Asia Slump Has Shipping Firms Feeling Seasick

The strongest evidence of damage from the Asian economic crisis emerged last week in the form of a record U.S. trade deficit, but the shipping world didn’t need to be told: It has been turned on its head by Asia’s woes.

Much as U-Haul trailers from Los Angeles stacked up in Seattle during the early 1990s flight from California, thousands of empty shipping containers are piling up at Long Beach, Los Angeles and other West Coast ports because of plummeting Asian demand for U.S. products--a phenomenon worsened by a boom in newly cheap Asian products bound for the United States.

Rather than lose money by sending them back across the Pacific empty, major carriers are pulling vessels out of Asia altogether. That hadn’t happened in decades, shipping executives say.

Some say this could create a crunch--and shipment delays--for Asian exporters by summer as back-to-school and holiday goods head for America. It also puts shippers in position to demand higher rates.

“I’ve been in the business 26 years and I’ve never seen anything like it,” said Tom Cowan, senior vice president of Pacific services for Charlotte, N.C.-based Sea-Land Services Inc., the largest U.S. ocean carrier.

“Ships are filling up eastbound but westbound is an absolute disaster,” said Jay Winter, executive secretary of the Steamship Assn. of Southern California.

This has made for a logistical nightmare at local ports as well--though not a financial one. Ports make more money on inbound cargo than on exports, according to Don Wylie, director of trade and maritime services at the Port of Long Beach, which projects 8% to 10% growth this year.

Indeed, the ramp-up in Asian exports has raised fears that it will overtax the trucking and railroad systems in Southern California. Last fall, the trouble-plagued expansion of Union Pacific Railroad had container ships backed up for days at the Ports of Los Angeles and Long Beach.

For now, the ports’ biggest headache is keeping the empty containers from piling up in the terminals--an imbalance expected to worsen as the year unfolds. Experts predict the Asian turmoil could expand the nation’s politically sensitive $167-billion trade deficit by as much as one-third in 1998, and the stakes are especially high for California, which sends 51% of its exports to Asia.

Shippers already had woes. Although today’s falling oil prices have been a boon, the slowdown in Asia has exposed vulnerabilities that were easier to ignore when the region was the global economy’s star pupil.

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The reversal of fortunes comes as the shipping industry copes with several years of severe price cutting spurred by overcapacity, stiff foreign competition and a push toward deregulation. Since 1995, cargo rates on the Pacific have declined $750 to $1,200 per 40-foot container, a drop of about one-third.

Now, for the first time in recent memory, Sea-Land and its partner, Maersk Lines of Denmark, and the New World Alliance--comprised of the newly merged NOL and APL, Mitsui OSK Lines, and Hyundai Merchant Marine--are pulling ships out of Asia.

At these rates, shippers argue they can’t make money unless they can fill their containers in both directions.

“We’re pulling capacity because the freight rates are too low,” said Cowan, whose company has removed eight ships from Asia. “It doesn’t pay on a one-way basis.”

In the first quarter of this year, Sea-Land’s exports to Asia have declined by at least one-quarter. Over the same period, APL, which handles about 10% of U.S. goods to Asia, reported a plunge of two-thirds in its shipments to the hardest hit economies of South Korea, Indonesia and Thailand.

Carriers are refocusing their Asia business to concentrate on China, moving ships to Latin America and Europe, pushing for a rate hike and slashing costs at each step along the transportation pipeline.

It’s a failed balancing act so far, as containers from Asia pile up not only on West Coast ports but at rail destinations like Des Moines and Dallas, with no goods to fill them for the voyage back.

Shipping “empties” is a losing proposition. But in January, carriers using the Port of Long Beach, the country’s busiest container port, were forced to ship as many empties as full loads to Asia, a whopping 71% increase in shipments of empties versus the same period the previous year.

There are several ways to tackle an equipment imbalance, but all of them are costly and time-consuming. In addition to shipping empties at a loss, carriers are leasing more containers in Asia and drastically lowering rates for low-value westbound cargo, like wastepaper, so they can at least make some money off those sailings.

Cowan and other shipping executives predict a shortage of U.S.-bound cargo space this summer, when Asia’s credit-strapped manufacturers crank up their businesses and U.S. importers gear up for a robust holiday season. They warn that low-value “frustrated cargo” will be stranded on the docks in Asia.

This scenario has emboldened them to ask importers for a $300 per container increase this spring.

“I think all the carriers are serious about revenue recovery,” said Richard Barbaria, marketing director for APL.

But Rosa Mow, president and chief operating officer of Bugle Boy Industries, a big importer and the largest private apparel company in the U.S., thinks carriers are exploiting Asia’s economic problems to gain more leverage in rate negotiations.

“Carriers are using this Asian crisis,” said the Simi Valley executive.

She said she won’t agree to a huge rate increase and isn’t worried about getting her firm’s orders back from Asia, even though the company expects to move an astounding 2,500 containers--54 million pieces of apparel--from Asia to the U.S. this year.

James Brennan, a principal with Mercer Management Consulting, believes eastbound cargo rates might firm up because of the stepped-up demand. But he doesn’t think the carriers will win an increase given the competition for westbound cargo.

Brennan also downplays the notion of a serious capacity crunch this summer, considering the number of giant container ships that have entered the Pacific market in the last two years.

“This will cause disruption, it will cause complications in carriers’ operations,” he said. But he added, “if their problems become worse, it’s going to have less to do with the short-term problems in Southeast Asia and much more to do with the overriding economics of the shipping business.”

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Indeed, few would deny that the shipping industry is in a world of hurt. Although the largest U.S. carriers have enjoyed steady growth in recent years, the capital required for container ships, port equipment and labor has skyrocketed. Competition has increased as foreign carriers, generously backed by their governments, have entered the fray.

These changes have accelerated a move toward deregulation of this long-protected industry, which has historically negotiated rates through loosely formed coalitions. A bill awaiting a vote in the Senate would allow shippers to sign confidential agreements with customers.

Some carriers predict the Asian turmoil will accelerate mergers, takeovers or even shutdowns in an industry that has already undergone tremendous change, including last year’s takeover of U.S. flag carrier APL by Singapore’s Neptune Orient Lines, known as NOL, and the purchase of Lykes Lines by CP Ships of Canada.

Particularly vulnerable are small Asian carriers dependent on low-cost, high-volume trade within the region.

Sea-Land, a subsidiary of CSX Corp., oversees the unfolding trans-Pacific logistical crisis from a tactical planning center at its new Charlotte headquarters that resembles a high-tech war room, complete with giant screens providing simultaneous reports on global weather conditions, breaking news and shipping routes.

It is command central for monitoring the movements of the company’s 99 ships and 220,000 containers, which are in play around the clock, 365 days a year. Over a year’s time, the center handles up to 50 million pieces of information produced by nearly 9,000 employees across the globe.

“We are like a spider sitting in the middle of the web,” explained Wayne Pighin, Sea-Land director of global equipment logistics.

If an unexpected cold spell wipes out the coffee crop in Brazil in early summer, the center quickly reroutes a ship to other coffee-growing countries like El Salvador. If a ship headed for Alaska’s Bristol Bay with refrigerated containers full of frozen beef is held up by a longshoremen’s strike in Brazil, then the logistics staff must scramble to divert “reefers”--refrigerated containers--from another market to reach Alaska in time to pick a scheduled cargo of salmon.

“The salmon fishermen depend on Sea-Land to have the refrigerated boxes waiting when they reach the dock because they don’t have anywhere else to put their catch,” said Charles Raymond, Sea-Land’s chief transportation officer.

Computers analyze shipping costs from every conceivable angle, enabling Sea-Land to pay much closer attention to which customers they accept and where they are going. For example, they try to avoid taking badly needed containers into Asian ports with a reputation for slow turnover for fear the goods might sit for months while their cash-strapped buyers come up with funds.

In the past, Sea-Land would have gladly accepted a $6,300 load of float glass bound for Singapore because it garnered a premium price. But not anymore, given the problems the carrier could face filling that container for the return. Float glass is shipped in open containers and most of the cargo out of Singapore is manufactured goods that require covered containers.

“So what if you get the box to Singapore?” Raymond said. “You’ve still got to get it out of Singapore.”

Abandoning the Pacific has never been an option, since Sea-Land and its competitors are certain the region will eventually recover.

In the meantime, Cowan, the company’s top Asia hand, sees no room for complacency. Taped to the wall behind his desk is a magazine cover featuring a photo of a weeping Japanese executive whose company has just declared bankruptcy.

“We don’t want to have to do that, which is why we’re making these tough decisions now,” he said. “That photo is kind of motivational.”