cause the rates to start to rise again. The rates are too low. The shipping lines cannot sustain competitive and high-service operations with the kind of rates that are out there. That’s going to have to come around. We’re going to see more consolidation, we’re going to see more VSAs, and we’re going to see less shipping lines even attempting to try and run their own lines or services on their own, There aren’t that many out there anymore, anyway.
The impact this situation has upon the terminal operations is quite significant, from a couple of different perspectives. One, of course I already mentioned that the bigger ships still can only call in a relatively small array of ports, so that creates an operational situation where the economics and the impact of those larger vessels cannot be felt everywhere simply because the vessels can’t get into the ports that are in the major trade lanes. Having said that, there are some other dynamics. For example, the expansion of the Panama Canal, which will result in a canal that will be able to handle vessels that are three times the size of what they can today in the early part of next year. This is going to enable up to 13,000 or 14,000 TEU vessels to be able to transit to Canal, whereas today they can only handle vessels of 5000.
That is going to change dramatically the ability of cargo to flow into the East Coast terminals that, today, can’t because the canal cannot handle that volume. Some of those larger vessels have moved over to the Suez Canal, so Panama has lost some of that market share. However, that’s going to flip back around for a couple reasons: one, as I said, the enlarged canal; number two is that Panama Canal folks have been very smart. They’re implementing a new tariff, which will essentially mean it’ll be cheaper to transit the Panama Canal than it will be to transit the Suez Canal.
You’re going to see a situation where Panama is not only going to gain the market share they’ve lost over the past couple years, but they’re going to improve upon that. This results from the reality that there are a lot of shippers out there who really don’t want to go through the U.S. West Coast ports because they don’t want to face the possibility of future problems with various labor issues, productivity issues, congestion issues, that sort of thing. You’ve got the U.S. East Coast ports that are ready, willing, and able to take those larger-size vessels that will be able to transit the Panama Canal. In the next year we’re going to see a very significant change in the dynamics of how freight moves, how vessels move, and what routes they want to take.
How should things be done differently in the industry?
There are several things we need to take a look at. One is to look at where the most productive ports are. You’ve got a dynamic where—comparing the East Coast of the U.S. and the West Coast of the U.S.—the productivity differences between the East and West Coast are dramatically different. Shipping lines are taking advantage of that productivity and turning the vessels faster in more efficient ports.
The service capability of many of the vessels that are in the various trades today are not as good as they need to be. Our port-port transit times are not what they need to be, and our turn times through the ports are not as they should be. We need to send the vessels to the ports that have the highest degree of productivity.
The second thing is this—there’s going to be a significant amount of cargo that, no matter what, is going to move through the U.S. West Coast ports; that’s going to happen, as it does today. The West Coast ports must get themselves into a situation where they are more productive and can turn the vessels faster. They have some tremendous issues with respect to how the vessels are stowed coming out of Asia. This is creating a loss of productivity and congestion issues on the West Coast. What must happen is that the terminals on the West Coast need closer direct ties with the shipping lines, and Terminal Operators at origin ports. They need to work out an arrangement, a process, and a procedure whereby the way vessels are stowed are coordinated much more closely among the various shipping lines and among the various sharing agreements together with the terminal operators on the West Coast. In this way they must ensure that when a vessel arrives to a particular location, a particular port—let’s just use Long Beach as an example—that freight is coming off efficiently and being handled correctly, being put in the right locations, and is not having to be drayed all over the port, which is a situation that occurred during and after the ILWU contract issues on the West Coast. The vessels must be stowed with the consideration of where the cargo has to be stowed for ultimate delivery, and movement to the trains for that freight requiring intermodal transport.
There needs to be a lot more consolidation, a lot more working together of the various shipping lines in order to allow them to become more productive, and more service focused. We also need to ensure that the capability of the various hubs throughout the world- Suez and Panama, for example, are conscious of the role they play in ensuring vessels are moving through as quickly as possible. This is something that Panama is working very ******* right now, with adding new ports, port space, and expanding the canal.
I would say the most important thing out of all this is attention various governments around the world, including Europe, the United States, and Asia need to give to their entire cargo supply chain. They need to be more astute about the importance of ensuring the infrastructure is there to support the cargo operations in these ports. They need to ensure that the infrastructure is built in a timely way to be able to handle the increased cargo, and that there are workable maritime and transportation strategies which will support all the constituents and all the stakeholders. That’s probably the number one thing that has to be done. This effort must be tied together with the various regulatory bodies, again, in the same three places that I mentioned. And make sure these regulatory bodies are not trying to punish the shipping lines and terminal operators, but are trying to understand the issues that they go through so that the shippers can be serviced properly. Not everything that the shippers want or say they need are necessarily good for trade, the supply chain, or for business. The cargo terminal operating stakeholders, the shipping lines, the transportation service providers, the beneficial cargo owners, and the various government bodies must take a holistic approach and partner together in ensuring that our transportations systems are providing good service while giving the service providers a fair return on their investments.
Thanks, David, for sharing your views today on trends and ocean transportation.
Dustin, thank you very much for the opportunity to speak with you. These are very trying times for shipping lines and terminal operators, as well as a lot of other folks. Hopefully we can pull all of this together, in partnership with the subject matter experts throughout the world.
About David Sanborn
Director of Business Development at Global Logistics Associates