Articles in Category: Logistics

Over a year and a half ago we reported on a major trade dispute between the US and Mexico, specifically over a US ban on Mexican origin trucks crossing the border into the US. Mexico retaliated with US/Mexico truck dispute punitive tariffs that totaled $2.4 billion annually, according to the Wall Street Journal. The US, in disallowing Mexican trucks to cross the border, has violated the North American Free Trade Agreement. But no more — the two countries have brokered a deal in which half of the tariffs would get eliminated upon signing of the treaty (expected in 60 days, according to the story) and the other half of the tariffs would get eliminated when the first Mexican trucks pass a series of tests including drug tests, English language tests and safety tests.

Jim Hoffa, president of the International Brotherhood of Teamsters Union, had argued for the ban suggesting that, according to the WSJ, the new law “caves in to business interests at the expense of the traveling public and American workers.”

The punitive tariffs have harmed industry and stifled job growth according to US Chamber of Commerce President Tom Donohue: “This delay put more than 25,000 American jobs at risk, and retaliatory tariffs have been in place for two years on many U.S. products entering Mexico.

The argument for lifting the trucking ban, however, extends far beyond the jobs issue as well. From a US-import perspective, the existing process of essentially forcing every single inbound truck to change over to an American carrier adds nothing but hassle and extends the inbound supply chain. Crossing into the US border already creates potential excessive delays particularly due to the drug wars raging throughout Mexico (and some US cities). In a time-motion study from 2004, analyzing Northbound traffic (Mexico-US) truck re-loading times within Mexico can equate to 17 percent of the total time of moving goods from the border through to the US side.

But the biggest shocker of the time motion study involves the inherent efficiencies (or inefficiencies) of the US side of the equation (not the Mexican side). If you look at the time it takes to process the inbound or outbound truck from the US and Mexico, one might expect that to be about equal. If you made that assumption, you’d be dead wrong. Consider this:

  1. Leave out the time it takes to truck goods from Chicago to Laredo (it is what it is). The time study concluded that all of the remaining procedures (inspections, drayage, warehousing, congestion, wait time, etc.) ranged from 12 hours to 81 hours (in other words, to export US made goods, it takes 12 -81 hours at the border)
  2. On the import side of the equation it takes 1.3 to 10.5 hours

The Mexican side of the equation (e.g. the time it takes for the procedural aspects of border crossing) from Mexico to the US is 2.8 6 hours and from the US to Mexico 2.6 5.3 hours.

And here I thought the President wanted to double exports in five years!

–Lisa Reisman

MetalMiner has a tradition of providing insightful webinars for metals sourcing managers and other professionals, and the trend will certainly continue in 2011.

Indeed, with the metals markets once again entering a highly volatile period of unpredictable movement, companies can use all the help they can get from experienced analysts. Lisa Reisman, MetalMiner’s founder, will team up with Tim Maierhofer, a general manager at Metalwest, to provide a steel outlook and get to the bottom of the question: What can your suppliers do for you to improve your bottom line?

I recently chatted with Lisa to get a sense of what participants can look forward to on January 27.

Q: How will this webinar be different from previous MetalMiner webinars?

A: We are doing two things differently this time around. In previous metal market outlooks, we haven’t ventured into providing price forecasts. This time around, we will offer up some forecasts, as well as our analysis of underlying raw material costs.

The second part of the webinar, and the one in which we are most excited about involves lean supplier management as it relates to metals. With our consulting practice, we often had clients interested in pursuing lean supply programs with their metal suppliers but we have under-reported this supply management solution. Metalwest, our sponsor, has an active lean supplier program and we’re excited to share some specific lean strategies and tactics.

Q: How will recent global trade and political developments play into this webinar?

A: For a change, we’re going to steer clear of most of the political and global trade drama not that it doesn’t impact steel in particular but we’re not going to cover “the issues per se. However, we will definitely look at the macroeconomic environment and trends to examine how some of the ferrous metal underlying markets may fare in 2011.

Q: What is the one takeaway you’d like participants to come away with?

A: We are big believers in “takeaways, and my guess is attendees will walk away with several, including: insight as to where steel prices are headed for 2011 and perhaps as important, the rationale behind the outlook. Second, we’ve attended and seen many programs around lean supply chain but very few geared specifically toward manufacturers with metal buys. We think Metalwest’s unique lean supply management programs will provide many new profit enhancing ideas for metal-buying OEMs interested in “leaning their metal supply chains.

The free webinar will be presented Thursday, January 27 from 10-11 am CDT.

Please click here to get more information on Steel Price Trends and Outlook 2011

Register for Steel Price Trends and Outlook 2011 here.

–Taras Berezowsky

With our office currently very attuned to the world of babies (Lisa and Jason welcomed their third boy, Simon, into existence nearly two weeks ago), not to mention their feeding schedules, this little news item certainly set off the baby radar.

The Chicago Tribune reported that the Consumer Product Safety Commission just passed the toughest rules regulating baby cribs in US history. The main target is the “drop-side model, in which the sidepiece that drops down can cause babies to become trapped and hang themselves to death. Beginning this summer, drop-side cribs, and also those with unsafe mattress supports/slats, will be illegal to put or keep on the market. Another historic rule prohibits the sale of almost all second-hand cribs, since most would not pass the new standards.

Source: CPSC via Chicago Tribune

(For the record, Lisa and Jason are not using a drop-side crib. Whew.)

Needless to say, this will have quite an effect on both babies and their parents, and manufacturers.

In terms of baby safety, the rules are reportedly a long time in coming according to the Tribune, between November 2007 and April 2010, at least 35 fatalities attributed to structural crib problems were reported. Since 2007, 11 million cribs have been recalled. Earlier this year, “seven firms, including Million Dollar Baby, Jardine Enterprises and LaJobi Inc., voluntarily recalled more than 2 million drop-side cribs, according to an LA Times article.

On the manufacturing side, will this cause new supply chain disruptions, with new plans for production and distribution having to go into effect pretty soon?

The Juvenile Products Manufacturers Association, a non-profit trade association, doesn’t think so.

“There will be a negligible impact to manufacturers upon passing of the final rule in terms of product being able to meet the new federal standard, the association writes on its Web site.

But JPMA is worried about potential re-testing of already-safe cribs creating hiccups in getting the product to market efficiently.

According to their site: “JPMA does anticipate impact on the cost to be in compliance with the new mandatory rule to the manufacturers from a material standpoint. JPMA estimates the impact to be upwards of approximately 10% due to additional materials being utilized in order to meet some of the new requirements.

Even if companies like Child Craft, the world’s largest crib manufacturer, have to do an about face to adjust to the new regulations, babies around the country will undoubtedly be safer in the long run.

So, anyone want to speculate on future used-crib scrap market trends?

–Taras Berezowsky

We’re seeing some mixed messages again in bulk freight shipping prices as November has drawn to a close.

The Baltic Dry Index is down for a third straight session, declining 25 points to 2,145, according to a recent Bloomberg article. The index, long analyzed as an indicator of global economic growth and production, has undergone a rather steady decline during most of November, after hitting a 2010 low on Aug. 9. When last updated on Nov. 26, the index was down 1.4 percent.

Source: Bloomberg

However, this time, the surplus of ships is growing at a much higher rate proportional to the prices of iron ore and steel, which are also rising, driving the prices to rent bulk-carrying freighters lower. Rent prices for capesize ships those too large to sail through the Panama Canal, instead having to swoop around Cape Horn or the Cape of Good Hope dropped 16 percent over four days. (According to estimates by Clarkson Plc quoted in the Bloomberg article, iron ore will go up 6.1 percent, while the capesize fleet is looking to rise by 24 percent.)

Loyal MetalMiner readers will know that this has happened before, as we reported last July, mostly due to the vessel surplus rather than a dip in Chinese/Asian demand. The same holds true today: rebar prices in China have increased, and Chinese output remains strong. China’s PMI rose to 57.4 this past October, while the LEI rose to 150.8, both 2010 highs.

This time, it looks as though the oversupply trend will continue to hold. Alexandros Prokopakis, general manager of Mamidoil-Jetoil SA, mentioned in an interview with Hellenic Shipping News Worldwide that he doesn’t see an end to low tanker freight rates until 2012. “Of course the oversupply will continue to be a crucial factor. I have a very negative feeling for 2011 but I want to believe that mid 2012 onwards things will start to improve, he said. In terms of adding vessels to his fleet, Prokopakis added that he doesn’t think this is a good time to buy, despite attractive prices.

So does the decline in the BDI automatically spell doom for healthy overseas demand? Not necessarily. But we will have to wait for the vessel surplus from recent fleet expansion and the corresponding demand to even out until then, we can expect many more BDI ups and downs.

–Taras Berezowsky

Ariba, a major spend management firm, made a move today to broaden its reach in the mining industry by acquiring Quadrem, a leader in supply-chain management that focuses on the minerals and mining business.

Source: www.ariba.com

Our sister publication, Spend Matters, explores how the scale of Ariba’s reach will change after the deal is closed.

Now the largest global business commerce network, Ariba-Quadrem will be able to overcome Ariba’s past challenges to penetrate the mining market (“Quadrem brings immediate access and up-sell potential into: Alcoa, Anglo American, BHP Billiton, Nestlé, Vale and Rio Tinto and others,” writes Jason Busch.)

Specific deal considerations and details are outlined here.

Ariba will also now have greater leverage in emerging markets, where mineral and metal mining are increasingly important. Quadrem’s business reaches into Latin America, EMEA and Asia Pacific, whereas Ariba has had “weaker penetration in these markets from a volume perspective.”

Ultimately, Spend Matters offers an exclusive, big-picture analysis on deal that could will make waves in the procurement world. How do we think it relates to metals and mining?

Lisa Reisman, editor of MetalMiner, weighs in. “Indirect procurement network connectivity in the mining, minerals and metals world is not the primary focus of procurement and supply chain operations,” she said. “What gave rise to the use of Quadrem’s network business was the need for a shared service for something procurement heads did not want to waste a minute thinking about. More strategic procurement issues for mining, minerals and metals customers include: services procurement (including contingent workers in mines), labor management, capital equipment procurement, service parts and spares procurement (remember the tire issue and shortage from 2008?), MRO strategies and fulfillment for mining facilities (for example, safety supplies, mining supplies, etc.). BPO is also a rising area of interest here.”

–Taras Berezowsky

Though we tend to hear of stories involving price fixing on the part of metal producers, a recent story reported in Logistics Today highlights a related industry that undoubtedly impacts a range of metal buying organizations.   According to the story, six international freight forwarders pleaded guilty to a number of conspiracies involving price fixing related to global air cargo shipments. The six companies, EGL Inc of Houston, Kuhne & Nagel International AG of Switzerland, Geologistics International Management of Bermuda, Schenker AG of Germany and BAX Global of Toledo OH agreed to pay fines in excess of $50m. BAX Global will pay the highest fine of the six firms   – $19m+.

What did the charges include? Not surprisingly, the charges involved a range of taxes, “hidden fees or what we call the details of total landed cost models. These “fees remind me of what telecom providers often do unless savvy organizations hire outside consultants to unlock some of the hidden fees (e.g. a friend who does telecom sourcing said some companies still pay a tax that covers costs from the War of 1812!) By the way, drop us a line if you’d like to know the names of firms who do telecom sourcing.

In terms of the specific fees involved in the case, Logistics Today reports several:

  • An Air Automated Manifest System (AAMS) fee applied to companies in the US buying and shipping by air cargo from abroad
  • A similar fee on shipments to the US from Germany as well as from Switzerland
  • A New Export System (NES) fee on shipments to the US from the UK via air cargo
  • CAF (Currency Adjustment Factor) for shipments from China to the US (again air shipments)
  • Peak Season Surcharges (PSS) for shipments to the US from Hong Kong

Certainly most sourcing organizations could not have picked up on the “conspiracy or price fixing elements of this case. However, we have often seen companies readily pay freight bills with often a lack of understanding as to the specific charges levied. But organizations who source smaller metals with high dollar values (and hence buy via air freight) from overseas (e.g. titanium) might want to pay careful attention to the case.

We include several pieces here on developing total landed cost models buried deep in the MetalMiner archives which may prove helpful to metal buying organizations:

Calculating Inventory Carry Costs in Total Landed Cost Models

Best Practices Global Sourcing

Importing From China Could Cost You More

–Lisa Reisman

The dreams of 16th century explorers and 21st century politicians appear to be finally realized as Russia successfully sailed a 70,000 ton gas tanker through its North East Passage. The Baltica, owned by the Russian state owned shipping company Sovcomflot took just 11 days to travel from Russia’s Murmansk to China’s Ningbo port last month. The North East Passage, so named by the British when Greenwich was considered the center of the nautical world, represents the route from Europe to Asia as opposed to Canada’s North West Passage which marks the route from eastern North America to Asia but really cuts across the same sea just on the other side of the North Pole. As this map from Arctic Portal shows:

A Telegraph report quotes expert estimates that the North East Passage could be four times cheaper in terms of fuel and charter time than the conventional route via the Suez Canal for cargo sailing between Europe and Asia, although how they come up with that figure is debatable when one considers the distance is said to be 13,000 kms as against 22,000 kms. Nevertheless such a difference still offers the potential for halving transit times for the few brief weeks a year when the passage is likely to be open. Sea ice has been receding for the last few decades and 2007, 2008 and 2009 where the record years for the smallest polar ice cap making the channels wider and the number of icebergs fewer. Even so vessels had to be attended by ice breakers at critical points to ensure they were not caught, and explains Russia’s enthusiasm for opening up this route as they see provision of ice breakers and the establishment of repair ports along their northern coast as potentially lucrative sources of revenue.

This is not the first commercial transit of the North East Passage though by any means. During Soviet times, Russian traders regularly navigated the northern coast transporting fuel, supplies and other goods to remote Arctic settlements but they were not using the passage as a route to Asia. Last year, two German cargo vessels carried 3,500 tons of construction parts from Ulsan in Korea to Yamburg in Siberia. In the process they saved about $300,000 in fuel costs, scale that up to a super tanker and the financial incentives become quite compelling. The Germans biggest challenge was said to be Russian red tape in getting the necessary permits rather than the arctic ice. The biggest challenge though is undoubtedly the short season, the route is only open for about two to three months a year at present, although on current warming trends this may gradually increase in the years ahead. The voyage is still sufficiently dangerous that an ice tanker is needed to make the journey, and in the case of the Baltica it was accompanied for much of the 2000kms northern route by not one but two nuclear powered ice-breakers. Nevertheless it is an interesting expansion of Arctic commercial exploitation which is likely to escalate in the years to come as moves to exploit oil, gas and minerals are ramped up.

–Stuart Burns

Is nothing safe from being made into a financial instrument? Well it seems not in the business world. An Economist article reports that Clarksons, the world’s biggest ship broker, who pioneered derivatives for dry-bulk cargoes like iron ore and coal in the early 1990s, made its first container-derivative trade in January of this year. Since then, two other London-based brokers, ICAP and Freight Investor Services, have also started to offer derivatives products. Although tiny at the moment, Alex Gray of Clarksons believes, container derivatives may be worth 5-10% of the physical market by the end of 2011.

Some 140 million containers now carry around half the world’s seaborne trade as the graph shows, and it should be said the dry-bulk market was also tiny ten years ago before Chinese demand made rates take off. That prompted shippers and producers to use derivatives to hedge against rate volatility such that now forward freight agreements are worth 40% of the physical market.

Simply put, the new Container Freight Swap Agreement CFSA is a forward dated swap allowing users to hedge against volatility in freight rates by off-setting a physical position (a movement of goods by container) against a paper one (the swap agreement) and thereby lock in a guaranteed freight cost. The swap is priced in US$ per TEU/FEU and settled against a freight Index, the SCFI. The SCFI is published by the Shanghai Shipping Exchange and uses a panel system of Carriers and Non-Carriers (NVOCC’s/Forwarders/Shippers) to provide weekly spot assessments in US$ per TEU/FEU from Shanghai to eventually 15 major trade destinations – the four principle routes being to Northern Europe, the Mediterranean, US West Coast and US East Coast; as well as a number of other trade-lanes including the intra-Asia trades. To begin with, only the four principal routes will be used to set the swaps. The weekly spot assessments are based on a general cargo container and include surcharges related to the “Vessel” side of the transaction – BAF/CAF/PSS/WRS etc and exclude costs related to the “Shore” side – THC, South China Origin Surcharge etc.

So who is likely to use the new contract? Well there are three main user groups who may be interested. Ship owners or operators, who are “net long of space, shippers or freight forwarders, who are “net short of space and traders or investors who may seek to profit from playing the forward market, speculators if you like, who help provide the liquidity such that a buyer and seller can always be matched up on like terms.

As with just about every futures market that has ever been launched, there is initial reluctance from the “producers in this case the shipping lines, who see this as a dissolution of their power or control and a commoditization of the service. But in reality it needn’t be, a shipper can still choose to use a premium line for the physical shipment of their cargo in the interests of superior service, speed, sailing dates or any one of a host of reasons that can become key drivers for a particular sailing or product trade. To pretend that all shipping lines don’t move rates up or down in some form of unison is to ignore reality, all lines on specific routes are driven by the same fundamentals of demand, supply, availability, etc. For frequent shippers with regular requirements there is always the option of a long term contract with the shipping line to fix costs, providing the line is willing to do that. But that ties the shipper into using that line, whereas a financial swap allows the shipper to use any line as vessel availability or spot rate advantage dictates secure in the knowledge the financial swap will anchor rates to no more than the swap price. How closely the swaps mirror the actual market will be a deciding factor and in part will be a function of how quickly the market develops a sufficient level of liquidity to efficiently match buyers and sellers. It is certainly an interesting development for importers and exporters to hedge their shipping cost risks but may yet be a year or two away from offering a truly market reflecting price.

Glossary:

TEU Twenty Foot Equivalent Unit standard container

FEU Forty Foot Equivalent Unit double length standard container

NVOCC Non Vessel Operating Common Carrier an organization or company that sells container space but doesn’t own the vessels the containers are shipped on.

BAF Bunker Adjustment Factor added by the line to cover fluctuations in fuel costs

CAF Currency Adjustment Factor added by the line to cover Fluctuations between the USD and local costs

PSS Peak Season Surcharge added when demand for container space is seasonally high

WRS War Risk Surcharge self explanatory!

THC Terminal Handling Charge cost of loading the container onto or off the vessel.

–Stuart Burns

Never mind what the economists tell you, what is the global economy really doing? Well look no further than the fortunes of the container shipping industry, what the Baltic Dry Index is to the bulk ore/coal/agricultural commodities markets what the container traffic industry is to manufacturers and the global consumer markets. Of course profitability can be distorted by too much or too little capacity so utilization rates make a better measure of activity than profitability.

A series of Financial Times articles covering both the shipping markets and the fortunes of the principal players AP Moller Mearsk, DP World dock operators, Neptune Orient Lines and so on show a robust return to near full capacity. From the depths of the dip last year when shipping lines were parking 12% of the world’s container ships in lochs and fjords nearly all have now been returned to service, and most over just the last few months. According to AXS-Alphaliner only 1.7% of the world’s container ships are still laid up.

The return to health is due to two factors. On the one hand, container demand has picked up dramatically with traffic to and from developing markets. Container volumes this year are said to be up 35%, driven initially by supply chain re-stocking. Dubai’s DP World, one of the biggest container terminal operators, said volumes grew by 7% in the first half of the year. According to port statistics quoted in the Journal of Commerce, imports in Los Angeles were up 21%, 11.5% in Long Beach and 16.85% in Oakland compared to July 2009. Exports were also up 5.95% in Los Angeles, 13.1% in Long Beach and 0.4% in Oakland.

Total container volume, including imports, exports and empty containers, increased 26.8% in Los Angeles, 9.2% in Long Beach and 16.3% in Oakland. How much longer this trend will continue is uncertain. Activity in some markets is still expanding Germany, China, India, Brazil, whereas in others it is flat and short term prospects are uncertain. The second factor is in response to the dramatic slow down last year, shipping lines deliberately put their vessels onto slow running to save fuel and soak up extra ship capacity as more ships are needed to provide a service if each vessel is tied up longer on one voyage. The shortage of capacity means that, as lines carry more containers, space on ships is growing scarcer and lines can charge customers more. Neptune Orient Lines is quoted in the FT as saying the average rate it charged to move a standard container was 39% higher in July this year than in the same period in 2009.

Some shipping lines are fairing better than others though. France’s CMA CMG, the world’s third largest, is said to be struggling to fund huge orders of large expensive ships placed during the industry’s boom. Israel’s Zim Lines has needed massive bailouts but Evergreen of Taiwan declined to order during the boom and is doing well. Maersk said it expected 2010 to be its best year since 2004, when the container shipping boom was at its height.

Although comparisons with 2009’s appalling collapse of traffic can be misleading, still Maersk is quoted in an FT article as saying rates per 40-foot container were 30% higher for the first half this year than last year, while Neptune Orient Lines has seen a 15% improvement in the year to July 23. Volumes too are up on long distance routes generally by 13% in H1 2011 with Trans-Pacific routes seeing an 11% increase and Latin America an 18% improvement.

Having engineered rate increases by slowing ships and idling capacity when needed, even if there is a drop in global growth it is unlikely we will see rates fall back to where they were last year. Shipping lines say they expect rate increases to slow in the second half of the year but they will still be higher by year end. So anyone booking forward may be well advised to fix rates now, the good times in terms of low rates appears over.

–Stuart Burns

My TweetDeck was abuzz with tweets yesterday morning about a new bill that President Obama will have signed into law yesterday afternoon. Cleverly named the Manufacturing Enhancement Act of 2010, the bill while certainly helpful to US manufacturing can hardly be considered either comprehensive or complete. The bill’s actual name, the “Miscellaneous Tariff Bill commonly known as HR4380 specifically only covers the reduction of a range of import tariffs for materials and chemicals. You can view the complete text of the bill via this link. Some of the materials include flat screen plasma displays, golf club heads but also a range of chemicals and compounds such as Caprolactone-neopentylglycol copolymer, nickel carbonate and ortho nitro phinol, as examples.

But as this post from NAM (National Association of Manufacturers) points out, the legislation does not address several key aspects in order to truly “enhance manufacturing. For example, it doesn’t address any strategies for lowering trade barriers on imports of US products in foreign markets.  NAM calls for the adoption of free trade acts specifically for Panama and South Korea as examples of policies required to help double US exports, a policy plank of President Obama’s. NAM names over a dozen policy initiatives in a report entitled: Blueprint to Double Exports in Five Years that Congress would need to enact to ensure the success of the export initiative. Some of these changes involve export control changes, intellectual property protection, logistics, infrastructure investment, foreign trade compliance with WTO rules along with many others.

We have a little button that sits in our office that says “easy. When you hit it, the speaker says, “That was easy. We’d be clicking that button about this bill, though we understand that Republicans had held it up. It’s a non-controversial bill that has stood the test of time as it has been repeatedly introduced and signed into law by several previous administrations. With few controversial elements this law represents a “no-brainer. But to get US manufacturing moving again, the real work lies ahead.

–Lisa Reisman

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