ISSUE 1 2010

OPINION

25

Shipping service quality is under threat from cost pressures, warns shippers’ chief

Jean Louis Cambon

Jean Louis Cambon was recently elected as the chairman of the European Shippers’ Council’s Maritime Transport Council. His ‘day job’ is head of the Ocean Management Committee at tyre giant Michelin. He has pledged to

build bridges with the carriers but at the same

time believes that shippers should challenge some practices. He’s particularly worried about capacity shortages, cargo rollovers, slow steaming, and, at the same time, increased prices. He also warns the shipping lines that the current problems may force some shippers to shorten their supply lines and start sourcing goods and material closer to home.

When carriers reduce service quality to cut

their own costs, someone else inevitably has to pay – usually the shipper, through increased inventory holdings or, even worse, disappointed customers.

FBJ editor Chris Lewis caught up with him and asked him a few questions.

Q. We have had a little while now without the liner conference system in Europe. Has this made a difference to shippers’ dealings with lines? Is there any sign of collusion by shipping lines creeping back in?

A. “The economic crisis, which started almost simultaneously with the repeal of conference immunity to and from Europe, has blurred the landscape to a large extent and it is very difficult to judge what proceeds from one or the other. The benefits from the repeal have to be assessed over longer than 1½ years. In terms of dealing with lines, the major change is that each carrier is now issuing its own pricing, based on its own structures. Some practices have not changed. THCs (terminal handling charges) are as opaque as ever. Some carriers level a universal THC, others on a per- country basis. Some carriers used to have a 17-element system in their THCs, but now we really don’t know what they’re made up of. In many ways a ‘gate in, gate out’ flat pricing concept would be attractive to many shippers. Price increases are still communicated via circulars, in the old way, to buttress the carrier community’s determination to push increases forward. Does that signal collusion? One thing is clear: on the brink of bankruptcy as a result of a combined reduction in volumes and rates, carriers are determined to redress their finances. We have seen few positive changes. It seems a number of carriers realise that in the new environment, there will be a greater need to differentiate, but it does not appear clearly yet how they want to

achieve that. BAF (bunker adjustment factor) formulas have become more transparent, though there is still some reluctance to divulge consumption patterns, particularly in this environment of slow- steaming.

I find it very strange that at a time when the shipping industry has built a lot of very large, new tonnage, there are actually shortages of capacity on some routes? Why is this?

Carriers explain they have been caught by surprise by the resilience of exports and have not had time to reactivate capacity in line with demand. They say now that they want to be convinced of the robustness of this volume pick-up before launching new strings. There may be some truth in the first proposition, but it is obvious to most observers that capacity is restrained for one purpose: to increase prices. This creates roll-overs and shut-outs, which in combination with ‘slow- steaming’ produces the worst service quality ever observed in the past 25 years. A quarter of a century or so ago, the lines and consortia made sure that they had enough contingency built into their schedules to maintain service integrity but that has disappeared. Some degree of slow steaming would be acceptable if it were to result in improved reliability but this has not been the case. Even discounting the effect of bad weather in the winter months, the recent Drewry report on schedule reliability clearly shows that opposite to expectations, slow-steaming does not translate into more reliable arrivals. Reportedly, in the last quarter of 2009, only 53% of vessels arrived on time, down from 60% in the previous quarter.

How optimistic are you about the shipping industry’s long-term stability, and what do you think will happen? From where I see it, the lines seem to have got themselves into a real mess, possibly worse than ever – or is this too apocalyptic?

To answer this question, one needs a longer perspective than the last two years. Carriers must be credited, over the past 50 years, with successfully matching global annual trade growth of around 8% with adequate capacity, which indeed has supported the development of globalisation. However, buoyed by the unprecedented double- digit trade growth in 2003/07, they have all - with one exception - concluded that the virtuous cycle of “growth feeding growth” had started and would never stop. By that logic, if volumes became sluggish out of Asia, relief would be provided by the BRIC countries (Brazil, Russia and India). As the industry has movable assets, it would be easy to catch the wind of new, promising markets and maintain a satisfactory level of fleet utilisation. It’s easy to be a ‘Monday morning quarterback’ today and criticise this as shortsighted, but the facts are there: the economic crisis dealt a near simultaneous blow to all countries and there was a dramatic fall in trade volumes. The liner industry has seen other crises in the past, and has the capacity to recover from this one as well, but it will probably take two to three years to mop up the chronic overcapacity through slippage and cancellation of orders, increased demolition and, hopefully, a resurgence of demand.

It would appear that shippers are still not getting the level of service from the lines that they would expect. You mention the need for carriers to learn about their customer’s business – what sort of things do they need to learn about, what information do they currently lack?

In most manufacturing industries which export products on a global basis, competition is so strong that all facets of quality, delivery and price have to be explored in order to gain a competitive edge.

A product with a high quality image cannot suffer stock-outs or delays in delivery. That’s one aspect where current service patterns are not good enough. Communication of service failures (such as missed transhipments) leaves a lot to be desired. The worst that can happen, and unfortunately it happens all too often, is when we find out from people in the country of destination that a shipment has not arrived. The shipping lines say that you can track and trace from their websites, but I have 175,000teu a year to manage and I can’t stand over every one. We need a ‘push’ solution that gives an alert if a transhipment is missed and also a new arrival date – so we can take alternative action such as supplying from an alternative source. Factories do get stopped because they’re lacking material. But perhaps we as shippers haven’t put enough pressure on the shipping lines to produce such a system. They do have very sophisticated systems to manage their operations internally, so they should be able to communicate the information externally. In the same way, slow-steaming was introduced without consultations with shippers’ organisations and, while it cuts costs for carriers, it’s generating additional costs for cargo interests. On the other hand, our experience in terms of documentation and invoicing shows some improvement compared with two or three years ago when a lot of carriers moved these functions to low-cost countries.

I note that a Norwegian firm called the Containership Company is planning to start up a ‘low cost’ shipping line, though I’m not sure when, if ever, they have plans to operate to/from Europe. Could such an approach work – are there lessons to be learned from the low-cost airline industry? Or is shipping fundamentally too complex?

Shipping is complex, but too often, it is made complex to suit a specific purpose. I am not sure the low-cost airline industry scheme can be replicated exactly in shipping, but we surely welcome the initiative, in the sense that it increases the panel of service choices. One of the differences in container shipping versus a low-cost passenger airline is that once the aircraft has landed, the seats stay on board, whereas when the ship has completed discharge, containers go to various hinterland destinations. Container fleet management is crucial.

Are shippers shortening their supply chains because of slow steaming and other difficulties with ocean transport?

Slow-steaming as a way of avoiding idling ships should only be used on a temporary basis and not as a universal and permanent response to carriers’ financial difficulties. The more difficulties encountered in shipping goods from the other side of the world, the more thought will be given, when it is possible, to shorten supply chains. Alternative sourcing markets may not be as mature and equipped to satisfy a high level of demand at close call as Asia markets are, but the option exists already for a certain number of products.

Do you see any sign of the much-heralded recovery in world trade?

It’s very difficult to say at this stage whether the recent volume growth is the end of restocking or the beginning of a much-waited-for recovery. As long as consumer confidence indices are not going up, people prefer saving to spending, unemployment remains high - it will take time. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36