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Market
reforms deliver mixed news The Ocean Shipping Reform Act 1998 (OSRA), came into force at the beginning of May 1999. Changes such as allowing carriers and shippers to negotiate confidential service contracts and dismantling the system that required carriers to file tariffs publicly, are transforming the competitive landscape in ocean shipping. One of the most striking consequences of OSRA is that it is encouraging small to medium-sized shippers to group together to negotiate freight rates. The logic is simple. Now that lines can negotiate confidential contracts, large-volume shippers are expected to benefit most, since they have the sizeable cargo volumes to demand preferential rates. This could put small to medium-sized shippers at a disadvantage. So these operators are responding by forming groups and pooling their cargo to give them more market muscle. Shippers of refrigerated cargoes are among those who see safety in numbers. One of the most popular vehicles for such a tactic are shipper associations - non-profit organisations with shippers as members. The recently formed Refrigerated Shipping Association is an example. Palle Mathiesen, who heads the association, says that it is one of the first to cater specifically for reefer shippers. The association will initially focus on the US transpacific trades. Shippers of agricultural products in the US Midwest plan launched an association in 1999. Sponsored by the Mid-America International Agri-Council, a trade organisation representing 12 states in the region, the association is intended to help shippers to negotiate ocean rates in the deregulated market, says executive director Tim Hamilton. But the association has benefits over and above OSRA, he adds, mainly because its members often pay higher transportation costs compared to exporters in coastal regions. Hamilton explains that in addition to the extra cost of moving freight to ports from the Midwest, exporters located in coastal areas often have more choice when it comes to freight services. Other associations are regrouping to maximise their bargaining power. The Food Shippers' Association of North America is becoming part of a larger group, the Gemini Shippers Association, which controls over 40,000 loads annually is expected to increase to around 100,000 by mid-2000. The arrival of OSRA has also affected freight rates for refrigerated-cargo shippers. Recently rates have plummeted, and although ocean-shipping reform is not the only factor involved, it is seen by many as a major influence on the market. According to Mathiesen, the uncertainty resulting from the US reforms is causing carriers to outbid each other in an effort to attract business. The problem is that with no published rates to guide them, and contract terms hidden within confidential agreements, carriers are unsure what deals are being struck by their competitors. Reefer shippers in the US have been 'astounded' over recent months that after negotiating bargain-basement freight rates, lines have called them two days later asking them if they want a reduction. Average rates for 40 foot reefer containers have dropped from around $4,000 to $1,500 and even lower. Bob Weiss, an independent administrator of the Food Shippers' Association of North America, agrees that rates have fallen sharply, particularly in the reefer trades. 'I think some steamship lines are losing money,' he observes. The fall is notable in transpacific trade lanes, but conditions are similar in other lanes such as US/South America, he says. In the rush to sign up shippers, some lines were not well prepared for the shipping reform act, Mathiesen believes. Frenetic rate-cutting is the result of ocean carriers' trying to outbid each other in a deregulated environment, he argues. The view was echoed at a recent refrigerated shippers' conference in the US. Some steamship lines were not prepared for the amount of effort required to put contracts in place. 'We've seen a lot of variation between carriers,' says Brent Evans, also an independent administrator of the Food Shippers' Association of North America. Patrick Hanemann, CEO of Majestic Valley Produce, a major shipper of apples, maintains that the accepted wisdom has actually been reversed in some cases - that small shippers have negotiated rates that are just as competitive as those fixed by big players. Evans agrees. Some shippers have negotiated rates on the basis of contracts for 500 to 1,000 loads annually, 'only to find that small shippers have got the same rate for 30 loads a year', he explains. But not all smaller operators agree that they have fared just as well under OSRA as larger shippers. David Rind is president of Rind International Trading Company, the largest beef importer on the US West Coast, based in Bellevue, Washington State. Structural changes in his industry have increased the dominance of the top three or four importers, he explains. There are about six mid-tier importers like his company that are finding it increasingly difficult to compete. OSRA is a 'big concern', says Rind, since it presents an opportunity for the large players to negotiate more favourable freight rates, increasing their dominance even further. This could put more pressure on mid-sized importers in this low-margin business: 'It's too early to know, but we are worried.' There are more general worries that, although low rates are a welcome bonus for shippers, further down the road there may be a heavy price to pay for the carriers' largess. The fear is that as carriers adapt to OSRA they will seek to recoup their initial losses, and the freight-rate pendulum could swing the other way. 'We are advising people that the time to lock in is quickly, or the rates will start to go up,' says Mathiesen. Furthermore, falling revenues will make it more difficult for carriers to invest in expensive reefer hardware. 'You can't afford to reinvest at these rates,' says Joel Greenberg, regional director for refrigerated commodities with American President Line. Moreover, there is less room for error when transporting perishable cargoes, he points out. On the positive side, confidential contracts could open the way for more innovative service packages. Carriers no longer have to make their rates publicly available. This means that so-called 'me-too' rates - where shippers demanded the lowest rates publicly posted by the carriers - no longer exist. Freed from these restrictions, carriers will, it is hoped, be more willing to create service packages that cater for specific types of business, including reefer. Another big change that could lead to more creative ocean shipping is the negotiation of contracts across trade lanes. For reefer shippers this flexibility could bring substantial benefits. For example, in lanes where there are imbalances between imports and exports, reefer boxes could be used to carry dry cargoes where there are shortages of these units. In return, carriers would offer the shippers more favourable rates, or reductions in equipment-positioning costs. Mathiesen notes that his association of reefer shippers is looking for such opportunities. As ocean shipping adapts to deregulation in the US, ashore the consolidation of US railroads is causing much controversy. The service meltdown experienced a year or so ago when the Union Pacific merged with Southern Pacific drew bitter criticism from shippers. The more recent deal, whereby CSX and Norfolk Southern have swallowed Conrail, is also causing consternation among shippers. For those companies that ship perishable cargoes, delays and uncertainty are particularly hard to cope with. Terry Priest, manager of corporate logistics commerce at the Coors Brewing Company, believes that the railroads need to 'learn a lot about customer service'. He is referring to a marked decline in rail service quality. The fall-off has led to Coors' rail volumes decreasing from 65% or 75% of its domestic cargo movements to around 35%. Coors is experimenting with insulated blankets as a way of keeping its beers within the preferred temperature range of 40°C to 45°C, while reducing refrigeration costs. Settling cargo claims is at the heart of Coors' discontent. Priest says that Coors beers have a shelf life of 120 days, and when transit times increased as a result of railroad mergers so did the number of cargo claims. 'We generally had transit times of less than 18 days,' he says, but in some cases this increased to over a month while the rail carriers were establishing new service schedules. But he is optimistic that service quality will return to pre-merger levels, and he does not advocate any reregulation of rail transportation. 'The railroads should be smart enough to work it out,' he contends. Mike Bevers, director of logistics with Darigold Inc, takes the opposite view, however: 'We need rail reregulation to allow open access and rate competition.' Darigold is a co-operative of dairy-product companies in Washington, Oregon and Idaho states, with annual revenues of about $1.1 billion. It exports a wide range of products, including 110 million pounds of butter annually. According to Bevers the railroads have shown a 'total disregard' for shippers, with price increases that are difficult to pass on to customers and monopolistic services. 'The US must have competition on its railroads or we will lose our competitive edge,' he maintains. n Ken Cottrill is a freelance journalist based in the US, specialising in transportation issues |