Drop in Pacific Passage Hits Global Sea Carriers; Are FedEx, UPS Next?
A sharp drop in freight shipped across the Pacific during the past two months suggests the shipping-industry slump is about to get worse.
At the major ports of Los Angeles and Long Beach, Calif., which bring in nearly two-thirds of West coast containerized goods, import volume fell 8.8% in both January and February compared with a year earlier, as the weakening economy, tough housing market and high gasoline prices eroded U.S. demand.
In response to slowing. traffic, three of the largest global carriers Danish shipping-giant A.P. MollerMaersk AS's Maersk Line, French carrier CMA CGM Group and Swiss company Mediterranean Shipping Co.are sharing space on the same ships instead of operating their own weekly trans-Pacific shipping services, in hopes of slashing transportation costs by as much as 30%.
"These people are trying to compensate for the lack of growth by getting some of the economies into the system by moving traffic in a cheaper way," says Mark Page, director for liner shipping at Drewry Shipping Consultants Ltd., a London maritime-advisory firm.
The ocean-freight slowdown bodes ill for railroads, delivery companies and others that bring imported goods to U.S. businesses and consumers in the coming weeks and months.
Volumes of Asian-made goods crossing the Pacific Ocean peak in the summer and early fall for back-to-school and holiday shopping. Railroads then move the bulk of the items across the continent from ports on the West Coast. Package-delivery companies such as United Parcel Service Inc. and FedEx Corp., which together handle about 22 million packages a day, close the final gap with stores and consumers.
FedEx Corp.'s earnings report today could shed further light on the health of the industry. The Memphis, Tenn., company is expected to report that earnings for the quarter that ended in February hit the low end of its profit target. The company has said its performance depends on the economy showing no further sign of weakening. Moreover, the company is expected to report flat delivery volumes, particularly in the U.S. air market.
United Parcel Service Inc. told investors last week that, after a strong January, momentum vanished over the following six weeks.
Union Pacific Corp., the nation's largest railroad company in terms of revenue, says its volume dropped 4% from the beginning of the year to March 8 .
Import volume from Asia into the U.S. is expected to grow by less than 2% this year-no better than the tepid growth seen in 2007, says Mr. Page. Average growth for many years prior to 2007 was about 10% annually, he said.
Nationwide, research firm Global Insight expects import volumes to fall 2.1% year, compared with a drop of 0.5% last year. "We feel the market to keep on shrinking," says Rodolphe Saade, chief executive vice It of CMA CGM.
The slowdown comes amid skyrock~l costs, which make up more than 50% of the operating costs for shipping companies. As a result, shipping companies are seeking rates and surcharges despite traffic.
The Transpacific Stabilization Agreement, which covers 15 major container-shipping lines that carry cargo from Asia to U.S. ports, calls for an increase of $400 per 40 feet of cargo space to West Coast ports and an increase of $600 per 40 feet to East Coast ports, beginning May 1.
Mr. Saade says CMA CGM's fuel cost was $240 per ton in January 2007, but the company was paying $450 per ton by December.
China Ocean Shipping Group Co., a major Pacific shipper, and "K" Line America Inc., a unit of Kawasaki Kisen Kaisha Ltd. of Tokyo, plan to extend fuel surcharges to all contracts by the end of this year.
Container ships stack secure, metal boxes that are generally stoked with clothing, shoes and consumer electronics from southern China and furniture, apparel and auto parts from northern China. The Pacific crossing typically takes between 12 to 16 days.
Today companies operate more than 125 weekly container routes to the U.S., an increase of more than 60% since 1999, according to the World Shipping Council, a Washingtonbased trade association.
But in recent years, the U.S. service has generated less profit than other trade routes, shipping experts say. That is leading major shipping companies to shift ships out of the Pacific to routes serving Europe, where growth remains stronger.
By Stephanie Chen, with contributions from Corey Dade
Wall Street Journal March 20, 2008
