Articles in Category: Logistics

Here was the original title of that article from the New York Times:

Slow Trip Across Sea Aids Profit and Environment

As a quick follow-up to Stuart’s latest post on Maersk purposely slowing down its shipping fleet to create energy cost savings and better “green mindshare among its customer base, I thought I would offer another point of view which sourcing professionals may wish to consider.   From a sourcing manager’s point of view, this move by Maersk makes no sense from a supply chain management standpoint. Sure, haste makes waste, and personally, I have no problem buying fuel efficient vehicles or driving 55 instead of 65, but longer commercial transit times lead to nothing but waste. Is Maersk trying to guilt its customer base with the eco-stewardship argument that in reality turns out to be a direct cost pass-through straight to that customer base? I would argue this move will cost corporations millions of dollars in decreased supply chain efficiency.

Let’s start with the obvious increased costs you the buying organization will bear in the name of Maersk’s energy efficiency plans for you. First, you may lengthen your ocean lead-time by 25%. The NY Times article in the original post cites a 4-week journey from Germany to China (the route normally takes 3 weeks). Now that you have an extra week to account/plan for what will you do? You’ll likely order a bit more and create that bullwhip effect as you and your suppliers try and manage your longer lead times. And we all know that when we add time to order cycles we are less productive with our cash, we add to our inventory and we run the risk of not meeting demand.

But there are subtle losses to you the buying organization as well. Every day your material is on the water you add to your financing costs (thank you Maersk!) You decrease your throughput, you increase your WIP, and you offset those working capital improvements you made last year. Look, I don’t mean to rain on the green parade. If your company chooses to make environmental stewardship a priority, that’s great, so long as the costs have been weighed against the benefits.

A wise client once told me if your customer is not willing to pay more for a particular benefit then it may not represent a big enough benefit. In this case, you may intentionally [or unintentionally] pay a whole lot more but my question to you is this is your customer going to pay you more for that benefit?

–Lisa Reisman

Container Ships on Go Slow

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Global Trade, Green, Logistics

We wrote recently about the potential for manufacturers to differentiate their products on little more than the products’ carbon footprint. The thrust of the argument was that there is an evolving market in which faced with equal price and delivery terms a buying organization would opt for the supplier with a lower carbon footprint, perhaps out of a sense of environmental stewardship, perhaps in the expectation that in time they could incur costs or create marketing opportunities for themselves by reducing their supply chain carbon and wider emissions footprint.

So it was interesting to read in a NY Times article that the shipping industry is, for its own reasons, already taking positive steps to reduce the carbon footprint of every ton they transport. The lead shipping line in this development appears to be the Danish giant Maersk and they make great play of the reduced fuel consumption and carbon emissions that they have achieved simply by going slower. Call us cynics but we suspect the primary driver is it saves them a lot of money and has allowed them to compete more effectively on price in a market where buyers of shipping services focus more on cost than transit times. The reality is halving the top cruising speed can reduce fuel consumption by 30% and coincidentally have a similar impact on carbon emissions. The reason? – a slower speed reduces drag. For those of us that can dimly recall our physics classes, drag increases with the square of the speed, so the rise in drag is exponential all others factors remaining equal.

That principle holds true in the air and on land. Planes could easily reduce emissions by slowing down 10%, for example, adding just five or six minutes to a flight between New York and Boston according to the article. And simply driving at 55 instead of 65 miles per hour supposedly cuts carbon dioxide emissions of American cars by about 20%. Of course as the article points out, mile per mile, shipping even at conventional speeds is far more efficient than road travel. Shipping a ton of toys from Shanghai to Long Beach produces lower emissions than trucking them on to San Francisco afterwards but as container trade from Asia has risen 8 fold since 1985 and with zero tax on shipping, bunker fuels lines have sought ever faster transit times as a means of differentiating themselves in the market.

Never one to miss a tax raising opportunity, the European Union has suggested a tax be introduced on fuels used in shipping with the proceeds being used to help poor countries adapt to rising temperatures (after the EU has siphoned a large proportion off for themselves no doubt). China and India promptly objected as it would impact their exports to western markets and raise their import costs. Which raises the obvious solution to carbon emissions created by ocean shipping, move manufacturing closer to the markets in which the products are being consumed, a trend that we saw happening even before the credit crunch and was likely accelerated as volumes dropped.

The concept of slow running is not a total win-win though. Shipping lines have to balance fuel savings against greater labor costs as crews are kept at sea for longer and the possible impact on engines designed to run at high output being run at lower output for extended periods. However so popular have the savings been that some 220 vessels are practicing slow steaming, cruising at 20 knots instead of 24 or 25. Few take it to Maersk’s extreme of 12 knots but nevertheless the trend of a slow boat from China looks like it has caught on.

–Stuart Burns

The banks appear to be facing a similar crunch among their shipping clients as they do their clients with sub prime mortgages. That is to say loans taken out in the boom markets of 2005-2007 have resulted in plummeting ship values, burdensome debt and disappearing equity. Most vulnerable is HSH Nordbank, which is exposed to the industry’s weakest segment, container ships. It has $50 billion in shipping loans, or about seven times its equity.

The exposures of other major ship lenders include Commerzbank, with $37 billion; RBS with $25 billion; and Lloyds TSB with $23.9 billion, according to estimates made by ING Bank  in  a NY Times article. HSH Nordbank, set aside close to $800 million in provisions for its shipping-related loans this spring, and it has already received $19.4 billion in support from its owners, the regional German states of Hamburg and Schleswig-Holstein. Cato Brahde, an analyst at Tufton Oceanic, a hedge fund that specializes in the shipping industry, is quoted as saying that history shows that the stronger the trade-driven boom, the longer the down cycle that follows, with the slump possibly persisting anywhere from three to  ten years. The current bust began in the summer of 2008. And after what he called the “biggest order book of all time, that suggests that most of the pain for the shipping industry is still to come. “We estimate that there will be a 50 percent oversupply in container ships, he is quoted as saying. “And in the next five or six months you will see more banks repossessing ships.

The issue here is not that there will be bank failures as a result of shipping line bankruptcies; the banks debts to shipping companies  are modest compared to toxic mortgages, but rather the risk of failure to shipping lines particularly the small to medium sized fleets that may have expanded rapidly via debt in the boom of the middle decade. A New York based carrier with 55 vessels called Eastwind Maritime went bankrupt this summer. The vessels and their cargoes were stranded all over the world, often without enough money to pay for fuel, crew salaries or harbor dues. As shippers, companies need to extend due diligence into their logistics supply chain as effectively as they have traditionally done into the material supply chain. Do not rely on the 3PL providers assurances; seek clarity on who will be carrying the cargo, their relative size and financial strength. The larger 3PL’s have this data available and should be able to share it.

Logistics Management recently wrote in their November edition that the carriers comprising the Transpacific Stabilization Agreement were raising rates on Asia-US services and had so far managed to stick to them. Not normally advocates of raising costs to manufacturers, in this case we would support a modest rise in freight rates and the imposition of monthly adjusted bunker surcharges if it wards of failures among the major shipping lines. As global trade has slumped, container rates have fallen by some 45% and with the massive oversupply of capacity there is little chance of a major turnaround in shippers’ fortunes for a year or two. Some failures are inevitable and certainly fleet rationalization is desirable if it can be achieved in an orderly way that doesn’t strand shippers’ cargoes in transit.

–Stuart Burns

Last week I had a chance to catch up with a colleague whom I met a couple of years ago through my former employer (Deloitte Consulting). Back then, Joris Van der Smissen worked for Cat Logistics and today he works for arguably the largest 3PL (Third Party Logistics) provider, DHL/Exel. Historically, 3PL providers and the purchasing organization worked at an arms length from one another. But after a latte with Joris, I came away with the conclusion that 3PL providers will play a much bigger role in procurement than ever before and I believe that role will only continue to grow when you see what large OEM’s are asking Joris’ company to do for them.

First, let’s start with the business issues. Joris mentioned three of them that he sees within his target clients and prospects. The first, and no surprise to MetalMiner readers, involves the lack of credit and capital available to the business. The second issue involves what Joris calls the “velocity of the market in other words, whereas we always talk about the volatility of metal supply markets, he believes volatile demand wreaks the same kind of havoc to manufacturing organizations. In addition, OEM’s face a challenge in ensuring their assembly lines (and via extension, their supply chains) can react to market demand quickly. Finally, companies want and need to cut the part of the business that handles low sales to free up cash.

Now turning to specifics, what have these OEM’s specifically asked of their 3PL providers? The first request involves outsourcing inventory ownership. Instead of the manufacturing organization also playing the role of wholesaler, the 3PL provider serves that function by handling inventory, fulfillment and financing. In other words, the front office function stays with the OEM whereas the back office functions move to the 3PL. This trend has already begun to take hold particularly around spare parts and finished goods. If the parts are on a 40% margin, the 3PL will take over the fulfillment piece and take 10% of the margin while the client retains 30%.

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Every story I have seen on Warren Buffet’s purchase of Burlington Northern for $26.3b earlier this week contains a different take on “why Berkshire Hathaway did the deal. Of course we at MetalMiner have our own $.02 (which we have included), but thought you may appreciate glancing through all the possible reasons for “why this deal.

Top 6 Reasons Warren Buffett (Berkshire Hathaway) Bought Burlington Northern:

  1. Perhaps Mr. Buffett has forgotten his own rules of investing? This article discusses how he violates his own rules for “buying cigar butts and not splitting his own stock
  2. A very popular argument put forth as to the rationale behind the purchase goes like this: Buffett believes the US economy is poised to come roaring back fueling the need for the movement of goods across our vast country
  3. Some believe he had too much cash on hand, $37b to be exact, something Buffett himself says limits his ability to make money
  4. Buffett believes that crumbling roads and failing infrastructure along with increased environmental pressures around carbon emissions represent a boon to rail
  5. Buffett is signaling where he thinks dollars will get spent (e.g. on commodities), “Instead of turning to gold, Buffett sees Burlington Northern as a growth vehicle to earn more on the billions in cash Berkshire has on its books carrying coal, wheat and other resources across the nation.
  6. Or, my personal favorite, is Buffett buying the railroad because, “This is all happening because my father didn’t buy me a train set as a kid, Mr. Buffett joked in an interview.

The Times article suggested that the deal made sense, even using Buffett’s own investing maxims: only buy what you understand, buy at bargain prices and move quickly. Unlike the Times article, though, we would argue the deal was not “a bargain and subscribe to the Wall Street Journal point of view. Burlington Northern was no “cigar butt.

What’s our take? The purchase likely involves several of these rationales. But when Warren Buffett does the biggest deal of his career and it happens to involve trains to carry commodities, do we have any doubt as to where the Sage from Omaha thinks metal markets will move?

Cornelius Vanderbilt must be chuckling in his grave.

–Lisa Reisman

As a microcosm of the European shipping scene, Southampton takes some beating. The port is owned by Dubai World Ports and serves the twin markets of Cruise Liners (booming) and Container shipping (disaster). Unfortunately Southampton typically has four container ships for every cruise ship moored up at its quays and it is this highly visible sight of the city’s reason for existence that is most in trouble. Unlike other industries that appear to have stabilized and are now returning to growth, the container shipping industry is still badly depressed in Europe. Many of the world’s largest shipping lines serve the port including, Zim Lines, Evergreen and Hapag Lloyd. The world’s largest, Maersk, did run a service until they pulled out earlier this year. Dubai Ports doesn’t post figures for individual operating companies but Southampton’s great rival Hamburg, also serving the North Sea Asia routes and with the same lines providing regular services has seen trade slump 25% with tonnage dropping 23.7% in the first half and (TEU) container movements 28.7%. Many are expecting a major line to go down; they are cumulatively expected to lose about $12bn this year after making only $3bn profit last year.

Meanwhile container rates have collapsed from $1350/20′ box to $380 today. Chang Yung Fa, the boss of the fourth largest container fleet, Evergreen, estimates around 15% of the container vessels are idle or soon to be laid up and talks of a gruesome over capacity in the industry according to a business magazine in the city.

Meanwhile US ports are reporting a 17.7% drop in container movements from last year according to Logistics Management, but other reports suggest the market is beginning to pick up a little with projections for the balance of the year making modest gains.

–Stuart Burns

For the past 18 years, the masters study of the logistics market has identified trends in the field of logistics by benchmarking various performance criteria via surveys of logistics users. The results of this year’s survey is printed in stages by Logisticsmg.com and analyzes data collected by Georgia Southern University and the University of Tennessee in partnership with the IT services and business consultancy Capgemini and JDA Software. Some 830 logistics, transportation and supply chain professionals participated. The respondents accounted for an estimated $28.4 billion in transportation expenditure and nearly $14.5 billion in international transportation across the range from very small companies to very large and across some 14 industry sectors.

The survey is called Masters of Logistics and uses an interesting model to make year over year comparisons of the industry. They split logistics companies up into three groups, the Masters with sales over $3b, the Contenders with sales of $500m to 3b and the Challengers with sales of less than $500m. In recent years, the Masters have been investing heavily and engaged in consolidation with the aim of providing seamless end to end logistics services and high levels of service. The survey had shown gradual improvements in on time deliveries between 2004 and 2008 but the results were mixed for 2009 with railroads and full truck loads showing a small gain but national and regional less than full truck loads showing a decline. Volatility in volumes is one of the biggest problems for logistics providers and the roller-coaster ride of the last 12 months seems to have hit the major Masters as much as the smaller Challengers. The massive investments the Masters have put into systems has helped them gain efficiencies that have fed through to the bottom line, ultimately helping them survive in spite of high overheads but it has not yet translated into improved service levels. Read more

Though President Obama went to Mexico this week to discuss the swine flu epidemic with Mexican President Felipe Calderon, the two leaders discussed the trade dispute over the US Congress’ ban of a trucking program that would have allowed Mexican origin trucks access to US roads. According to NAFTA, Mexican trucks should be able to operate in the United States, as US trucks and Canadian trucks already do in Mexico.

But Congress failed to renew a pilot program earlier this year allowing Mexican trucks into the US. President Calderon told Obama yesterday that the dispute has harmed job creation efforts in Mexico as well as increase consumer costs and harm trade.   The US Teamsters Union made the claim that Mexican trucks were not as safe (American and Canadian trucks are allowed to cross the border into Mexico) but a US Transport study confirmed the Mexican trucks actually had a better safety record than their US counterparts as we previously reported.

The ban on Mexican trucks into the US forced Mexico to take retaliatory action by imposing tariffs on a very broad range of goods impacting companies as diverse as Proctor & Gamble and Caterpillar. The ban is in effect another form of protectionism. Mexico responded tit-for-tat by imposing the tariffs.

80% of Mexican goods are exported to the US. Mexico is the US’s third largest trading partner after Canada and China. Besides value-added parts such as fabrications, Mexico is a key source of a range of copper products, steel, stainless steel and precious metals. We’ll keep readers posted on any developments.

–Lisa Reisman

A review of the current freight market in Logistics Management paints a pretty dire picture of the state of our shipping and trucking industry. The good news for anyone with goods to move is rates are way down, likely to stay down and shippers are aggressively seeking new or incremental business. The caveat is some shippers will not be there by year end.

Traditionally the Hong Kong ” Los Angeles run is the benchmark for Asia Pacific shipments and as an example, 40ft standard container rates are down from $1800 last year to less than $1000 this year. Even though lines are playing with surcharges, any increases can’t begin to make up for the loss in the basic rate. Lines are withdrawing vessels to try to match supply to demand but capacity utilization is still way down. This, combined with the mothballed vessels is jeopardizing the viability of some lines.

If anything the situation is worse on the roads. Trucking can broadly be broken down into less than truck loads (LTL) and full truck load (FTL) movements. LTL is showing over capacity but one carrier, YTL which represents 25% of the national capacity, is in crisis and has asked the government for support. If this is not forthcoming and the company fails, the situation could change rapidly into deficit and rates would rise.

A spokesman for AlixPartners, a turnaround firm, is quoted in the article as estimating that 150,000 units are standing idle. To put that in perspective, that is ten times the fleet size of Swift Transportation the nation’s largest truckload provider. Truckers are keeping a close eye on diesel prices. The low prices this year are all that has kept some of them afloat. Although diesel prices have risen a little this year they are still, on average, below the level at the beginning of January 2007. A rise in refined diesel product prices could be the end for some firms.

As the most expensive form of transportation, air freight is suffering worse than any. But the major carriers, UPS, Fedex, etc moved swiftly to park planes and cut costs. Even the newly deregulated USPS is flexing its muscles looking to take business from the established players. Ground parcel deliveries are the only sector showing growth this year as shippers look to save costs at the expense of slower deliveries.

Lastly industry experts do not see the situation changing this year or early next, so what should be our takeaway? While this represents a welcome cost saving for shippers, it comes with risks. Some shipping companies and trucking firms will fail, and it won’t necessarily be the small ones. Take the time to keep tabs on how your shipping and trucking firms are managing financially. Keep a close look for early signs of service degradation and delays indicating possible financial problems. Renegotiate freight rates during the second half if you can fix them far enough forward but don’t drive your provider to the very last cent. They may not be around for you to collect it. A little give and take with a view to the long-term may yield a bonus in terms of relationship when the markets finally do return to some semblance of balance.

–Stuart Burns

Lower freight rates and lower metal costs, for both struggling exporters and consumers, have been about the only two developments that could be considered as a silver lining to the last 12 months of turmoil. But as with long term commodity prices, the industry’s reaction to the crisis will sow the seeds for a longer term problem.

Carl Steen, head of the shipping, oil services and international division at Nordea Bank Norge ASA is quoted in this article as saying he would not be surprised if more than 30% of the new ships on order were canceled over the next three years. Cancellations are currently running at 20%. That would affect commodity ships such as bulk ore, container and grain to a great extent and tankers to a limited extent, he said. The world fleet is set to increase by 42% this year as new orders come up for delivery but shipping companies who are unable to cancel imminent deliveries will have to finance new vessels by selling equity rather than taking on debt as vessel values have plummeted and banks are unwilling or unable to lend.

In some parts of the world, the problems of financing new vessels is even more acute such as India where 50% of the fleet is going to exceed acceptable age limits during the next three years yet lines can’t raise the cash to finance new orders according to the Hindu Business Line. As new ship orders are canceled, and lines fight to stay solvent by slashing costs, the current over capacity will be gradually reduced but as always happens in industries with such long lead-times and high capital costs to bring new capacity on stream, the inflection point comes and goes with a dreadful lag in it. The balance is never struck and may be two to three years from now a dearth of capacity will push up rates again as they did in 2006-7. Add rising shipping rates to growing supply side scarcity at mining companies and you can see how the seeds of the next cycle are being laid.

–Stuart Burns

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