Car component trade by sea container has recovered well since the recession, but box shortages and slow steaming have caused issues for some manufacturers’ supply chains. And with the outlook uncertain, capacity questions remain unanswered
The world container shipping industry has had a predictably torrid time of it these last couple of years. The global recession began to bite at the very point that many shipping lines were taking delivery of substantial numbers of new ships, many of them behemoths of 10,000TEU (twenty-foot equivalent units) or more. But now, after two long years, the worst of the downturn seems to be behind them–although the recovery is bringing its own problems, including longer waiting and delivery times for automotive manufacturers as their volumes return to pre-crisis levels.
Shipping analyst Drewry, in its Container Forecaster, says that the ocean carriers believe a real recovery is underway. Volumes are significantly up on the east-west trades compared to last year, laid up ships are being brought back and shipping lines have been successful in demanding freight rate increases. A number of new services have been added to the transpacific and Asia-Europe routes but space is still tight going into the run up to the busiest time of the year for Christmas, which usually starts from August onwards.
What the scenario will look like after the peak season, however, remains murky. Drewry has increased its global demand growth projection for 2010 to 8.5%, although it warns that the recovery in trade could still be derailed and it is not yet a case of business as usual.
In its first financial year quarter results, Japanese-owned Mitsui OSK Lines (MOL) said the container freight market had recovered thanks to a tighter balance of fleet supply and demand, supported by a resurgence in trade and recovering global demand.
For most of this year, there has been a large backlog of freight needing to be moved out of Asia and it is only when this is cleared in about mid-August that the industry will be able to gauge the underlying strength of the market–which may be somewhat less than what the more bullish shipping industry commentators have been predicting. By the end of August, for example, westbound Asia-Europe rates had dropped about $45 per TEU from four weeks prior (about 2%). Drewry says: “There is every possibility that utilisation factors will decline which in turn will have a knock-on effect on freight rates. By no means do we see a precipitous fall, but there will be an impact.”
An acute shortage of containers, caused by the shutdown of the container manufacturing industry in China in 2009, had also given the industry an artificial short-term boost.
Drewry adds that ocean carriers have brought back 19% of capacity to the eastbound transpacific in the second quarter (compared to Q1), and 12.4% on the Asia-Europe trade with a forecast 8% returning during the third quarter. Global fleet growth will also be around 8% this year with around 1.2m TEU to be delivered. However, shipping lines have meanwhile shifted their emphasis from garnering market share to actually making profits. Many have adopted slow steaming strategies which cut costs by saving fuel as well as helping to absorb surplus ship capacity.
Drewry adds: “By restricting supply more in line with demand, carriers appear to have finally learned that they have the ability to drastically improve their revenue streams. The old days of the volume shipper being seen as a VIP account appear to have gone as many shippers have told us their stories in recent months about lack of space and short shipments.”
Carriers are pushing up freight rates through a succession of general rate increases, peak season and equipment surcharges “which shippers have little option but to pay,” according to Drewry.
This may not be comfortable reading for manufacturers, but it could sow the seeds of successful shipper-carrier partnerships where shipment information on specific port pairs, commodities, weights and seasonality is shared and forecasting and performance will be suitably rewarded on both sides.
Consultants MDS Transmodal, which produces trade figures in tonnage terms broken down by commodity, suggests that the global shipping trade in car components rose steadily from 2005 to 2008 (16.25m tonnes rising to 20.26m) before collapsing suddenly to back below its 2005 level. However, MDS predictions are for a very strong recovery in 2010, to something like 2008’s 20m tonnes-plus.
Overall, the car industry is a significant customer of the shipping lines, although far from the largest. Exact figures are hard to come by, but car components and parts account for perhaps 2-5% of global maritime container trade, according to Automotive Logistics’s unofficial calculations, though there will also be traffic that is not immediately identifiable such as raw material or nuts and bolts imported by general distributors, some of which may find itself into completed cars.
Shortages of capacity tend to come and go in shipping, in response to seasonal peaks in other sectors of the market. For example, Chinese New Year (around February) has been a difficult time for US-based supplier Cooper Standard Automotive, says Michael Silvio. “Now the situation seems to have got better, but during Chinese New Year we have to move orders up by three weeks to cope and we have also pre-booked containers in order to guarantee availability.”
Cooper imports mainly from China, but Christmas time can cause similar problems on other trade lanes, such as Europe to the US.
Lately, the situation with container capacity has improved, says Silvio, but there have been price increases, not only in ocean freight but for airfreight and land transport, too. “The problems really peaked at the beginning of 2010 but things have improved since. We’ve made adjustments to our scheduling.”
Like most suppliers to the automotive industry, Cooper doesn’t deal directly with the shipping lines but works through freight forwarders. A manufacturer would have to be very big to go direct and in any case most would not want to deal with the complexity of the shipping process. Even the major tier one and tier two suppliers tend to choose this route, though a few of the tier ones are big enough to deal direct.
However, one strategy that Cooper has adopted is to deal with more than one freight forwarder to obtain capacity when space is tight. Panalpina handles the majority of Cooper’s ocean shipments, but the tier one supplier does use others from time to time.
Delays of one sort or another have become a fact of life in ocean shipping, whether it is because ships are slow steaming, containers fail to be loaded in the first place, there is no space on the ship or because of delays in obtaining customs clearance at the port of arrival. A wise shipper reckons on it taking around ten days longer to get a container to destination than the schedule suggests.
But perhaps the most frustrating part of the whole process is not the delays but the lack of visibility in the supply chain, says Silvio. “There isn’t a fluid flow of information,” he complains. If there was, it would make it much easier to plan and to arrange alternatives, often at far lower cost than they are. Scarcely a week goes by when Cooper does not have to resort to airfreight to let a delayed shipment catch up, and it has had to resort to express package or even on-board courier to get vital components to the customer’s plant.
So far, shipping difficulties have not forced Cooper Standard to increase total stock in its supply chain, but that has been achieved by paring down stock levels in the more dependable sections to counteract areas where stocks have had to be increased because of unreliability. Many people have put in a lot of work to make this possible, according to Silvio.
The logistics teams at Honda of the UK Manufacturing Ltd (HUM) say the shortage of container capacity has hit OEMs less than their suppliers. This is because the manufacturer’s volume requirements are higher, which in turn require the shipping lines to secure the capacity they need.
HUM works directly with the shipping lines rather than through a freight forwarder and whilst its capacity is secure, the company has been affected by slow steaming, added port calls and rotation changes within Europe, all of which have increased lead times from the Far East.
These changes, an increase of up to seven days in some cases, have stretched an already tight supply chain. This has resulted in HUM modifying its internal processes to closely monitor the progress of vessels to plan, along with improved working relationships with the shipping lines and ports.
Longer lead times and more port callings were introduced as a result of the significant losses made by the liner shipping operators during the previous year. Space on board is now at a premium and HUM has been affected by increases in shipping costs.
HUM adds that some of its first tier suppliers are struggling to book container capacity, but to date this has not affected HUM directly.
So far, HUM has not had to increase the amount of material in its supply chain. With the current economic situation and the significant impact on the manufacturing industry, HUM is investigating ways to minimise its warehousing and logistics costs. Should supply lead times increase further, it would have to revisit the supply chain strategy from the Far East.
HUM has managed to compensate for the increased shipping times by working closely with suppliers in Japan and the Far East to pack and dispatch materials several days earlier.
Safmarine, part of the Danish-owned global AP Moller- Maersk Group, specialises in services to and from the whole of Africa, and particularly South Africa. Rob Lord, automotive key account manager says: “The global automotive producers are predominantly high-volume movers with regular and predictable weekly flow patterns. We have therefore moulded our shipping services and capacity to support their needs and give fixed-space commitments to meet their needs.”
Rob Lord adds: “There has indeed been a reduction of available capacity which has lead to capacity constraints and equipment shortages due to the slower turn-times of the equipment.” He adds that there has been a global trend towards restocking of inventories during early 2010, which has resulted in greater than expected growth in global volumes.
Dave Everett, Safmarine Pretoria branch manager, who manages the line’s relationship with the Ford Motor Company of South Africa, says that automotive has certain advantages in spite of capacity decreases: “Automotive cargoes are typically regular and sustainable, so shipping lines can plan for these volumes longer-term.”
Safmarine obtains weekly forecasts from the OEMs and automotive suppliers of their expected bookings, which allows it to confirm availability of equipment and vessel capacity in advance and give an assured supply of containers.
Shipments are also closely monitored through loading and any transhipments en route. Should a delay be detected, early advice ensures that both the shipper and receiver are aware of what alternatives exist to minimise delays.
For some big OEMs, Safmarine has dedicated teams on site and in the local Safmarine office. Safmarine also operates the OEMs’ container depots and delivers containers to the unpack bays in some countries.
Safmarine adds that the recent rapid fluctuations in container volumes benefit neither lines nor shippers. It would therefore welcome a closer relationship with OEMs. Both parties need to share their future plans and strategies; for example, if shipping lines know the plans of OEMs, they would be better able to cater for their needs through future planning of services, routes, capacity and port selection.
This would also allow shipping lines to improve the services offered. Ideally, OEMs need to share their five- to seven-year plans as this length of time would allow both parties to plan more effectively for the future–two year contracts do not allow for this.
Rob Lord adds: “OEMs should also take a closer look at their supply chains and systems to reduce inefficiencies which not only add additional costs to their business, but also to the carrier’s. They also need to adopt a broader focus when it comes to costs, and it should be on total costs, not just freight rates as there are several savings that can be made by adopting a broader view.”
At APL Logistics, part of the Singapore-based NOL group, Bill Villalon says that automotive is an important customer, particularly the logistics division, which accounts for around 30% of business. Recently APL Logistics established automotive as its first vertical segment, to reflect its importance to the carrier.
Bill Villalon and APL Logistics are working with the car industry to tackle the lack of capacity, which he acknowledges is a problem for the industry. “In automotive, synchronising logistics with production and reliability is an important requirement. We are working closely with OEMs and tier ones suppliers to give a lot more coordination of forecasting.”
Container manufacturers are trying to crank up production, and while it is probably easier to rectify the shortage of containers than that of ships, it’s hardly a comforting thought that just as the box shortage is alleviated, the vessel shortage will really start to kick in.
Slow steaming is another concern for the industry, and while it could be said to have led to a rise in inventory levels, it has also led to better schedule reliability which has lessened the need for inventory buffers.
APL Logistics has developed a range of specialist services such as guaranteed deliveries for both full and less-thancontainer loads with a refund if the shipment doesn’t arrive on time. It has also introduced an ‘Ocean 53’ programme to make 53-foot long containers available on selected trade lanes, including from the automotive components producing region of North China to the US. Ships on specific trade lanes have been specially adapted to allow them to carry the longer units above deck.
The automotive logistics vertical will help APL Logistics develop in new markets, not all of them involving ocean transport. For example, it is building up a rail container operation within the North American Free Trade Area that will link Canada and the upper US Midwest with Mexico in both directions.
Another development is in India, where the possibility of backloading finished vehicles in containers that have delivered components to assembly lines is being actively considered. “There is a shortage of car wagon capacity and also it helps minimise damage risk,” explains Villalon.
Svein Steimler at major container operator NYK Group Europe, says that there has been a big increase in car parts to and from China and India, and he anticipates that this trend will continue. The growth of car manufacturing in those countries has also enhanced the trade in other commodities to those countries, such as raw materials and chemicals.
Svein Steimler adds: “In 2010 we have seen demand growth rates between 10% and 25% on all major trade lanes compared with 2009.” As a result, shipping lines’ owned tonnage has been returned to the market.
However, globally around half the new tonnage that had originally been scheduled for delivery in 2010 has been delayed until 2011-12, in agreement with the shipyards. “Hence a combination of stronger demand than expected in 2010, and the delaying of surplus newbuild tonnage this year, has meant that the markets have swung back into supply and demand equilibrium,” says Steimler.
But the tonnage shortage is less the need for more assets, and more about seasonal demand peaks, he says. “In general, shipping lines operate fixed capacity, year-round services, which they need to flex up and down during the seasonal peak and off-peak periods. Forecasting consumer demand remains a key challenge for our industry, and any short-term unexpected changes result in knock-on impacts in equipment and allocation availability. At NYK we keep a close dialogue with our automotive customers, and try to work together as much as possible to align capacity and equipment availability with their demand needs.”
However, he believes that there are limits to even the best long-term forecasts. “Consider back in 2007, only few foretold the sub-prime mortgage crisis.” However, any information that can be shared is only to the good. Svein Steimler adds that while sharing potentially sensitive information does not come naturally to car manufacturers, who operate in a cutthroat industry, they have opened up much more over the years and a good dialogue has developed between them and the shipping lines.
“It’s a case of help us, so we can help you,” Steimler says.